Bowater Reports 2nd Quarter Loss

July 27, 2006 (Press Release) - Bowater Inc. today reported a net loss of $10.6 million, or $0.18 per diluted share, on sales of $899.4 million for the second quarter of 2006. These results compare with a net loss of $3.6 million, or $0.06 per diluted share, on sales of $897.5 million in the second quarter of 2005.

"Our second quarter financial results were impacted by additional costs related to scheduled operational maintenance, conversion of a newsprint machine to specialty papers at our Calhoun, Tennessee facility and permanent closure of a market pulp line at our Thunder Bay site," said David J. Paterson, President and Chief Executive Officer. "However, with these events largely behind us, I look forward to improved operational and financial performance which, when combined with our asset sale program, should lower our debt levels in the second half of the year."

Second quarter 2006 special items, net of tax, consisted of a $45.7 million gain related to asset sales, an $18.5 million charge related to tax adjustments, and a $20.2 million loss relating to foreign currency changes. Excluding these special items, the net loss for the quarter was $17.6 million, or $0.31 per diluted share, compared with the 2005 second quarter net loss before special items of $3.1 million, or $0.05 per diluted share.

The asset sale program announced last October is well ahead of schedule. During the second quarter, proceeds were $201.3 million providing an after-tax gain of $45.7 million. As a result, total debt, less cash on the balance sheet, declined by $148.0 million. The company currently owns 165,000 acres of timberlands and leases 72,000 acres in the United States and owns 620,000 acres in Canada. Additional sales are expected in the second half of the year.

During the quarter, the company's manufacturing costs were negatively impacted by the strong Canadian dollar, which reached the highest quarterly average in almost 30 years. Due to scheduled maintenance, the company curtailed 13,000 metric tons of newsprint and 15,000 metric tons of market pulp. Maintenance spending was approximately $14 million higher than the first quarter of 2006. It is anticipated that maintenance costs will be lower in the third quarter.

The coated papers average transaction price for the company decreased $21 per short ton in the quarter compared with the first quarter of 2006, while the average operating cost decreased $22 per short ton due to lower energy and repair costs. The company expects normal seasonal improvements in demand in the latter half of the year.

In specialty papers, the company's average transaction price increased $11 per short ton. Operating income was reduced by approximately $10 million due to the conversion of the Calhoun, Tenn., machine and average operating costs increased $51 per short ton. The machine conversion was completed at the end of the second quarter and the new freesheet hybrid product was introduced in July.

The company's average transaction price for newsprint increased $18 per metric ton. During the quarter, average operating costs increased by $16 per metric ton primarily due to a stronger Canadian dollar and higher maintenance related costs. Shipments declined by 26,000 metric tons in the quarter due to increased maintenance and elimination of newsprint capacity as a result of the Calhoun machine conversion. The company's newsprint inventory level declined to the lowest level in almost five years.

The average market pulp transaction price for the company increased $41 per metric ton. Average operating costs increased $49 per metric ton compared to the first quarter primarily due to scheduled maintenance costs. The permanent closure of the Thunder Bay pulp line 'A' in the second quarter reduced operating income by approximately $10 million. As a result of this closure, annual operating income is expected to improve by $20 million by the beginning of 2007.

The average lumber transaction price for the company decreased $17 per thousand board feet. During the quarter, the company paid countervailing and antidumping duties of approximately $4 million, bringing the total paid to date to approximately $110 million. The company is addressing lower lumber prices by reducing production volume.

The effective tax rate, as adjusted for special items, was a benefit of 64 percent in the second quarter. The rate was impacted by approximately $10 million related to recent state and Canadian tax law changes. The company's statutory rate remains approximately 35 percent.

During the quarter, the company refinanced its existing credit agreement and accounts receivable securitization program. The new facility includes a $415 million, five-year, revolving credit facility in the United States and a $165 million, 364-day, renewable revolving credit facility in Canada. As of the end of the quarter, there was no outstanding debt under either agreement

SOURCE: Bowater Inc.

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