ABY Abbey Nat.Dub.

A (TSX) ABY (NYSE) C$ MONTREAL, July 24 /PRNewswire-FirstCall/ -- Abitibi-Consolidated Inc. today reported second quarter net earnings of $148 million, or 34 cents a share, compared to net earnings of $157 million, or 36 cents a share in the second quarter of 2006. For the six-month period ending June 30, 2007, the Company recorded net earnings of $78 million, or 18 cents a share, compared to net earnings of $124 million, or 28 cents a share, for the same six-month period last year. Although not a GAAP measure, the second quarter results before the impact of specific items would have been a loss of $111 million, or 25 cents per share, compared to a loss of $29 million, or 7 cents a share, in the second quarter of 2006 (see Table 3 of MD&A). The quarter's results include the following after-tax specific items: a gain of $204 million on translation of foreign currencies, a net gain on dilution of $31 million as a result of the issuance of new units equivalent to a 25% interest in ACH Limited Partnership, a $22 million favourable income tax adjustment, a positive impact of $18 million due to a gain from the disposal of certain timberlands in the United States, a $7 million negative impact of mill closure and other elements, and a charge of $7 million for merger and integration-related costs. In the second quarter of 2007, the Company posted an operating loss of $64 million before specific items, compared to an operating profit of $57 million in the second quarter of 2006. The Newsprint segment had operating losses of $25 million, while the Commercial Printing Papers and Wood Products segments had operating losses of $21 million and $18 million respectively. Before specific items, the $121 million reduction in operating results in the second quarter of 2007 was mainly attributable to lower prices in the Company's Newsprint and Wood Products business segments, higher cost of products sold in the Newsprint segment and lower sales volume for all segments. ------------------------------------------------------------------------- Q2 vs. Q1 2007 Summary ------------------------------------------------------------------------- - Sales of $1.06 billion vs. $1.07 billion ($1.25 billion in Q2 2006) - EBITDA of $42 million vs. $70 million ($168 million in Q2 2006) - US newsprint prices lower by approximately US$28 per tonne (lower by US$73 per tonne vs. Q2 2006) - Continued positive demand outlook for uncoated groundwood papers - Higher wood products prices but volume still impacted by low U.S. housing starts ------------------------------------------------------------------------- Comments by the CEO "The forest products industry continues to be challenging for us and for our customers," said John Weaver, Abitibi-Consolidated President and Chief Executive Officer. "We believe the combination with Bowater, which is expected to generate annualized synergies of at least US$250 million, will enhance financial flexibility, increase cash flow, and create a better opportunity to unlock future value. We have spent the past months planning for the integration with Bowater and once final approvals have been achieved, the plan will quickly be put into action." Proposed Combination with Bowater Incorporated On January 29, 2007, Abitibi-Consolidated Inc. and Bowater Incorporated announced the execution of a definitive agreement to combine in an all-stock merger of equals. The combination is expected to create a new leader in publication papers, the third largest publicly traded paper and forest products company in North America and the eighth largest in the world. On June 22, the two companies announced that the United States Securities and Exchange Commission (SEC) had completed its review of the joint proxy statement/prospectus/management information circular, which was subsequently mailed to shareholders of both companies. In July, Institutional Shareholder Services Inc. (ISS), Glass Lewis & Co. and PROXY Governance, Inc., three independent proxy advisory firms, recommended that Abitibi-Consolidated shareholders vote in favour of the proposed combination with Bowater. In separate reports, the three firms also recommended that Bowater stockholders vote in favour of the proposed combination. Shareholders of Abitibi-Consolidated and stockholders of Bowater will vote on the proposed combination on July 26. Transaction Closes on ACH Limited Partnership On April 2, 2007, the Company closed the transaction with the Caisse de depot et placement du Quebec (Caisse) to create a partnership for Abitibi-Consolidated's hydroelectric assets located in Ontario, which represent approximately 137 megawatts of installed capacity. The Company has retained a 75% interest in the partnership, known as ACH Limited Partnership (ACH LP), while the Caisse has acquired a 25% interest. On a consolidated basis, the transaction has yielded gross proceeds of $297.5 million to the Company. ACH LP is intended to be Abitibi-Consolidated's growth vehicle in energy generation. Investor Call A conference call hosted by management to discuss quarterly results will be held today at 11:00 a.m. (Eastern). The call will be webcast at http://www.abitibiconsolidated.com/, under the "Investor Relations" section. A slide presentation to be referenced on the call will also be made available in the same section prior to the call. Participants not able to listen to the live conference call can access a replay along with the slide presentation, both of which will be archived online. Abitibi-Consolidated is a global leader in newsprint and commercial printing papers as well as a major producer of wood products, serving clients in some 70 countries from its 45 operating facilities. Abitibi-Consolidated is among the largest recyclers of newspapers and magazines in North America, diverting annually approximately 1.7 million tonnes of waste paper from landfills. Forward-Looking Statements -------------------------- Any statements made regarding the proposed combination between Abitibi-Consolidated Inc. and Bowater Incorporated, the expected timetable for completing the combination, benefits or synergies of the combination, and other statements contained in this news release that are not historical fact are forward-looking statements that are based on management's beliefs, certain assumptions and current expectations. These statements may be identified by the use of forward-looking terminology such as the words "expects," "projects," "intends," "believes," "anticipates" and other terms with similar meaning indicating possible future events or actions or potential impact on the businesses or shareholders of Abitibi-Consolidated and Bowater. Such statements include, but are not limited to, statements about future financial and operating results, Abitibi-Consolidated's and Bowater's plans, objectives, expectations and intentions, the markets for Abitibi-Consolidated's and Bowater's products, the future development of Abitibi-Consolidated's and Bowater's business, and the contingencies and uncertainties to which Abitibi-Consolidated and Bowater may be subject and other statements that are not historical facts. This news release also includes information that has not been reviewed by either company's independent auditors. There is no assurance the combination contemplated in this news release will be completed at all, or completed upon the same terms and conditions described. All forward-looking statements in this news release are expressly qualified by information contained in each company's filings with regulatory authorities. The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: the ability to obtain required governmental or third party approvals of the combination on the proposed terms and schedule and without material concessions; the failure of Abitibi-Consolidated or Bowater shareholders to approve the combination; the exercise by a material percentage of Abitibi-Consolidated shareholders of their dissent rights; the risk that the businesses will not be integrated successfully; the risk that the cost savings and other expected synergies from the combination may not be fully realized or may take longer to realize than expected; and disruption from the combination making it more difficult to maintain relationships with customers, employees or suppliers. Additional factors that could cause Abitibi-Consolidated's and Bowater's results to differ materially from those described in the forward-looking statements can be found in the periodic reports filed by Abitibi-Consolidated and Bowater with the SEC and the Canadian securities regulatory authorities and available at the SEC's Internet site (http://www.sec.gov/) and on SEDAR (http://www.sedar.com/). Neither Abitibi-Consolidated nor Bowater undertakes and each specifically disclaims, any obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise. Abitibi-Consolidated Inc. Management's Discussion and Analysis (MD&A) Second Quarter Report to Shareholders July 24, 2007 KEY EVENT --------- Abitibi-Consolidated Inc. and Bowater Incorporated to combine ------------------------------------------------------------- On January 29, 2007, Abitibi-Consolidated Inc. and Bowater Incorporated (Bowater) announced a definitive agreement to combine in an all-stock merger of equals. The combination is expected to create a new leader in publication papers. The combined company, which will be called AbitibiBowater Inc. (AbitibiBowater), would have realized, on a pro forma basis, revenues of approximately US$7.8 billion in 2006, making it the 3rd largest publicly traded paper and forest products company in North America and the 8th largest in the world. The combination has been approved unanimously by the Boards of Directors of both companies, which received fairness opinions from their respective financial advisors. On June 22, 2007, the two companies announced that the U.S. Securities and Exchange Commission (SEC) completed its review of the joint proxy statement/prospectus/management information circular in connection with their proposed combination. As a result, the definitive joint proxy statement/prospectus/management information circular and related materials were mailed to shareholders of both companies and to shareholders of Bowater Canada Inc. - an exchangeable share Canadian public subsidiary of Bowater - during the week of June 25, 2007. The special meeting of Abitibi-Consolidated shareholders will be held at the Windsor, Salon Windsor, 1170 Peel Street, Montreal, Quebec, at 10:00 a.m. Eastern Time on July 26, 2007. Shareholders of record at the close of business on June 20, 2007 will be entitled to vote at the Abitibi-Consolidated meeting. The annual meeting of Bowater stockholders will be held in the Peachtree Auditorium of the Bank of America Plaza, 600 Peachtree Street N.E., Atlanta, Georgia, at 10:00 a.m. Eastern Time on July 26, 2007. Stockholders of record at the close of business on June 8, 2007 will be entitled to vote at the Bowater meeting. In connection with the proposed combination of Abitibi-Consolidated and Bowater, Bowater Canada Inc. will also hold a special meeting of its shareholders in order to approve certain amendments to Bowater Canada's articles required to facilitate and implement the combination. The special meeting of Bowater Canada shareholders will be held on July 25, 2007, at Fairmont The Queen Elizabeth Hotel, Salon St Laurent, 900 Boulevard Rene-Levesque West, Montreal, Quebec, at 9:30 a.m., Eastern Time. Shareholders of record at the close of business on June 20, 2007 will be entitled to vote at the Bowater Canada meeting. On July 17, 2007, the two companies announced the executive team to lead the new company, pending approval of the proposed combination and appointment by the Board of AbitibiBowater. The combination is also subject to regulatory approvals and customary closing conditions. It is expected to be completed in the third quarter of 2007. Abitibi-Consolidated and Bowater will continue to operate separately until the transaction closes. HIGHLIGHTS ---------- $148 million net earnings in the second quarter of 2007 ------------------------------------------------------- Abitibi-Consolidated reported net earnings of $148 million, or 34 cents a share, in the second quarter ended June 30, 2007, compared to net earnings of $157 million, or 36 cents a share, in the same quarter of 2006. For the six-month period ended June 30, 2007, the Company recorded net earnings of $78 million, or 18 cents a share, compared to net earnings of $124 million, or 28 cents a share, in the same period last year. To view Abitibi-Consolidated Inc. charts (Highlights) please click here: http://files.newswire.ca/490/abitibi.q2.summary.doc Table 1: Summary of financial information (in millions of dollars, except per share amounts) As per financial statements -------------------------------------- Second Quarter Six-month period ------------------ ------------------- 2007 2006 2007 2006 -------- --------- --------- --------- Sales $ 1,064 $ 1,253 $ 2,132 $ 2,490 EBITDA N/A N/A N/A N/A Operating profit (loss) (20) 48 (67) 89 Net earnings (loss) 148 157 78 124 $ per share 0.34 0.36 0.18 0.28 Before specific items(1) -------------------------------------- Second Quarter Six-month period ------------------ ------------------- 2007 2006 2007 2006 -------- --------- --------- --------- Sales $ 1,064 $ 1,253 $ 2,132 $ 2,490 EBITDA 42 168 112 330 Operating profit (loss) (64) 57 (103) 109 Net earnings (loss) (111) (29) (206) (65) $ per share (0.25) (0.07) (0.47) (0.15) Note (1) Non-GAAP measures Sales were $1,064 million in the three-month period ending June 30, 2007, compared to $1,253 million in the same period last year. The Company recorded an operating loss of $20 million during the quarter, compared to an operating profit of $48 million for the second quarter of 2006. Sales were $2,132 million for the six-month period ending June 30, 2007, compared to $2,490 million in the same period last year. The operating loss was $67 million, compared to an operating profit of $89 million in the first six months of 2006. SPECIFIC ITEMS IMPACTING RESULTS AND NON-GAAP MEASURES ------------------------------------------------------ The Company's operating results include specific items that are not related to normal operating activities and make the comparison of results difficult from period to period. Abitibi-Consolidated compares its performance as well as those of its business segments before specific items, based on EBITDA, operating profit (loss), net earnings (loss), net earnings (loss) per share and other such measures. Specific items include gain or loss on translation of foreign currencies, mill closure and other elements, asset write offs or write downs, income tax adjustments related to the finalization of prior-year audits, impact of changes in income tax legislation and other items that do not relate to normal operating activities. Operating profit (loss) before specific items, net earnings (loss) before specific items, net earnings (loss) per share before specific items and other such measures before specific items, such as EBITDA, are not measures prescribed by the Canadian Generally Accepted Accounting Principles (GAAP). The Company believes this is useful supplemental information, as it provides an indication of performance and comparative trends, excluding these specific items. However, readers should be cautioned that this information should not be confused with or used as an alternative to measures prescribed by Canadian GAAP. Specific items impacting operating profit (loss) ------------------------------------------------ In the second quarter of 2007, operating profit (loss) was positively impacted by specific items for a total of $44 million, compared to a negative impact of $9 million in the same quarter last year. Second quarter 2007 Mill closure and other elements include $9 million of expenses related to the proposed combination with Bowater, announced during the previous quarter. The merger expenses were allocated to the Company's Newsprint, Commercial Printing Papers and Wood Products segments for $5 million, $3 million and $1 million, respectively. The Company recorded a net gain on dilution of $33 million as a result of the issuance of new units equivalent to a 25% interest in ACH Limited Partnership. This gain was allocated to the Company's Newsprint and Commercial Printing Papers segments for $23 million and $10 million, respectively. Newsprint operating results were also positively impacted by $30 million mainly due to a gain on disposal of a portion of the Company's timberlands located in the states of Georgia and South Carolina. Commercial Printing Papers operating results were negatively impacted by $10 million of mill closure and other elements mainly due to the indefinite idling of the Company's Fort William paper mill located in Thunder Bay, Ontario. Second quarter 2006 Specific items for the second quarter of 2006 have been adjusted to take into consideration a $10 million countervailing duty (CVD) and anti-dumping duty (AD) credit related to the lumber dispute settlement reached in April of 2006 and finalized in the fourth quarter of 2006. In the second quarter of 2006, the Company recognized in its Selling, General and Administrative (SG&A) expenses, a credit of $11 million related to prior years' provisions of capital tax, which impacts Newsprint, Commercial Printing Papers and Wood Products segments by $6 million, $3 million and $2 million, respectively. Also in the second quarter of 2006, Abitibi-Consolidated accounted for a provision of $10 million of mill closure and other elements for restructuring charges related to the SG&A review announced in the previous quarter. The restructuring charges impacted Newsprint, Commercial Printing Papers and Wood Products segments by $4 million, $5 million and $1 million, respectively. Table 2 highlights the impact of the above specific items on operating results by segment. Table 2: Operating profit (loss) (in millions of dollars) As per financial statements -------------------------------------- Second Quarter Six-month period ------------------ ------------------- 2007 2006 2007 2006 -------- --------- --------- --------- Newsprint $ 23 $ 63 $ 31 $ 105 Commercial Printing Papers (24) (13) (44) (19) Wood Products (19) (2) (54) 3 -------- --------- --------- --------- ($ 20) $ 48 ($ 67) $ 89 Before specific items(1) -------------------------------------- Second Quarter Six-month period ------------------ ------------------- 2007 2006 2007 2006 -------- --------- --------- --------- Newsprint ($ 25) $ 61 ($ 20) $ 106 Commercial Printing Papers (21) (11) (30) (17) Wood Products (18) 7 (53) 20 -------- --------- --------- --------- ($ 64) $ 57 ($ 103) $ 109 Note (1) Non-GAAP measures Other specific items impacting net earnings (loss) -------------------------------------------------- Other than specific items covered in the previous section, in the second quarter of 2007, Abitibi-Consolidated recorded an after-tax gain on translation of foreign currencies of $204 million, mainly from the stronger Canadian currency at the end of the quarter, compared to the U.S. dollar, in which most of the Company's long-term debt is denominated, and a favourable income tax adjustment of $22 million, due to realized losses and to prospective reductions in income tax rates. The Company recorded financial expenses of $2 million after tax, in relation to the ACH Limited Partnership long-term debt financing. In the second quarter of 2006, Abitibi-Consolidated recorded an after-tax gain on translation of foreign currencies of $130 million, mainly from the stronger Canadian currency at the end of the quarter, compared to the U.S. dollar, in which most of the Company's long-term debt is denominated. Also, the Company recorded a positive income tax adjustment of $63 million, related to the prospective reduction in the Canadian federal income tax rate. Table 3: Impact of specific items (in millions of dollars, except per share amounts) Second Quarter -------------------------------------- 2007 2006 ------------------ ------------------- Before After Before After Tax Tax Tax Tax -------- --------- --------- --------- Net earnings (loss) as reported in the financial statements $ 148 $ 157 $ per share 0.34 0.36 Specific items: Impacting operating profit (loss) (as per Table 2) (44) (35) 9 7 Loss (gain) on translation of foreign currencies (235) (204) (156) (130) Transfer of Augusta timberlands (Minority interest) - - - - Financial expenses 3 2 - - Income tax expense (recovery) (22) (63) --------- --------- Net earnings (loss) excluding specific items(1) ($ 111) ($ 29) $ per share(1) (0.25) (0.07) Note (1) Non-GAAP measures Six-month period -------------------------------------- 2007 2006 ------------------ ------------------- Before After Before After Tax Tax Tax Tax -------- --------- --------- --------- Net earnings (loss) as reported in the financial statements $ 78 $ 124 $ per share 0.18 0.28 Specific items: Impacting operating profit (loss) (as per Table 2) (36) (32) 20 14 Loss (gain) on translation of foreign currencies (268) (233) (141) (118) Transfer of Augusta timberlands (Minority interest) - 9 - - Financial expenses 3 2 - - Income tax expense (recovery) (30) (85) --------- --------- Net earnings (loss) excluding specific items(1) ($ 206) ($ 65) $ per share(1) (0.47) (0.15) RESULTS BEFORE SPECIFIC ITEMS ----------------------------- As specific items have been covered in the previous section, the following comparisons and analyses will only focus on the Company's performance related to normal operating activities and, as compared to the same quarter of the previous year. Consolidated results before specific items ------------------------------------------ Before specific items, the $121 million reduction in operating results in the second quarter of 2007 is mainly attributable to lower prices in the Company's Newsprint and Wood Products business segments, as well as higher cost of products sold in the Newsprint segment and lower sales volume for all segments. Table 4: Consolidated results before specific items(1) (in millions of dollars, except per share amounts) Fav/(unfav) variance due to Second ---------------------------------- Second Quarter Foreign Quarter 2007 Volume exchange Prices Costs 2006 -------- -------- -------- -------- -------- -------- Sales $ 1,064 ($ 105)($ 17)($ 67) $ - $ 1,253 Cost of products sold 859 81 1 - (22) 919 Distribution costs 122 11 1 - (5) 129 CVD, AD and other duties 4 - - - (4) - SG&A 37 - - - - 37 -------- -------- -------- -------- -------- -------- EBITDA(1) $ 42 ($ 13)($ 15)($ 67)($ 31) $ 168 Amortization 106 - - - 5 111 -------- -------- -------- -------- -------- -------- Operating profit (loss) ($ 64)($ 13)($ 15)($ 67)($ 26) $ 57 Financial expenses 84 84 Other expenses 7 7 Income tax expense (recovery) (48) (14) Share of earnings from investments subject to significant influence - 1 Non-controlling interests (4) (10) -------- -------- -------- -------- Net earnings (loss) ($ 111) ($ 29) $ per share (0.25) (0.07) Note (1) Non-GAAP measures When comparing the average exchange rate in the second quarter of 2007 to the same period in 2006, the Canadian dollar was 2.2% (0.3% for six months) stronger compared to the U.S. dollar. The Company estimates that this had an unfavourable impact of approximately $12 million ($3 million year-to-date) on its operating results, compared to the same period last year. The Company's hedging program was also unfavourable by $6 million ($30 million year-to-date) mainly due to a positive contribution of $17 million ($39 million year-to-date) in the second quarter of 2006, compared to $11 million ($9 million year-to-date) in the second quarter of 2007. Other currency exchange rates had a positive impact of $3 million ($6 million year-to-date). Sequentially, the Canadian dollar was 6.7% stronger than the U.S. dollar, negatively impacting the Company's operating results by $36 million in the second quarter compared to the first quarter of 2007. Segmented results before specific items --------------------------------------- Newsprint In the Newsprint segment, the $86 million reduction in operating results before specific items is mainly due to lower North American selling prices and higher cost of products sold. To view Abitibi-Consolidated Inc. charts (Newsprint) please click here: http://files.newswire.ca/490/abitibi.q2.newsprint.doc Table 5: Newsprint operating results before specific items(1) (in millions of dollars) Fav/(unfav) variance due to Second ---------------------------------- Second Quarter Foreign Quarter 2007 Volume exchange Prices Costs 2006 -------- -------- -------- -------- -------- -------- Sales $ 570 ($ 19)($ 5)($ 43) $ - $ 637 EBITDA(1) 33 (4) (3) (43) (36) 119 Amortization 58 - - - - 58 Operating profit (loss) (25) (4) (3) (43) (36) 61 Note (1) Non-GAAP measures The Company's newsprint shipments in the second quarter of 2007 were 827,000 tonnes, compared to 853,000 tonnes in the second quarter of 2006. The reduction in shipments was mainly attributable to lower sales in North America. At the end of the second quarter of 2007, the Company's newsprint inventories were approximately 30,000 tonnes higher than at the end of the second quarter 2006 and approximately 54,000 tonnes higher than at the end of December 2006. The increase is mainly due to inventory build-up required for higher international sales, with inventory destined to North America remaining at low levels. Year-over-year, the average newsprint price in the U.S. for the second quarter of 2007 was US$73 per tonne lower. In Europe, newsprint prices have increased, compared to the same quarter last year. During the second quarter of 2007, the average newsprint price in the U.S. also decreased by approximately US$28 per tonne, compared to the previous quarter as a result of the market softening in North America. In July of 2007, the Company announced a price increase of US$25 per tonne in the United States, effective September 1, 2007. On a per tonne basis, cost of products sold for newsprint in the second quarter of 2007 was $38 higher than in the same quarter of 2006. The increase in costs was mainly due to higher recycled fibre prices, as well as maintenance-related downtimes causing higher maintenance and energy costs and lower production. According to the Pulp and Paper Products Council (PPPC), total U.S. newsprint consumption was down by 10.5% in the second quarter of 2007, compared to the second quarter of 2006, as daily publishers' advertising volume and circulation continued on a downward trend. In the second quarter of 2007, total inventory decreased by 50,000 tonnes, compared to a decrease of 41,000 tonnes in the second quarter of 2006. North American newsprint production declined by 4.9% in the second quarter of 2007, compared to the same period in 2006. In the second quarter of 2007, the operating rate of the North American industry was 94%, compared to 95% in the same period of 2006. The Company expects 2007 worldwide newsprint demand to decrease by approximately 1%. Specific regions should continue to deliver growth in demand, such as Eastern Europe, China, India, Turkey and, to a certain extent, Brazil. Nonetheless, whether impacted by a weakened advertising/circulation environment or inventory destocking, North American newsprint demand is expected to decrease by approximately 9% this year. Commercial Printing Papers In the Commercial Printing Papers segment, the $10 million reduction in operating results before specific items is mainly due to a stronger Canadian dollar and lower sales volume. To view Abitibi-Consolidated Inc. charts (Printing) please click here: http://files.newswire.ca/490/abitibi.q2.commercial.doc Table 6: Commercial Printing Papers operating results before specific items(1) (in millions of dollars) Fav/(unfav) variance due to Second ---------------------------------- Second Quarter Foreign Quarter 2007 Volume exchange Prices Costs 2006 -------- -------- -------- -------- -------- -------- Sales $ 343 ($ 42)($ 9)($ 2) $ - $ 396 EBITDA(1) 16 (5) (9) (2) 2 30 Amortization 37 - - - 4 41 Operating profit (loss) (21) (5) (9) (2) 6 (11) Note (1) Non-GAAP measures The Company's shipments of commercial printing papers totalled 413,000 tonnes in the second quarter of 2007, compared to 462,000 tonnes in the second quarter of 2006. On February 25, 2007, Abitibi-Consolidated idled its Fort William paper mill for an indefinite period, due to market conditions and high production costs. The mill has an annual production capacity of approximately 145,000 tonnes of commercial printing papers. In addition, the Company took market-related downtime at three of its commercial printing paper mills, resulting in the removal of 24,000 tonnes of production in the second quarter of 2007. The average price for commercial printing papers in the U.S. remained stable, compared to the previous quarter. Compared to the second quarter of 2006, the average price in the U.S. was 0.7% lower. On a per tonne basis, cost of products sold for commercial printing papers in the second quarter of 2007 was $5 lower than in the same quarter of 2006. The cost reduction was due to lower input usage and better productivity, partly offset by a lower production volume as a result of market-related downtime. According to the PPPC, North American demand for uncoated groundwood papers increased by 1.7% in the first two months of the second quarter of 2007, compared to the same period of 2006. The increase in demand was driven by higher demand for glossy and directory grades. The outlook for uncoated groundwood papers demand remains positive. Demand growth in hi-gloss and directory grades is expected to be partly offset by a decline in demand for standard grades. Hi-gloss demand is recovering from the previous year decline. Wood Products In the Wood Products segment, the $25 million reduction in operating results before specific items is mainly due to lower selling prices and sales volume. To view Abitibi-Consolidated Inc. charts (Wood Products) please click here: http://files.newswire.ca/490/abitibi.q2.wood.doc Table 7: Wood products operating results before specific items(1) (in millions of dollars) Fav/(unfav) variance due to Second ---------------------------------- Second Quarter Foreign Quarter 2007 Volume exchange Prices Costs 2006 -------- -------- -------- -------- -------- -------- Sales $ 151 ($ 44)($ 3)($ 22) $ - $ 220 EBITDA(1) (7) (4) (3) (22) 3 19 Amortization 11 - - - 1 12 Operating profit (loss) (18) (4) (3) (22) 4 7 Note (1) Non-GAAP measures Sales volume in the second quarter of 2007 totalled 432 million board feet (MBf), compared to 541 MBf for the same period in 2006. Average selling prices in Canadian dollars for the second quarter of 2007 were 14% lower than in the same quarter of 2006, as a result of lower U.S. dollar lumber prices. During the second quarter of 2007, six sawmills were idled for periods varying from 3 weeks to the entire quarter. The temporary closures were mainly attributable to deteriorated wood products' market conditions as well as high production costs. Two of the six sawmills are still idled. In addition to these temporary closures, the Company reduced production shifts in certain other sawmills. On a per thousand board feet basis, cost of products sold for wood products in the second quarter of 2007 was $18 lower than in the second quarter of 2006. This was mainly due to lower wood costs and the revaluation of finished goods inventory at realizable value for $7 million. This was partly offset by lower production related to downtime. In the United States, housing starts decreased by 19% from an annual rate of 1.819 million units during June of 2006 to 1.467 million units in June of 2007. During the second quarter of 2007, average U.S. dollar lumber prices (f.o.b. Great Lakes) decreased by 9% for 2x4 Stud and by 13% for 2x4 Random Length, compared to the same period of 2006. Sequentially, average U.S. dollar lumber prices (f.o.b. Great Lakes) increased by 6% for 2x4 Stud and by 1% for 2x4 Random Length, compared to the first quarter of 2007. BALANCE SHEET ------------- As at June 30, 2007, total long-term debt amounted to $3,789 million for a ratio of net debt to total capitalization of 0.586, compared to $3,864 million for a net debt to total capitalization ratio of 0.592 as at December 31, 2006. The reduction in the Company's long-term debt is mainly attributable to the strengthening of the Canadian dollar. During the month of July 2007 and in preparation for the proposed combination with Bowater, Abitibi-Consolidated and its lenders have agreed to amend the Company's bank credit agreement. The amendment will allow the necessary steps for the integration of Abitibi-Consolidated with Bowater. It also includes a waiver of the interest coverage ratio from the date of the amendment to the end of June 2008. The Company has received Majority Lender's consent and is in the process of finalizing ancillary legal documentation relating to the amendment. On June 15, 2007, Standard & Poor's Rating Services lowered its rating on the Company, including the long-term corporate credit rating from B+ to B, with negative outlook. Net funded debt to capitalization ratio, calculated as per the requirements of the Company's revolving credit facilities, amounted to 57.4% at the end of June 2007 and the interest coverage ratio was 1.8x for the twelve-month period ended June 30, 2007, both ratios being compliant with the covenants of the said facilities. At the end of June 2007, the Company had drawn $275 million on the $750 million credit facilities. As at June 30, 2007, cash and cash equivalents amounted to $268 million, an increase of $65 million compared to December 31, 2006. As at June 30, 2007, the outstanding balance of the Company's securitization programs, in Canadian dollars, was $373 million, compared to $433 million as at December 31, 2006. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash used for operating activities totalled $45 million for the second quarter ended June 30, 2007, compared to cash generated by operating activities of $46 million in the corresponding period of 2006. The increase in cash used is mainly due to the lower operating results. This was partly offset by lower working capital requirements in the second quarter of 2007, compared with the same quarter last year. Capital expenditures were $15 million ($41 million year-to-date) for the three-month period ended June 30, 2007, compared to $31 million ($68 million year-to-date) in the corresponding period last year. On March 8, 2007, Abitibi-Consolidated announced an investment of $84.3 million in a new biomass energy generator to be located at its Fort Frances, Ontario, pulp and paper mill. The Company's net contribution to this project is expected to be $61.8 million. Construction began in early June of 2007, and the generator is anticipated to be in operation during the fall of 2008. The equipment will use renewable, cost-effective fuel from wood waste to generate steam and 45.5 Megawatts (MW) of electricity for the mill which should eliminate approximately 90% of its current greenhouse gas emissions. The new biomass boiler will burn mill-generated wood waste and primary sludge, as well as harvest slash from woodland operations and wood waste from area sawmills. This project is expected to positively impact the mill's manufacturing costs by approximately $26 million annually. The Company intends to limit its capital expenditure program in 2007 to approximately $125 million of which approximately $15 million is estimated to be for the biomass energy generator at Fort Frances. SHARES OUTSTANDING ------------------ As at June 30, 2007, the number of shares outstanding remained constant at 440 million, compared to the end of the same period in 2006. There were 15.5 million options outstanding at the end of June 2007, compared to 14.5 million as at the end of December 2006. OTHER NOTEWORTHY EVENTS ----------------------- On April 2, 2007, Abitibi-Consolidated closed the transaction with the Caisse de depot et placement du Quebec (Caisse) announced in January of 2007 to create a partnership for the Company's Ontario hydroelectric assets, consisting of approximately 137 MW of installed capacity. The Company has retained a 75% interest in the partnership, called ACH Limited Partnership (ACH LP), while the Caisse has acquired a 25% interest. The Caisse has also provided ACH LP with a 10-year unsecured term loan of $250 million, non recourse to the Company, to partially fund the acquisition of the facilities. The transaction, on a consolidated basis, has yielded gross proceeds of $297.5 million to Abitibi-Consolidated. ACH LP is intended to be Abitibi-Consolidated's growth vehicle in energy generation. ACH LP has also entered into a three-year revolving facility in the principal amount of $15 million. With respect to the disposal of 55,000 acres of timberlands located in Georgia and South Carolina, Abitibi-Consolidated and its partner have agreed that all proceeds from the sale of the timberlands would go to the Company. Therefore, in the first quarter of 2007, Abitibi-Consolidated acquired the timberlands from Augusta Newsprint Company. In the second quarter of 2007, the Company closed the sale of 51 tracts totalling 17,723 acres for net proceeds of US$41.3 million. The Company expects to sell the majority of the timberlands before the end of the third quarter and to complete the sale before the end of the year. Total proceeds are expected to be in excess of US$100 million. SELECTED QUARTERLY INFORMATION ------------------------------ Table 8: Summary of quarterly results (in millions of dollars, except otherwise noted) 2007 2006 ------------------ -------------------------------------- Q-2 Q-1 Q-4 Q-3 Q-2 Q-1 -------- -------- -------- -------- -------- -------- Sales $ 1,064 $ 1,068 $ 1,180 $ 1,181 $ 1,253 $ 1,237 Operating profit (loss) from continuing operations (20) (47) 236 2 48 41 Operating profit (loss) from continuing operations before specific items(1) (64) (39) 17 10 57 52 Earnings (loss) from continuing operations 148 (70) (22) (48) 157 (33) Earnings (loss) from continuing operations per share 0.34 (0.16) (0.05) (0.11) 0.36 (0.08) Net earnings (loss) 148 (70) (22) (48) 157 (33) Net earnings (loss) per share 0.34 (0.16) (0.05) (0.11) 0.36 (0.08) Exchange rates (CDN$1= US$): Average noon rate 0.911 0.854 0.878 0.892 0.891 0.866 2005 ---------------------------- Q-4 Q-3 Q-2 -------- -------- -------- Sales $ 1,310 $ 1,355 $ 1,354 Operating profit (loss) from continuing operations (352) 8 57 Operating profit (loss) from continuing operations before specific items(1) 15 49 58 Earnings (loss) from continuing (345) 95 (49) operations Earnings (loss) from continuing operations per share (0.79) 0.22 (0.11) Net earnings (loss) (355) 99 (43) Net earnings (loss) per share (0.81) 0.23 (0.10) Exchange rates (CDN$1= US$): Average noon rate 0.852 0.832 0.804 Note (1) Non-GAAP measures CHANGES IN ACCOUNTING POLICIES ------------------------------ Financial instruments, hedges and comprehensive income ------------------------------------------------------ In January 2005, the CICA published the following three new sections of the CICA Handbook: Section 3855, Financial Instruments - Recognition and Measurement, Section 3865, Hedges, and Section 1530, Comprehensive Income. Together, these standards introduced new requirements for the recognition and measurement of financial instruments, hedge accounting and comprehensive income that are, for the most part, harmonized with standards issued by the U.S. Financial Accounting Standards Board. These new recommendations have been adopted by the Company for the fiscal year beginning on January 1, 2007. These new recommendations did not have a significant impact on the Company's financial position, earnings or cash flows, but require presenting two new statements entitled "Comprehensive Income (Loss)" and "Changes in Shareholders' Equity". More information on the above changes is presented in Note 1 of the Company's interim consolidated financial statements. Accounting changes ------------------ In 2006, the CICA issued Section 1506, Accounting Changes, of the Handbook. This standard establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies and estimates, and correction of errors. The Company applied this standard as of January 1, 2007. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS -------------------------------------------------------- In the quarter ended June 30, 2007, the Company did not make any significant changes in, nor take any significant corrective actions regarding its internal controls or other factors that could significantly affect such internal controls. The Company's CEO and CFO periodically review the Company's disclosure controls and procedures for effectiveness and conduct an evaluation each quarter. As of the end of the second quarter, the Company's CEO and CFO were satisfied with the effectiveness of the Company's disclosure controls and procedures. OVERSIGHT ROLE OF AUDIT COMMITTEE --------------------------------- The Audit Committee reviews, with Management and the external auditor, the Company's quarterly MD&A, and related consolidated financial statements and approves the release to shareholders. Management and the internal auditor of the Company also periodically present to the Committee a report of their assessment of the Company's internal controls and procedures for financial reporting. The external auditor periodically prepares a report for Management on internal control weaknesses noted, if any, identified during the course of the auditor's annual audit, which is reviewed by the Audit Committee. FORWARD-LOOKING STATEMENTS -------------------------- Certain statements contained in this MD&A and in particular the statements contained in various outlook sections, constitute forward-looking statements. These forward-looking statements relate to the future financial condition, results of operations or business of the Company. These statements may be current expectations and estimates about the markets in which Abitibi-Consolidated operates and management's beliefs and assumptions regarding these markets. These statements are subject to important risks and uncertainties, which are difficult to predict and assumptions, which may prove to be inaccurate. The results or events predicted in the forward-looking statements contained in this MD&A may differ materially from actual results or events. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In particular, forward-looking statements do not reflect the potential impact of any merger, acquisitions or other business combinations or divestitures that may be announced or completed after such statements are made. Abitibi-Consolidated Inc. Consolidated Statements of Earnings Three months ended Six months ended June 30 June 30 June 30 June 30 (unaudited) 2007 2006 2007 2006 (in millions of Canadian dollars, unless otherwise noted) $ $ $ $ ------------------------------------------------------------------------- Sales 1,064 1,253 2,132 2,490 ------------------------------------------------------------------------- Cost of products sold, excluding amortization 859 919 1,701 1,825 Distribution costs 122 129 238 258 Countervailing, anti-dumping and other duties 4 10 6 19 Selling, general and administrative expenses 37 26 71 66 Mill closure and other elements (note 3 and note 4) (44) 10 (32) 12 Amortization of plant and equipment 101 107 206 213 Amortization of intangible assets 5 4 9 8 ------------------------------------------------------------------------- Operating profit (loss) (20) 48 (67) 89 Financial expenses (note 5) 87 84 172 167 Gain on translation of foreign currencies (235) (156) (268) (141) Other expenses 7 7 13 14 ------------------------------------------------------------------------- Earnings before the following items 121 113 16 49 Income tax recovery (note 6) (31) (53) (80) (93) Share of earnings from investments subject to significant influence - 1 1 1 Non-controlling interests (4) (10) (19) (19) ------------------------------------------------------------------------- Net earnings 148 157 78 124 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Per common share (in dollars, basic and diluted) Net earnings 0.34 0.36 0.18 0.28 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares outstanding (in millions) 440 440 440 440 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Comprehensive Income (Loss) Three months ended Six months ended June 30 June 30 June 30 June 30 (unaudited) 2007 2006 2007 2006 (in millions of Canadian dollars) $ $ $ $ ------------------------------------------------------------------------- Net earnings 148 157 78 124 Other comprehensive income (loss), net of income taxes Foreign currency translation adjustment (99) (48) (111) (46) Reclassification to earnings of losses on derivatives designated as cash flow hedges(a) - - (1) - Change in unrealized gains on derivatives designated as cash flow hedges(b) 23 - 28 - ------------------------------------------------------------------------- Comprehensive income (loss) 72 109 (6) 78 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (a) Nil in the three months ended June 30, 2007, and net of $1 million of income taxes in the six months ended June 30, 2007 (2006 - nil) (b) Net of income taxes of $10 million in the three months ended June 30, 2007, and of $12 million in the six months ended June 30, 2007 (2006 - nil) See accompanying Notes to consolidated financial statements Abitibi-Consolidated Inc. Consolidated Statements of Cash Flows Three months ended Six months ended June 30 June 30 June 30 June 30 (unaudited) 2007 2006 2007 2006 (in millions of Canadian dollars) $ $ $ $ ------------------------------------------------------------------------- Operating activities Net earnings 148 157 78 124 Amortization 106 111 215 221 Future income taxes (32) (51) (84) (89) Gain on translation of foreign currency long-term debt (285) (169) (325) (156) Employee future benefits, excess of funding over expense (12) (8) (37) (18) Non-cash mill closure and other elements (note 3) - - (9) - Gain on disposal of assets (note 2) (31) - (31) - Net gain on dilution resulting from units issued by a subsidiary (note 4) (33) - (33) - Non-controlling interests 4 10 19 19 Other non-cash items 6 4 1 (3) ------------------------------------------------------------------------- (129) 54 (206) 98 Changes in non-cash operating working capital components 84 (8) (9) (153) ------------------------------------------------------------------------- Cash flows generated by (used in) operating activities (45) 46 (215) (55) ------------------------------------------------------------------------- Financing activities Increase in long-term debt 413 121 613 288 Repayment of long-term debt (265) (114) (335) (186) Dividends paid to shareholders - (11) - (22) Dividends and cash distributions paid to non-controlling interests (6) (10) (12) (18) Net proceeds on issuance of units by a subsidiary (note 4) 37 - 37 - Other - (1) - - ------------------------------------------------------------------------- Cash flows generated by (used in) financing activities 179 (15) 303 62 ------------------------------------------------------------------------- Investing activities Additions to property, plant and equipment (15) (31) (41) (68) Additions to intangible assets - - - (3) Cash distributions from entities subject to significant influence 2 - 2 - Receipt of note receivable - 10 - 10 Net proceeds on disposal of assets (note 2) 42 - 42 1 Cash subject to restriction (note 4) (22) - (22) - Other (2) 2 (1) 2 ------------------------------------------------------------------------- Cash flows generated by (used in) investing activities 5 (19) (20) (58) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents during the period 139 12 68 (51) Foreign currency translation adjustment (3) - (3) - Cash and cash equivalents, beginning of period 132 4 203 67 ------------------------------------------------------------------------- Cash and cash equivalents, end of period 268 16 268 16 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying Notes to consolidated financial statements Components of the changes in non-cash operating working capital Accounts receivable 12 (7) 59 2 Inventories 106 69 5 (4) Prepaid expenses (16) (18) (18) (22) Accounts payable and accrued liabilities (18) (52) (55) (129) ------------------- ------------------ 84 (8) (9) (153) ------------------- ------------------ Cash outflows during the period related to Interest on long-term debt 89 89 166 159 Income taxes 4 4 7 2 ------------------- ------------------ 93 93 173 161 ------------------- ------------------ Abitibi-Consolidated Inc. Consolidated Balance Sheets June 30 December 31 (unaudited) 2007 2006 (in millions of Canadian dollars) $ $ ------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents 268 203 Accounts receivable 330 362 Inventories 670 683 Prepaid expenses 71 53 Future income taxes 49 70 ------------------------------------------------------------------------- 1,388 1,371 Timberlands held for sale (note 2) 26 - Property, plant and equipment 3,704 3,984 Intangible assets 451 460 Employee future benefits 370 328 Future income taxes 296 322 Other assets (note 4) 181 200 Goodwill 1,294 1,297 ------------------------------------------------------------------------- 7,710 7,962 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities (note 7) 739 785 Long-term debt due within one year 356 72 ------------------------------------------------------------------------- 1,095 857 Long-term debt 3,433 3,792 Employee future benefits 160 162 Future income taxes 538 629 Non-controlling interests 78 71 Shareholders' equity Capital stock 3,518 3,518 Contributed surplus 42 40 Deficit (799) (843) Accumulated other comprehensive loss (note 9) (355) (264) ------------------------------------------------------------------------- 2,406 2,451 ------------------------------------------------------------------------- 7,710 7,962 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying Notes to consolidated financial statements Abitibi-Consolidated Inc. Consolidated Statements of Changes in Shareholders' Equity Three months ended Six months ended June 30 June 30 June 30 June 30 (unaudited) 2007 2006 2007 2006 (in millions of Canadian dollars) $ $ $ $ ------------------------------------------------------------------------- Capital stock ------------------------------------------------------------------------- Common shares, beginning and end of period 3,518 3,518 3,518 3,518 ------------------------------------------------------------------------- Contributed surplus Contributed surplus, beginning of period 41 35 40 34 Stock options 1 2 2 3 ------------------------------------------------------------------------- Contributed surplus, end of period 42 37 42 37 ------------------------------------------------------------------------- Deficit Deficit, beginning of period (947) (919) (843) (875) Transition adjustment on adoption of Financial Instruments standards, net of taxes (note 1) - - (34) - Net earnings 148 157 78 124 Dividends declared - (11) - (22) ------------------------------------------------------------------------- Deficit, end of period (799) (773) (799) (773) ------------------------------------------------------------------------- Accumulated other comprehensive loss, net of taxes Accumulated other comprehensive loss, beginning of period (279) (274) (264) (276) Transition adjustment on adoption of Financial Instruments standards (note 1) - - (7) - Other comprehensive loss for the period (76) (48) (84) (46) ------------------------------------------------------------------------- Accumulated other comprehensive loss, end of period (355) (322) (355) (322) ------------------------------------------------------------------------- Total shareholders' equity, end of period 2,406 2,460 2,406 2,460 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total of deficit and accumulated other comprehensive loss amounts to $1,154 million as of June 30, 2007 ($1,095 million as of June 30, 2006). See accompanying Notes to consolidated financial statements Abitibi-Consolidated Inc. Consolidated Business Segments (unaudited) (in millions of Canadian dollars, unless otherwise noted) Additions Operating to Three months ended Amorti- profit capital Sales June 30, 2007 Sales zation (loss)(1) assets(2) volume ------------------------------------------------------------------------- $ $ $ $ Newsprint 570 58 23 14 827 thousands of tonnes Commercial printing papers 343 37 (24) - 413 thousands of tonnes Wood products (3) 151 11 (19) 1 432 millions of board feet ------------------------------------------------------------------------- 1,064 106 (20) 15 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended June 30, 2006 ------------------------------------------------------------------------- Newsprint 637 58 63 16 853 thousands of tonnes Commercial printing papers 396 41 (13) 8 462 thousands of tonnes Wood products (3) 220 12 (2) 7 541 millions of board feet ------------------------------------------------------------------------- 1,253 111 48 31 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Additions Operating to Six months ended Amorti- profit capital Sales June 30, 2007 Sales zation (loss)(1) assets(2) volume ------------------------------------------------------------------------- $ $ $ $ Newsprint 1,146 117 31 31 1,606 thousands of tonnes Commercial printing papers 695 76 (44) 9 814 thousands of tonnes Wood products (3) 291 22 (54) 1 831 millions of board feet ------------------------------------------------------------------------- 2,132 215 (67) 41 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six months ended June 30, 2006 ------------------------------------------------------------------------- Newsprint 1,299 119 105 34 1,733 thousands of tonnes Commercial printing papers 756 79 (19) 25 881 thousands of tonnes Wood products (3) 435 23 3 12 1,040 millions of board feet ------------------------------------------------------------------------- 2,490 221 89 71 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Specific items affecting: Mill closure and other elements ------------------ CVD, AD Mill Other and SG&A Total Three months ended closure elements other expenses specific June 30, 2007 cost (4) duties(5) (6) items --------------------------------------------------------------------- $ $ $ $ $ Newsprint 1 (49) - - (48) Commercial printing papers 11 (8) - - 3 Wood products - 1 - - 1 --------------------------------------------------------------------- 12 (56) - - (44) --------------------------------------------------------------------- --------------------------------------------------------------------- Three months ended June 30, 2006 --------------------------------------------------------------------- Newsprint - 4 - (6) (2) Commercial printing papers - 5 - (3) 2 Wood products - 1 10 (2) 9 --------------------------------------------------------------------- - 10 10 (11) 9 --------------------------------------------------------------------- --------------------------------------------------------------------- Mill closure and other elements ------------------ CVD, AD Mill Other and SG&A Total Six months ended closure elements other expenses specific June 30, 2007 cost (4) duties(5) (6) items --------------------------------------------------------------------- $ $ $ $ $ Newsprint 1 (51) - (1) (51) Commercial printing papers 19 (4) - (1) 14 Wood products - 3 (2) - 1 --------------------------------------------------------------------- 20 (52) (2) (2) (36) --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ended June 30, 2006 --------------------------------------------------------------------- Newsprint 1 6 - (6) 1 Commercial printing papers - 5 - (3) 2 Wood products - - 19 (2) 17 --------------------------------------------------------------------- 1 11 19 (11) 20 --------------------------------------------------------------------- --------------------------------------------------------------------- (2) Capital assets include property, plant and equipment and intangible assets. (3) Wood products sales exclude inter-segment sales of $38 million for the three months ended June 30, 2007 ($45 million for the three months ended June 30, 2006) and $78 million for the the six months ended June 30, 2007 ($88 million for the six months ended June 30, 2006). (4) Other elements include early retirement program, labour force reductions, gain on sale of timberlands, net gain on dilution resulting from units issued by a subsidiary and expenses related to the Abitibi-Consolidated and Bowater announced merger. (5) Credit related to adjustment to the settlement of the lumber dispute. (6) Related to prior years capital tax adjustment included in selling, general and administrative expenses. June 30 December 31 2007 2006 Total assets $ $ ------------------------------------------------------------------------- Newsprint 4,268 4,358 Commercial printing papers 2,682 2,742 Wood products 760 862 ------------------------------------------------------------------------- 7,710 7,962 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Abitibi-Consolidated Inc. Notes to Consolidated Financial Statements June 30, 2007 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 1. Summary of significant accounting policies These interim consolidated financial statements of Abitibi-Consolidated Inc. (the "Company"), expressed in Canadian dollars, are prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), with the exception that their disclosures do not conform in all material respects to the requirements of GAAP for annual financial statements. They should be read in conjunction with the latest annual financial statements. These consolidated financial statements are prepared using the same accounting principles and application thereof as the consolidated financial statements for the year ended December 31, 2006, except for the following: Accounting changes On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1506, Accounting Changes. This standard establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies and estimates, and correction of errors. Financial instruments On January 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement and Section 3865, Hedges. These standards provide accounting guidelines for recognition and measurement of financial assets, financial liabilities and non-financial derivatives, and describe when and how hedge accounting may be applied. The Company's adoption of these new Financial Instruments standards resulted in changes in the accounting for financial instruments and hedges, as well as the recognition of certain transition adjustments that have been recorded in opening deficit or opening accumulated other comprehensive loss as described below. The comparative interim consolidated financial statements have not been restated other than for the foreign currency translation adjustment, which is now disclosed within accumulated other comprehensive loss. The principal changes in the accounting for financial instruments and hedges due to the adoption of these accounting standards are described below. (a) Comprehensive income (loss) Comprehensive income (loss), established under CICA Section 1530, is defined as the change in equity, from transactions and other events and circumstances from non-owner sources, and is composed of the Company's net earnings (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are recognized in comprehensive income (loss), but excluded from net earnings (loss), and include foreign currency translation gains and losses on the net investment in self-sustaining operations and changes in the fair market value of derivative instruments designated as cash flow hedges, all net of income taxes. The components of comprehensive income (loss) are disclosed in the interim consolidated statements of comprehensive income (loss). (b) Financial assets and financial liabilities Under the new standards, financial assets and financial liabilities are initially recognized at fair value and are classified into one of these five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. They are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition. Held-for-trading Financial instruments classified as held-for-trading are carried at fair value at each balance sheet date with the changes in fair value recorded in net earnings (loss) in the period in which these changes arise. Held-to-maturity investments, loans and receivables and other financial liabilities Financial instruments classified as loans and receivables, held-to- maturity investments and other financial liabilities are carried at amortized cost using the effective interest method. The interest income or expense is included in net earnings (loss) over the expected life of the instrument. Available-for-sale Financial instruments classified as available-for-sale are carried at fair value at each balance sheet date with the changes in fair value recorded in other comprehensive income (loss) in the period in which the changes arise. Securities that are classified as available-for-sale and do not have a readily available market value are recorded at cost. Available-for-sale securities are written down to fair value through earnings (loss) whenever it is necessary to reflect other-than- temporary impairment. Upon derecognition, all cumulative gain or loss is then recognized in net earnings (loss). As a result of the adoption of these new standards, the Company has classified its cash and cash equivalents as held-for-trading. Accounts receivable are classified as loans and receivables. The Company's investments consist of equity accounted for investments which are excluded from the scope of this standard. Accounts payable and accrued liabilities and long-term debt, including interest payable are classified as other liabilities, all of which are measured at amortized cost. (c) Derivatives and hedge accounting Embedded derivatives All derivative instruments are recorded in the consolidated balance sheets at fair value at each balance sheet date. Derivatives may be embedded in other financial instruments (the "host instrument"). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new standards, embedded derivatives are treated as separate derivatives if their economic characteristics and risks are not clearly and closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value at each balance sheet date with subsequent changes recognized in net earnings (loss) in the period in which the changes arise. The Company selected January 1, 2003 as its transition date for embedded derivatives, which is the latest date that could be selected according to the accounting standard. Hedge accounting At the inception of a hedging relationship, the Company documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The Company also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging transactions are effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. Under the new standards, all derivatives are recorded at fair value. These derivatives are recorded in accounts receivable or accounts payable. The method of recognizing fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments, and, if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives not designated as hedges are recognized in the consolidated statements of earnings (loss). When derivatives are designated as hedges, the Company classifies them either as: (i) hedges of the change in fair value of recognized assets or liabilities or firm commitments (fair value hedges); or (ii) hedges of the variability in highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flow hedges). Fair value hedge The Company has outstanding interest rate swap contracts, which it designates as a fair value hedge related to variations of the fair value of its long-term debt due to change in LIBOR interest rates. Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the consolidated statements of earnings (loss). A corresponding adjustment amounting to changes in the fair value of the assets, liabilities or group thereof that are attributable to the hedged risk is recorded as an adjustment of the hedged item and to earnings. Any gain or loss in fair value relating to the ineffective portion of the hedging relationship is recognized immediately in "Financial expenses" in the consolidated statements of earnings (loss). If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of the hedged item is amortized to the consolidated statements of earnings (loss) based on a recalculated effective interest rate over the residual period to maturity, unless the hedged item has been derecognized in which case it is released to the statements of earnings (loss) immediately. Upon adoption of the new standards, the Company recorded a net increase in accounts payable of $37 million, and a decrease of $37 million in long-term debt. Cash flow hedge The Company has outstanding options and forward exchange contracts, which it designates as cash flow hedges of anticipated future revenue for a maximum period of two years. The amounts and timing of future cash flows are projected on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows over time form the basis for identifying the effective portion of gains and losses on the derivatives designated as cash flow hedges of forecasted transactions. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in comprehensive income (loss). Any gain or loss in fair value relating to the ineffective portion is recognized immediately in "Sales" in the consolidated statements of earnings (loss). Amounts accumulated in other comprehensive income (loss) are reclassified to the consolidated statement of earnings (loss) in the period in which the hedged item affects earnings. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income (loss) at that time remains in other comprehensive income (loss) until the forecasted transaction is eventually recognized in the consolidated statements of earnings (loss). When it is probable that a forecasted transaction will not occur, the cumulative gain or loss that was reported in other comprehensive income (loss) is immediately transferred to the statements of earnings (loss). Upon adoption of the new standards, the Company recorded an increase in accounts payable of $10 million, an increase of $3 million of future income tax assets, and an increase of $7 million net of taxes in accumulated other comprehensive loss. (d) Deferred financing fees Under the new standards, transaction costs related to the issuance or acquisition of financial assets and liabilities (other than those classified as held-for-trading) may be either all recognized into earnings (loss) as incurred, or are recorded with the asset or liability to which they are associated and amortized using the effective-interest rate method. Previously, the Company had deferred these costs and amortized them over the life of the related financial asset or liability. The Company elected to recognize all such costs into earnings (loss). As a result, the Company wrote-off deferred financing costs of $39 million and income taxes of $5 million, resulting in a $34 million adjustment to deficit on January 1, 2007. The following table summarizes the transition adjustments required to adopt the new standards: Accumulated other comprehensive Deficit loss ------------------- ------------------- Before After Before After tax tax tax tax $ $ $ $ ------------------------------------------------------------------------- Adoption of new accounting policies for: Deferred financing costs (39) (34) - - Cash flow hedges - - (10) (7) ------------------------------------------------------------------------- (39) (34) (10) (7) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The fair value of financial instruments is determined using price quoted on active markets, when available, and recognized valuation models using observable market-based inputs. ACCOUNTING PRINCIPLES ISSUED BUT NOT YET IMPLEMENTED ---------------------------------------------------- Financial instruments - disclosure and presentation In December 2006, the CICA published the following two sections of the CICA Handbook: Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. These standards introduce disclosure and presentation requirements that will enable financial statements' users to evaluate, and enhance their understanding of, the significance of financial instruments for the entity's financial position, performance and cash flows, and the nature and extent of risks arising from financial instruments to which the entity is exposed, and how those risks are managed. Capital disclosures In December 2006, the CICA published section 1535 of the Handbook, Capital disclosures, which requires disclosure of both qualitative and quantitative information that enables financial statements' users to evaluate the entity's objectives, policies and processes for managing capital. Inventories In January 2007, the CICA published section 3031 of the Handbook, Inventories, which prescribes the accounting treatment for inventories. Section 3031 provides guidance on the determination of costs and its subsequent recognition as an expense, and provides guidance on the cost formulas used to assign costs to inventories. Those standards must be adopted by the Company for the fiscal year beginning on January 1, 2008. While the Company is currently assessing the impact of these new recommendations on its financial statements, it does not expect the recommendations to have a significant impact on its financial position, earnings or cash flows. 2. Timberlands held for sale On February 23, 2007, the Company acquired all of the timberlands from its 52.5%-owned subsidiary located in Augusta, Georgia. This related-party transaction was concluded at fair market value, and the partner's $9 million share of the gain recorded by the subsidiary is presented in "Mill closure and other elements" in the "Newsprint" segment, in the interim consolidated statements of earnings. This gain, which is to be recognized by the Company's minority shareholders in the subsidiary, has been recorded in "Non-controlling interests" and, thus, the transaction has no impact on the "Net earnings" in the consolidated statements of earnings. In the three months ended June 30, 2007, the Company sold 17,723 acres of timberlands for net proceeds of $44 million (US$41.3 million). The Company expects to sell the majority of the remaining timberlands before the end of the third quarter, and to complete the sale before the end of the year. As the "held for sale" classification criteria were met as at June 30, 2007, the timberlands, with a book value of $26 million, are classified as such in the consolidated balance sheets. 3. Mill closure and other elements Three months ended June 30, 2007 On February 25, 2007, the Company idled its Fort William, Ontario, paper mill for an indefinite period of time, due to current market conditions and high production costs. In the three months ended June 30, 2007, a charge of $10 million of mill closure and other elements was recorded related to this idling, mainly for severance and other labour-related costs. During the quarter, the Company also recorded a gain of $31 million on the disposal of timberlands, a net gain on dilution of $33 million resulting from units issued by a subsidiary (see note 4), $9 million of costs related to the announced merger of Abitibi-Consolidated and Bowater, a credit of $1 million of other elements and a charge of $2 million of mill closure elements. The mill closure and other elements included in the "Newsprint", "Commercial printing papers" and "Wood products" segments were a credit of $48 million, a charge of $3 million and a charge of $1 million, respectively. Three months ended June 30, 2006 In the three months ended June 30, 2006, the Company recorded a charge of $10 million of labour force reductions, of which $4 million was included in the "Newsprint" segment, $5 million in the "Commercial printing papers" segment and $1 million in the "Wood products" segment. Six months ended June 30, 2007 The idling of the Fort William, Ontario, paper mill resulted in a charge of $18 million of mill closure and other elements, mainly for severance and other labour-related costs. In the six months ended June 30, 2007, the Company also recorded a gain of $31 million on the disposal of timberlands, a net gain on dilution of $33 million resulting from units issued by a subsidiary (see note 4), $20 million of costs related to the announced merger of Abitibi-Consolidated and Bowater, a $1 million charge of early retirement program and labour force reductions, the partner's $9 million share of the gain recorded by the subsidiary upon the sale of all its timberlands to the Company, and a charge of $2 million of mill closure elements. The mill closure and other elements included in the "Newsprint", "Commercial printing papers" and "Wood products" segments were a credit of $50 million, a charge of $15 million and a charge of $3 million, respectively. Six months ended June 30, 2006 In the six months ended June 30, 2006, the Company recorded a charge of $12 million of early retirement program and labour force reductions, $1 million of mill closure and other elements, as well as a $1 million compensation for reduction of cutting rights in British Columbia. The "Newsprint" and "Commercial printing papers" segments include $7 million and $5 million of mill closure and other elements, respectively. There are no mill closure and other elements in the "Wood products" segment in the six months ended June 30, 2006. 4. Partnership in energy generation On April 1, 2007, the Company completed the transfer of its Ontario hydroelectric assets and related water rights (the "Facilities") to its wholly owned subsidiary called ACH Limited Partnership ("ACH LP"). On April 2, ACH LP issued new units equivalent to a 25% interest of the partnership to the Caisse de depot et placement du Quebec (the "Caisse"), for gross proceeds of $48 million. This transaction resulted in a net gain on dilution resulting from units issued by a subsidiary of $33 million, after $11 million of transaction costs ($31 million net of income taxes) recorded in "Mill closure and other elements", of which $23 million is included in the "Newsprint" segment and $10 million in the "Commercial printing papers" segment. The Caisse has also provided ACH LP with a 10-year unsecured 7.132% term loan of $250 million, non recourse to the Company, to partially fund the acquisition of the Facilities. ACH LP has also entered into an unsecured bank credit facility of $15 million, for general business purposes. The facility matures on March 31, 2010 and is non recourse to the Company. The unsecured term loan and unsecured bank credit facility require ACH LP to meet a specific financial ratio, which is met as at June 30, 2007. As of June 30, 2007, ACH LP had $22 million of restricted cash recorded in "Other assets". Of this amount, $18 million will be used over the next 3 years to realize a capital project related to the Facilities and $4 million is required as a reserve under the term loan credit agreement. As per the same credit agreement, another $2 million will have to be reserved by ACH LP prior to September 30, 2007. DATASOURCE: ABITIBI-CONSOLIDATED INC. CONTACT: Investors: Francesco Alessi, (514) 394-2341, ; Media and Others: Denis Leclerc, (514) 394-3601,

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