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Bowater turns fourth quarter profit on cash refund

Feb. 6, 2007 - Bowater Inc. today reported net income for the fourth quarter of 2006 of $107.2 million, or $1.86 per diluted share, on sales of $861.3 million. These results compare with a net loss of $101.9 million, or $1.78 per diluted share, on sales of $876.4 million for the fourth quarter of 2005.

For the full year 2006, the company reported a net loss of $138.3 million, or $2.41 per diluted share. This compares with a net loss of $120.6 million, or $2.10 per diluted share, for 2005. Sales in 2006 totaled $3.53 billion, up slightly from 2005 sales of $3.48 billion.

"During 2006, we realigned our organization to focus on operational excellence," said David J. Paterson, Chairman, President and Chief Executive Officer. "This realignment, combined with the addition of several key manufacturing leaders, has resulted in the beginnings of meaningful operational improvements. In addition, we made substantial progress in debt reduction, reducing net debt by $280 million in 2006. Our fourth quarter results were impacted by significant curtailments in paper production. However, I am confident with the changes we have made to our manufacturing base; we have laid the groundwork for a better 2007. While we continue to improve our operations as a standalone company, our recently announced agreement to merge with Abitibi is a transformational move that will allow us to generate even greater efficiencies and compete more effectively."

Fourth quarter 2006 special items, net of tax, consisted of a: $19.5 million gain related to asset sales, $14.1 million charge related to tax adjustments, $27.1 million gain relating to foreign currency changes, $101.1 million income from the refund of lumber duties, $3.2 million severance charge, and $7.8 million impairment charge. Excluding these special items, the net loss for the quarter was $15.4 million, or $0.27 per diluted share, compared with a 2005 fourth quarter net income before special items of $15.5 million, or $0.27 per diluted share.

During the fourth quarter, the company received a cash refund of $103.9 million, or 82% of the amount deposited with U.S. Customs, pertaining to softwood lumber shipments from Canada to the U.S. The refund consisted of a return of $92.5 million of the duties paid and $11.4 million of interest due the company. Since 2002, the duties have been included in distribution costs and deducted from operating earnings in the lumber segment. This cash refund was applied to debt during the quarter. Total debt, less cash on the balance sheet, declined by $93.0 million during the fourth quarter and has declined by $279.5 million since December 31, 2005. During the quarter, the company repurchased $95.3 million face value of its Series A, 10.625% notes due June 15, 2010 and booked a net gain of $5.2 million. The company ended the quarter with cash on hand of $98.9 million.

Also during the quarter, the company received proceeds of $35.3 million from the sale of 19,100 acres of timberlands. Since the program was announced in the fall of 2005, the company has received proceeds of approximately $375 million from asset sales. The company expects to receive an additional $170 million of proceeds from timberland sales by the end of 2007.

SEGMENT DETAIL

Newsprint

Operating earnings for the fourth quarter were $11.3 million, a decrease of $19.6 million from the third quarter. The company's average transaction price decreased $3 per metric ton, compared to the third quarter. Average operating costs increased by $32 per metric ton primarily due to lower production volumes, higher recycled paper costs and higher energy usage. The lower production volumes were largely driven by a 17,000 metric ton curtailment of newsprint at the Thunder Bay site and a 17,000 metric ton reduction at the South Korea facility. The South Korean reduction was due to labor issues, which have been resolved and production has returned to a normal schedule. Operating income was reduced by $14 million from these curtailments. Shipments increased slightly in the fourth quarter. Total newsprint shipments were 12% lower in the fourth quarter of 2006 than in the fourth quarter of 2005. Newsprint inventories decreased 9,600 metric tons to 67,900 metric tons in the fourth quarter.

Coated Papers

Operating earnings for the quarter increased slightly from the third quarter to $15.8 million. The company's average transaction price for coated papers decreased $17 per short ton in the quarter compared with the third quarter of 2006. Average operating costs decreased $20 per short ton due to higher production volumes and lower repair material costs. Coated paper inventories decreased slightly to 37,200 short tons.

Specialty Papers

For the fourth quarter, specialty papers had an operating loss of $9.0 million. The company's average transaction price decreased $5 per short ton during the quarter. Average operating costs increased $32 per short ton, due primarily to lower production levels as a result of the production curtailments of approximately 20,000 short tons at the Thunder Bay facility.

Market Pulp

Operating earnings for pulp increased from the third quarter by $3.0 million to $20.4 million for the fourth quarter. The average market pulp transaction price for the company increased $14 per metric ton. Average operating costs increased slightly compared to the third quarter. Inventory for the company continued to decline during the quarter to 48,900 tons. The company has informed its North American customers of a $20 per metric ton price increase in softwood and a $30 per metric ton fluff pulp price increase effective January 1, 2007.

Lumber

Operating earnings for the quarter were $83.0 million, including the softwood duty refund of $92.5 million. The average lumber transaction price for the company decreased $17 per thousand board feet. Excluding the impact of the softwood duty refund, operating costs decreased $51 per thousand board feet. Due to the volume limitations imposed on the company as a result of the softwood lumber agreement between the United States and Canada, the company indefinitely closed the Ignace, Ontario sawmill and reduced production at its Thunder Bay, Ontario sawmill. An impairment charge was recorded for the Ignace sawmill during the quarter. In addition, the company permanently closed its Girardville, Quebec sawmill.

Recent Events

On January 29, 2007, Bowater and Abitibi-Consolidated announced a definitive agreement to combine in an all-stock merger of equals to create AbitibiBowater Inc., a new leader in publication papers which would become the third largest public paper and forest products company in North America and the eighth largest in the world. Under the terms of the transaction, each common share of Abitibi-Consolidated will be exchanged for 0.06261 common share of AbitibiBowater, and each Bowater common share will be exchanged for 0.52 common share of AbitibiBowater. The exchange ratio will result in 48% of AbitibiBowater being owned by former Abitibi-Consolidated shareholders and 52% of AbitibiBowater being owned by former Bowater shareholders.

"Combining with Abitibi will allow us to address the realities of the current marketplace," said Paterson. "The $250 million in estimated annualized cost synergies, which we expect to fully realize within two years, are realistic and will deliver significant value to our shareholders. Given the improvements these synergies will allow us to make to our products and service, as well as the highly competitive market in which we operate, we are very confident that this is a pro-competitive transaction that will benefit our shareholders and customers."

SOURCE: Bowater, Inc.




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