ABY Abbey Nat.Dub.

A (TSX) ABY (NYSE) MONTREAL, Feb. 1 /PRNewswire-FirstCall/ -- Abitibi Consolidated Inc. reported today a fourth quarter loss of $355 million, or 81 cents a share, after recording after-tax asset write downs of $228 million. This compares to a loss of $108 million, or 24 cents a share, in the same quarter of 2004, which also included mill closure elements and asset write downs as well as a credit for countervailing and anti-dumping duties (CVD and AD). The Company recorded in the fourth quarter of 2004, an after-tax gain of $169 million on the translation of foreign currencies, derived primarily from its U.S. dollar debt. The write downs were mainly related to the permanent closure of both its Kenora, Ontario and Stephenville, Newfoundland and Labrador paper mills as well as impairment charges related to the Lufkin, Texas and Fort William, Ontario paper mills. In addition to the Kenora and Stephenville mills, the Company closed its Champneuf, Quebec sawmill and announced its intention to permanently close one paper machine at its Bridgewater, U.K. facility. Costs associated with these actions were partly offset by the gain of $53 million on the sale of timberlands in the Thunder Bay area in Ontario. Also included in the quarter's results were the following after-tax items: a negative income tax adjustment of $41 million, $14 million of financial expenses primarily related to early debt repayment and a $9 million loss on the translation of foreign currencies, namely the Company's US dollar-denominated debt. Although not a GAAP measure, the loss would have been $51 million, or 12 cents per share, before the impact of specific items in the fourth quarter. This compares to a loss of $56 million, or 13 cents a share, in the fourth quarter of 2004, also before specific items (see Table 2 of MD&A). The operating loss in the fourth quarter was $352 million compared with an operating loss of $346 million in the same quarter of 2004. The major difference year-over-year is higher mill-related energy and fibre costs and a stronger Canadian dollar. Offsetting these are higher prices for the Company's two paper segments and lower amortization as a result of mill closures (see Table 1 of MD&A). ------------------------------------------------------------------------- Q4 2005 and year-end highlights ------------------------------------------------------------------------- - Sales of $1.31 billion ($5.34 billion in 2005) - Approximately $1 billion of debt reduction associated with PanAsia sale - Price increases implemented for newsprint and commercial printing papers - EBITDA before specific items of $139 million ($649 million in 2005) ------------------------------------------------------------------------- For all of 2005, the Company reported a loss of $350 million, or 80 cents a share, compared with a loss of $36 million, or 8 cents a share, for 2004. On an operating basis, the Company reported a loss of $276 million in 2005, compared with a loss of $256 million in 2004. Although not a GAAP measure, the loss would have been $176 million, or 40 cents per share in 2005, before the impact of foreign currency translation and other specific items. This compares to a loss of $153 million, or 35 cents a share, in 2004, also before specific items (see Table 2 of MD&A). The difference year-over-year is higher mill-related energy and fibre costs and a stronger Canadian dollar. Offsetting these are higher prices in the Company's two paper segments. "As promised, we have taken decisive actions which have delivered an important reduction in our debt and at the same time, sharpened our strategic focus on our North American portfolio of assets while still serving customers across the globe," said President and Chief Executive Officer John Weaver. "We have significantly improved our balance sheet and liquidity position and we are positioning ourselves for greater financial flexibility for the future," added Weaver. Currency For the full year 2005, the Canadian dollar was on average 7.4% stronger against the US dollar than in 2004. The Company estimates that this had an unfavourable impact on its operating results of approximately $236 million compared to the previous year. Other currency exchange rates had a negative impact of $16 million. Capex Capital expenditures were $177 million for the full year 2005, compared to $256 million in 2004. This reduction is mainly attributable to capital spent on the conversion of the Alma, Quebec machine in 2004 for production of Equal Offset(R). Banking Covenants At the end of the fourth quarter, and following the asset write downs, the Company's net funded debt to capitalization ratio was 59.1% compared to its covenant requirement of 70% until December 31, 2007 and of 65% thereafter. Its EBITDA to interest coverage was 1.9x compared to the 1.5x threshold. These covenants only apply to the Company's $700 million revolving credit facility of which $70 million was drawn at year-end. In-Depth Operations Review Update "Throughout 2005, the Company undertook an intensive review of its operations. As a result of this undertaking, the Stephenville and Kenora mills were permanently closed, removing 434,000 tonnes of newsprint capacity. The Company also announced its intention to permanently close the 60,000-tonne no. 4 paper machine at the Bridgewater mill and another 60,000-tonne paper machine in Grand Falls, Newfoundland and Labrador. The Company sold privately owned timberlands in Ontario and its interest in PanAsia. In 2006, we will continue to review options for our Fort William, Grand Falls and presently idled Lufkin paper mills. We will remain focused and vigilant, doing what is necessary to restore the Company to profitability," stated Weaver. A conference call hosted by management to discuss quarterly results will be held today at 11 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 call can access a replay along with the slide presentation, both of which will be archived online. Abitibi-Consolidated is a leading producer of newsprint and commercial printing papers as well as a major supplier of wood products. Committed to the sustainable forest management of more than 40 million acres through third- party certification, the Company supplies customers in 70 countries from its 45 operating facilities. Abitibi-Consolidated is also the largest recycler of newspapers and magazines in North America. Company shares are traded on the Toronto Stock Exchange (TSX: A) and on the New York Stock Exchange (NYSE: ABY). FORWARD-LOOKING STATEMENTS This disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond the Company's control, including: the impact of general economic conditions in the U.S. and Canada and in countries in which the Company and its subsidiaries currently do business; industry conditions, the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; fluctuations in the availability or costs of raw materials or electrical power; changes in existing forestry regulations or changes in how they are administered which could result in the loss of certain contractual or other rights or permits which are material to the Company's business; increased competition; the lack of availability of qualified personnel or management; the outcome of certain litigation; labour unrest; and fluctuation in foreign exchange or interest rates. The Company's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, that the Company will derive therefrom. Abitibi-Consolidated Inc. Consolidated Statements of Earnings (unaudited) Three months ended ended (in millions of December December December December Canadian dollars, 31 31 31 31 unless otherwise 2005 2004 2005 2004 noted) $ $ $ $ ------------------------------------------------------------------------- Sales 1,310 1,347 5,342 5,299 ------------------------------------------------------------------------- Cost of products sold, excluding amortization 969 993 3,875 3,777 Distribution costs 148 158 591 592 Countervailing and anti-dumping duties 13 (40) 67 50 Selling, general and administrative expenses 41 41 169 169 Mill closure and other elements (note 5) 19 33 37 32 Amortization of plant and equipment (note 4) 468 504 863 919 Amortization of intangible assets 4 4 16 16 ------------------------------------------------------------------------- Operating loss from continuing operations (352) (346) (276) (256) Financial expenses (note 6) 113 92 412 375 Loss (gain) on translation of foreign currencies 17 (205) (101) (317) Other expenses (income) 6 3 10 (16) ------------------------------------------------------------------------- Loss from continuing operations before the following items (488) (236) (597) (298) Income tax recovery (151) (123) (271) (176) Share of earnings from investments subject to significant influence 1 2 2 6 Non-controlling interests (9) (4) (29) (10) ------------------------------------------------------------------------- Loss from continuing operations (345) (115) (353) (126) Earnings (loss) from discontinued operations (note 3) (10) 7 3 90 ------------------------------------------------------------------------- Loss (355) (108) (350) (36) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Per common share (basic and diluted) Loss from continuing operations (0.79) (0.26) (0.81) (0.29) Loss (0.81) (0.24) (0.80) (0.08) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares outstanding (in millions) 440 440 440 440 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Deficit Year Three months ended ended December December December December (unaudited) 31 31 31 31 (in millions of 2005 2004 2005 2004 Canadian dollars $ $ $ $ ------------------------------------------------------------------------- Deficit, beginning of period (509) (362) (481) (401) Loss (355) (108) (350) (36) Dividends declared (11) (11) (44) (44) ------------------------------------------------------------------------- Deficit, end of period (875) (481) (875) (481) ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying Notes to consolidated financial statements Abitibi-Consolidated Inc. Consolidated Statements of Cash Flows Year Three months ended ended December December December December (unaudited) 31 31 31 31 (in millions of 2005 2004 2005 2004 Canadian dollars $ $ $ $ ------------------------------------------------------------------------- Continuing operating activities Loss from continuing operations (345) (115) (353) (126) Amortization 472 508 879 935 Future income taxes (152) (120) (194) (182) Gain on translation of foreign currency long-term debt (2) (223) (154) (356) Employee future benefits, excess of funding over expense (9) (78) (65) (116) Long-term portion of countervailing and anti-dumping duties receivable - (44) - (44) Non-cash mill closure elements 18 28 19 28 Gain on disposal of asset (53) - (58) - Gain on disposal of investment - - (2) (25) Share of earnings from investments subject to significant influence (1) (2) (2) (6) Non-controlling interests 9 4 29 10 Other non-cash items 11 8 32 25 ------------------------------------------------------------------------- (52) (34) 131 143 Changes in non-cash operating working capital components (note 9) 145 83 33 (146) ------------------------------------------------------------------------- Cash flows from (used in) continuing operating activities 93 49 164 (3) ------------------------------------------------------------------------- Financing activities of continuing operations Increase in long-term debt 138 15 1,172 1,004 Repayment of long-term debt (note 7) (871) (18) (1,881) (766) Financing fees (5) - (14) (9) Dividends paid to shareholders (11) (11) (44) (55) Dividends and cash distributions paid to non-controlling interests (16) (7) (31) (16) Cash contributions by non-controlling interests - - - 3 Net proceeds on issuance of shares - - 1 - ------------------------------------------------------------------------- Cash flows from (used in) financing activities of continuing operations (765) (21) (797) 161 ------------------------------------------------------------------------- Investing activities of continuing operations Additions to property, plant and equipment (75) (72) (177) (256) Business acquisition, net of cash and cash equivalents (note 2) - - (13) 8 Acquisition of non-controlling interests - - - (7) Net proceeds on disposal of discontinued operations (note 2) 693 - 693 112 Net proceeds on disposal of investment - - 2 57 Net proceeds on disposal of property, plant and equipment and other assets 55 4 64 4 Investments - (1) - (4) Other (1) - (3) - ------------------------------------------------------------------------- Cash flows from (used in) investing activities of continuing operations 672 (69) 566 (86) ------------------------------------------------------------------------- Cash generated (used) by continuing operations - (41) (67) 72 Cash generated (used) by discontinued operations (note 3) (7) (2) 3 15 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents during the period (7) (43) (64) 87 Foreign currency translation adjustment on cash 1 (3) (4) (5) Cash and cash equivalents, beginning of period 73 181 135 53 ------------------------------------------------------------------------- Cash and cash equivalents, end of period 67 135 67 135 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents, at the end of the period, related to: Continuing operations 67 115 Discontinued operations - 20 ------------------------------------------------------------------------- 67 135 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying Notes to consolidated financial statements Abitibi-Consolidated Inc. Consolidated Balance Sheets December December 31 31 (unaudited) 2005 2004 (in millions of Canadian dollars) $ $ ------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents 67 115 Accounts receivable 436 380 Inventories 652 675 Prepaid expenses 52 58 Current assets of discontinued operations (note 2) - 174 ------------------------------------------------------------------------- 1,207 1,402 Property, plant and equipment 4,260 5,005 Intangible assets 473 468 Employee future benefits 248 176 Future income taxes 414 389 Other assets 146 145 Goodwill 1,296 1,296 Non-current assets of discontinued operations (note 2) - 906 ------------------------------------------------------------------------- 8,044 9,787 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities 933 882 Long-term debt due within one year 18 491 Current liabilities related to discontinued operations (note 2) - 181 ------------------------------------------------------------------------- 951 1,554 Long-term debt (note 7) 3,744 4,121 Employee future benefits 154 150 Future income taxes 716 853 Non-controlling interests 78 83 Non-current liabilities related to discontinued operations (note 2) - 300 Shareholders' equity Capital stock 3,518 3,517 Contributed surplus 34 26 Deficit (875) (481) Foreign currency translation adjustment (276) (336) ------------------------------------------------------------------------- 2,401 2,726 ------------------------------------------------------------------------- 8,044 9,787 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 December 31, 2005 Sales zation(1) (loss)(1) assets(2) volume ------------------------------------------------------------------------- $ $ $ $ Newsprint 731 295 (268) 19 1,000(a) Commercial printing papers(3) 387 165 (82) 33 448(a) Wood products(4) 192 12 (2) 23 446(b) ------------------------------------------------------------------------- Continuing operations 1,310 472 (352) 75 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended December 31, 2004 ------------------------------------------------------------------------- Newsprint 725 449 (400) 52 1,056(a) Commercial printing papers(3) 375 45 (25) 13 451(a) Wood products(4) 247 14 79 7 549(b) ------------------------------------------------------------------------- Continuing operations 1,347 508 (346) 72 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Additions Operating to Year ended Amorti- profit capital Sales December 31, 2005 Sales zation(1) (loss)(1) assets(2) volume ------------------------------------------------------------------------- $ $ $ $ Newsprint 2,892 531 (228) 70 3,972(a) Commercial printing papers(3) 1,552 297 (89) 57 1,782(a) Wood products(4) 898 51 41 50 1,965(b) ------------------------------------------------------------------------- Continuing operations 5,342 879 (276) 177 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Year ended December 31, 2004 ------------------------------------------------------------------------- Newsprint 2,795 702 (362) 96 3,971(a) Commercial printing papers(3) 1,479 177 (52) 141 1,738(a) Wood products(4) 1,025 56 158 19 2,169(b) ------------------------------------------------------------------------- Continuing operations 5,299 935 (256) 256 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Operating loss for the "Newsprint" segment for the three months ended December 31, 2005 includes $71 million of mill closure and other elements and asset write downs of $224 million ($30 million of mill closure and other elements and asset write downs of $364 million in the three months ended December 31, 2004). The year ended December 31, 2005 includes mill closure and other elements of $89 million, asset write downs of $247 million and $9 million of early retirement program and labour force reduction ($25 million of mill closure and other elements and asset write downs of $364 million in the year ended December 31, 2004). Operating loss for the "Commercial printing papers" segment for the three months and for the year ended December 31, 2005 includes a gain on sale of timberlands of $53 million and asset write downs of $124 million ($3 million of mill closure and other elements in the three months ended December 31, 2004 and $7 million of mill closure and other elements and $7 million of start-up costs in the year ended December 31, 2004). Operating profit (loss) for the "Wood products" segment for the three months and for the year ended December 31, 2005 includes $1 million of mill closure and other elements (countervailing and anti-dumping credit of $57 million in the three months ended December 31, 2004 and of $32 million in the year ended December 31, 2004). Asset write downs are included in Amortization. (2) Capital assets include property, plant and equipment and intangible assets. (3) Previously reported as "Value-added groundwood papers". (4) Wood products sales are presented net of inter-segment sales of $47 million for the three months ended December 31, 2005 ($42 million for the three months ended December 31, 2004) and $172 million for the year ended December 31, 2005 ($177 million for the year ended December 31, 2004). (a) in thousands of tonnes (b) in millions of board feet December December 31 31 2005 2004 Total assets $ $ ------------------------------------------------------------------------- Newsprint 4,490 5,011 Commercial printing papers(3) 2,701 2,901 Wood products 853 795 Total assets of discontinued operations - 1,080 ------------------------------------------------------------------------- 8,044 9,787 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Abitibi-Consolidated Inc. Notes to Consolidated Financial Statements December 31, 2005 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 1. Summary of significant accounting policies These 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 consolidated 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, 2004, except for the following: Consolidation of variable interest entities Effective January 1, 2005, the Company adopted Accounting Guideline ("AcG") AcG-15, Consolidation of Variable Interest Entities. This guideline addresses the application of consolidation principles to entities that are subject to control on a basis other than ownership of voting interests. The adoption of this guideline had no impact on the Company's consolidated financial statements. 2. Business acquisition and divestiture On November 17, 2005, the Company completed the sale of its 50% share ownership in Pan Asia Paper Company Pte Ltd ("PanAsia") to Norske Skogindustrier ASA of Norway for a cash consideration of $712 million (US$600 million), less $11 million of post-closing transaction costs, plus a cash purchase price adjustment of up to US$30 million depending on the achievement of certain financial performance objectives in 2006. The Company recorded a gain of $3 million (loss of $10 million net of income taxes) related to this transaction. The $10 million loss is included in "Earnings (loss) from discontinued operations" in the consolidated statements of earnings. In the first quarter of 2005, the Company acquired the remaining 57% of the softwood sawmill assets owned by Gestofor Inc., in which the Company previously had a 43% interest. The sawmill is located in Saint-Raymond de Portneuf, Quebec. The results of the acquired business have been included in the consolidated financial statements since January 1, 2005. The fair value of net assets acquired or carrying value of net assets sold was as follows: Net Net assets assets sold acquired $ $ ------------------------------------------------------------------------- Net assets acquired or net assets sold Current assets (174) 8 Property, plant and equipment (819) 5 Chips supply access - 21 Other non-current assets (4) - Goodwill (75) - Current liabilities 81 (1) Long-term debt 346 (1) Future income tax liabilities 46 (8) Non-controlling interests 33 - Foreign currency translation adjustment (120) - ------------------------------------------------------------------------- Fair value of net assets acquired or carrying value of net assets sold (686) 24 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consideration paid (received) Cash (net of cash and cash equivalents) (689) 13 Transaction costs payable (4) - Carrying amount of existing investment in Gestofor Inc. - 11 ------------------------------------------------------------------------- (693) 24 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 3. Discontinued operations As mentioned in note 2, on November 17, 2005, the Company completed the sale of its 50% share ownership in PanAsia. Accordingly, the information pertaining to PanAsia is no longer included on a proportionate consolidation basis, but presented as discontinued operations in the Company's consolidated financial statements. Comparative figures were reclassified to exclude PanAsia's results from the Company's continuing operations. Condensed earnings from discontinued operations related to PanAsia are as follows: Three months ended Year ended December 31 December 31 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Sales 68 132 430 502 Operating profit 4 11 33 37 Financial expenses 2 3 13 13 Earnings (loss) from discontinued operations (10) 7 3 15 ------------------------------------------------------------------------- Earnings (loss) per common share from discontinued operations (0.02) 0.02 0.01 0.04 ------------------------------------------------------------------------- Condensed cash flows from discontinued operations are as follows: Three months ended Year ended December 31 December 31 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Cash flows from operating activities 4 11 36 69 Cash flows from financing activities - 55 33 78 Cash flows used in investing activities (11) (68) (66) (132) ------------------------------------------------------------------------- Cash flows generated (used) by discontinued operations (7) (2) 3 15 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Condensed business segments from discontinued operations are as follows: Three months ended Year ended December 31 December 31 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Newsprint Sales 55 102 354 410 Amortization 7 9 40 40 Operating profit 3 7 26 30 Additions to capital assets 12 67 64 128 Commercial printing papers Sales 13 30 76 92 Amortization - 2 6 7 Operating profit 1 4 7 7 Additions to capital assets - 1 1 2 4. Impairment of long-lived assets In December of 2005, the Company recorded asset write downs of $180 million ($122 million net of income taxes), mainly due to the permanent closure of its Stephenville, Newfoundland and Kenora, Ontario newsprint mills. The book value of the property, plant and equipment has been written down to its fair value, which represents the present value of the estimated net proceeds from dismantling, redeployment and disposal, based on experience with the disposal of similar assets. In the fourth quarter of 2005, the Company also recognized an impairment charge of $125 million ($77 million net of income taxes) related to the property, plant and equipment of the Lufkin, Texas paper mill as some of its long-lived assets are no longer recoverable and exceed their fair value. Furthermore, following the sale of timberlands in the Thunder Bay area, in Ontario, the Company assessed its Fort William, Ontario, paper mill to net realizable value and recognized an impairment charge of $43 million ($29 million net of income taxes). Of the $348 million of write downs and impairment charges, $224 million is included in the "Newsprint" segment and $124 million is included in the "Commercial printing papers" segment. In the third quarter of 2005, the Company had announced the permanent closure of one paper machine at Kenora, and recognized an impairment charge of $23 million ($16 million net of income taxes) mainly related to the equipment located in Kenora, as these long-lived assets were no longer recoverable. These assets were included in the "Newsprint" segment. During the fourth quarter of 2004, the Company recognized an impairment charge of $364 million ($235 million net of income taxes) related to the property, plant and equipment located in Sheldon, Texas, and Port-Alfred, Quebec, as these long-lived assets were no longer recoverable and exceeded their fair value. Those assets were included in the "Newsprint" segment. 5. Mill closure and other elements With respect to the permanent closure of the Kenora and Stephenville paper mills, as well as the Champneuf, Quebec sawmill, and the eventual closure of one paper machine in Bridgewater, United Kingdom, announced in December 2005, the Company recorded a charge of $72 million ($50 million net of income taxes) in the fourth quarter of 2005. Of those mill closure and other elements, $71 million is included in the "Newsprint" segment, and $1 million is included in the "Wood products" segment. During the fourth quarter of 2005, the Company also recorded a gain on the sale of timberlands in the Thunder Bay area for an amount of $53 million ($48 million net of income taxes). This gain is included in the "Commercial printing papers" segment. In the third quarter of 2005, the Company recorded a charge of $18 million ($12 million net of income taxes), related to the permanent closure of one paper machine in Kenora and the indefinite idling of the remaining of the mill. This charge was included in the "Newsprint" segment as mill closure and other elements. In the fourth quarter of 2004, the Company announced the permanent closure of the two previously idled Port-Alfred and Sheldon paper mills, resulting in a provision for mill closure and other elements of $28 million ($18 million net of income taxes). The Company also recorded $5 million ($3 million net of income taxes) of additional costs resulting from the 2003 idling of the Lufkin and Port-Alfred mills. Of those mill closure and other elements, $30 million was included in the "Newsprint" segment, and $3 million was included in the "Commercial printing papers" segment. In the first three quarters of 2004, the Company recorded $7 million of additional costs resulting from the 2003 idling of the Lufkin and Port-Alfred mills, and a gain on disposal of $8 million, which resulted from the sale of air emission credits. Of those mill closure and other elements, a $5 million gain was included in the "Newsprint"segment, and a $4 million charge was included in the "Commercial printing papers" segment. The following table provides the components of the mill closure and other elements: Three months ended Year ended December 31 December 31 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Severance and other labour -related costs 17 3 32 3 Defined benefit pension and other benefits costs 10 - 12 - Obsolescence of inventory 18 17 18 17 Asset retirement obligations related to environmental matters 12 11 12 11 Gain on sale of timberlands (53) - (53) - Gain on sale of air emission credits - - - (8) Contractual obligations 10 - 10 - Costs incurred for idling and other 5 2 6 9 ------------------------------------------------------------------------- 19 33 37 32 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table provides a reconciliation of the mill closure elements provision (excluding defined benefit pension and other benefits costs, obsolescence of inventory, asset retirement obligation and other gains): Three months ended Year ended December 31 December 31 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Mill closure elements provision, beginning of period 18 19 17 62 Mill closure elements incurred during the period 34 5 49 12 Payments (14) (7) (28) (57) ------------------------------------------------------------------------- Mill closure elements provision, end of period 38 17 38 17 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company expects to pay most of the balance of the provision for mill closure elements before the end of 2006. 6. Financial expenses Three months ended Year ended December 31 December 31 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Interest on long-term debt 91 89 376 363 Amortization of deferred financing fees 3 3 11 8 Premium on early retirement of debt and other elements related to early debt retirement 20 - 32 - Interest income (3) (1) (17) (3) Other 2 1 10 7 ------------------------------------------------------------------------- 113 92 412 375 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. Long-term debt On December 16, 2005, the Company repaid a total of US$579 million comprised of US$185 million of 6.95% notes due 2006, US$139 million of 7.625% notes due 2007, US$50 million of 6.95% notes due 2008, US$100 million of 7.875% notes due 2009 and US$105 million of 8.55% notes due 2010. On October 3, 2005, the Company renewed its Credit Agreement into two new Bank Credit facilities. The new $700 million secured facilities are maturing in December 2008, and bear interest at floating rates based on bankers' acceptance, prime, U.S. base rate or LIBOR. The $550 million Facility A is secured by certain fixed assets and the $150 million Facility B is secured by certain working capital elements, as permitted under bond indentures. The unused portion of the facilities incurs a commitment fee of 0.60%. The bank credit facilities require the Company to meet specific financial ratios, which are met as of December 31, 2005. At the end of December 2005, the Company had drawn $70 million on its credit facility. On March 28, 2005, the Company issued US$450 million of 8.375% notes due 2015. The net proceeds of the issue were used to repay, on March 29, 2005, US$337 million of 8.30% notes due August 1, 2005, and, on April 5, 2005, US$100 million of 6.95% notes due December 15, 2006. 8. Employee future benefits The following table provides total employee future benefits costs: Three months ended Year ended December 31 December 31 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Defined contribution pension plans 3 3 14 14 Defined benefit pension plans and other benefits 39 20 130 82 ------------------------------------------------------------------------- 42 23 144 96 ------------------------------------------------------------------------- ------------------------------------------------------------------------- A portion of the defined benefit pension plans and other benefits cost is related to mill closure and other elements, and therefore presented as such in the consolidated statements of earnings. This portion amounts to $10 million in the fourth quarter of 2005, and to $12 million in the year ended December 31, 2005. 9. Supplemental cash flow information The following tables provide supplemental cash flow information related to continuing operations: Three months ended Year ended December 31 December 31 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Components of the changes in non-cash operating working capital Accounts receivable 34 31 (51) (87) Inventories 24 26 7 35 Prepaid expenses 21 10 4 (9) Accounts payable and accrued liabilities 66 16 73 (85) ------------------------------------------------------------------------- 145 83 33 (146) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash outflows (inflows) during the period related to Interest on long-term debt 109 78 376 359 Income taxes 9 3 (40) 12 ------------------------------------------------------------------------- 118 81 336 371 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. Comparative figures Certain comparative figures presented in the consolidated financial statements have been reclassified to conform to the current period presentation. Abitibi-Consolidated Inc. Management's Discussion and Analysis (MD&A) Fourth Quarter Report to Shareholders February 1, 2006 Sale of PanAsia On November 17, 2005, Abitibi-Consolidated announced it completed the sale of its 50% share ownership in Pan Asia Paper Company Pte Ltd (PanAsia) to Norske Skogindustrier ASA (Norske Skog) of Norway for a cash consideration of US$600 million plus a cash purchase price adjustment of up to US$30 million depending on the achievement of certain financial performance objectives in 2006. Effective with the third quarter of 2005 financial reporting, the information pertaining to PanAsia is no longer proportionally included in the Company's consolidated financial statements, but presented as discontinued operations. Also, the Company has reclassified its historical information to exclude from continuing operations PanAsia's results (refer to Table 8). $355 Million Loss in Fourth Quarter of 2005 Abitibi-Consolidated reported a loss of $355 million, or 81 cents a share, in the fourth quarter ended December 31, 2005 compared to a loss of $108 million, or 24 cents a share, in the same quarter of 2004. In the fourth quarter of 2005, the Company recorded a provision for mill closure and other elements of $19 million and asset write downs of $348 million mainly related to the permanent closure of the Kenora, Ontario and Stephenville, Newfoundland paper mills as well as impairment charges related to the Lufkin, Texas and Fort William, Ontario paper mills. In the fourth quarter of 2004, the Company recorded a provision for mill closure and other elements of $33 million and asset write downs of $364 million with respect to the permanent closure of two previously idled paper mills located in Port-Alfred, Quebec and in Sheldon, Texas. The Company recorded in the fourth quarter of 2004, an after-tax gain of $169 million on the translation of foreign currencies, derived primarily from its U.S. dollar debt. Sales were $1,310 million in the three-month period ended December 31, 2005 compared to $1,347 million in the same period last year. The Company recorded an operating loss from continuing operations of $352 million during the quarter compared to an operating loss from continuing operations of $346 million for the fourth quarter of 2004. Lower operating results from continuing operations in the fourth quarter of 2005 were mainly attributable to higher manufacturing costs, a credit applied in 2004 related to the lumber countervailing duty (CVD) and anti-dumping duty (AD) revised rates and the strength of the Canadian dollar. These were partially offset by higher prices in the Company's paper business segments, lower amortization as well as lower mill closure and other elements. Table 1: Variance summary (in millions of dollars) Fav/(unfav) variance due to: Fourth -------------------------------------- Fourth Quarter Foreign Quarter 2005 Volume exchange Prices Costs 2004 -------- -------- -------- -------- -------- ----------- -------- -------- -------- -------- -------- ----------- Sales $ 1,310 ($87) ($50) $ 100 $ - $ 1,347 Cost of products sold 969 61 11 - (48) 993 Distribution costs 148 9 3 - (2) 158 CVD/AD 13 3 1 - (57) (40) SG&A 41 - - - - 41 Mill closure and other elements 19 - - - 14 33 -------- -------- -------- -------- -------- ----------- EBITDA $ 120 ($14) ($35) $ 100 ($93) $ 162 Amortization 124 - 6 - 14 144 Amortization (other) 348 - - - 16 364 -------- -------- -------- -------- -------- ----------- -------- -------- -------- -------- -------- ----------- Operating loss from continuing operations ($352) ($14) ($29) $ 100 ($63) ($346) Operating profit (loss) from continuing operations bef. specific items(1) 15 (14) (29) 100 (36) (6) Note (1) Not in accordance with GAAP When comparing the average exchange rate of the fourth quarter of 2005 to the same period in 2004, the Canadian dollar was 4% stronger against the U.S. dollar. The Company estimates this had an unfavourable impact of approximately $25 million on its operating results compared to the same period last year. Other currencies exchange rates had a negative impact of $4 million. In the fourth quarter of 2005, the Company expensed $13 million in relation to the CVD and AD for lumber compared to a credit of $40 million in the fourth quarter of 2004. In the fourth quarter of 2004, the Company recorded a credit of $57 million in relation to the lumber CVD and AD estimated revised rates published in December of 2004 while expensing $17 million related to the fourth quarter shipments. More details are provided in the wood products section. The reduction of $4 million was mainly due to lower sales volume and the application, for a period of three weeks, of the lower estimated revised rates published by the U.S. Department of Commerce, in December of 2005. As stated above, mill closure and other elements amounted to $19 million in the fourth quarter of 2005. Mill closure costs totalled $72 million mainly related to the permanent closure of the Kenora and Stephenville paper mills and the Champneuf, Quebec sawmill as well as the announced closure of one paper machine in Bridgewater, UK. These costs were partly offset by the gain of $53 million on the sale of timberlands in the Thunder Bay area, in Ontario. In the fourth quarter of 2004, the Company announced the permanent closure of the two previously idled Port-Alfred and Sheldon paper mills resulting in a provision for mill closure and other elements of $33 million. Total amortization decreased to $472 million compared to $508 million in the fourth quarter of 2004. In December of 2005, the Company wrote down assets for an amount of $348 million attributable to asset write downs of $180 million mainly due to the permanent closure of the Kenora and Stephenville paper mills, an impairment charge of $125 million as a result of the impairment test of some long-lived assets of the Lufkin, Texas paper mill and an impairment charge of $43 million as a result of the devaluation of the Fort William paper mill to its net realizable value following the sale of timberlands in the Thunder Bay area. This compares with asset write downs of $364 million taken in December of 2004 with respect to the permanent closure of the Port-Alfred and Sheldon paper mills, which reduced amortization in 2005. Financial expenses totalled $113 million in the fourth quarter of 2005, compared to $92 million in 2004. The increase is mainly due to the premium paid on early debt repayment. For the twelve-month period ended December 31, 2005, the Company recorded a loss of $350 million compared to a loss of $36 million in the same period last year. On a per share basis, the Company recorded a loss of 80 cents compared to a loss of 8 cents in 2004. Sales were $5,342 million in the twelve-month period ended December 31, 2005 compared to $5,299 million in the same period last year. The operating loss from continuing operations was $276 million compared to an operating loss from continuing operations of $256 million in the twelve months of 2004. In the twelve months of 2005, the Canadian dollar was on average 7.4% stronger against the U.S. dollar compared to the same period of 2004. The Company estimates that the Canadian dollar appreciation had an unfavourable impact on its operating results of approximately $236 million compared to the previous year. Other currencies exchange rates had a negative impact of $16 million. Table 2 shows how certain specific items have affected the Company's results in the reporting periods. The Company believes it is useful supplemental information as it provides an indication of the results excluding these specific items. Readers should be cautioned however that this information should not be confused with or used as an alternative for net earnings (loss) determined in accordance with the Canadian Generally Accepted Accounting Principles (GAAP). Table 2: Impact of Specific Items In millions of dollars (except per share amounts) -------------------- ----------------------- Fourth quarter Twelve-month period -------------------- ----------------------- 2005 2004 2005 2004 --------- --------- ---------- ----------- Loss as reported ($355) ($108) ($350) ($36) (In accordance with GAAP) $ per share (0.81) (0.24) (0.80) (0.08) Specific items (after taxes): Loss (gain) on translation of foreign currencies 9 (169) (90) (260) CVD/AD rates adjustments - (39) - (22) Gain on sale of the Saint- Felicien pulp mill - - - (73) Gain on sale of Voyageur Panel - - - (19) Loss on sale of PanAsia 10 - 10 - Asset write offs / write downs 228 235 244 235 Mill closure and other elements 2 21 14 20 Alma start-up costs - - - 4 Early retirement program and labour force reduction - - 6 - Financial expenses 14 - 17 - Income tax adjustments 41 4 (27) (2) --------- --------- ---------- ----------- Loss excluding specific items ($51) ($56) ($176) ($153) (Not in accordance with GAAP) $ per share (0.12) (0.13) (0.40) (0.35) As the above table indicates, during the fourth quarter of 2005, the Company recorded an after-tax loss on translation of foreign currencies of $9 million, mainly from the weaker Canadian currency at the end of the quarter compared to the U.S. dollar, in which most of its long-term debt is denominated and a loss of $10 million after-tax on the sale of its interest in PanAsia attributable to a fiscal gain higher than the accounting gain. Also, the Company recorded asset write downs and impairment charges of $228 million after-tax mainly due to the permanent closure of the Kenora and Stephenville paper mills as well as impairments of the long-lived assets of the Lufkin and Fort William paper mills. Furthermore, the Company recognized an after-tax amount of $14 million in its financial expenses mainly due to the premium paid on early debt repayment and negative income tax adjustments of $41 million mainly due to the Quebec provincial tax rate increase. Finally, the Company recorded a provision for mill closure and other elements of $50 million after- tax mainly related to the permanent closure of the Kenora and Stephenville paper mills and the Champneuf sawmill as well as the announced closure of one paper machine in Bridgewater partly offset by an after-tax gain of $48 million on sale of timberlands. During the fourth quarter of 2004, the Company recorded an after-tax gain on translation of foreign currencies of $169 million mainly from the stronger Canadian currency at the end of the quarter compared to the U.S. dollar, in which most of its long-term debt is denominated. Also in this reporting period, the Company recorded an after-tax credit of $39 million in relation to the revised lumber CVD and AD rates published in the fourth quarter of 2004. On the other hand, the Company recorded a provision for mill closure and other elements of $21 million after-tax and asset write downs of $235 million after- tax following the permanent closure of the two previously idled Port-Alfred and Sheldon paper mills. Consistent with its normal practice, the Company reviewed its income tax provision resulting in a $4 million unfavourable adjustment. Overview of Results At the beginning of 2005, Abitibi-Consolidated changed the name of its Value-Added Groundwood Papers segment to Commercial Printing Papers to better reflect the business segment in which the Company is operating. Operating profit (loss) from continuing operations per business segment for the periods ended December 31 was as follows: Table 3: Operating Profit (Loss) from Continuing Operations In millions of dollars ---------------------------------------------------------------------- As reported in the financial statements Before specific items(1) --------------------------------------- ----------------------------- Fourth Twelve-month Fourth Twelve-month quarter period quarter period ---------------- ------------- -------------- --------------- 2005 2004 2005 2004 2005 2004 2005 2004 --------- ----- ------ ------ ------ ------- ------ -------- Newsprint ($268) ($400) ($228) ($362) $27 ($6) $117 $27 Commercial Printing Papers (82) (25) (89) (52) (11) (22) (18) (38) Wood Products (2) 79 41 158 (1) 22 42 126 --------- ----- ------ ------ ------ ------- ------ -------- ($352) ($346) ($276) ($256) $15 ($6) $141 $115 Note (1) Not in accordance with GAAP In the fourth quarter of 2005, Newsprint operating results were negatively impacted by $71 million of mill closure and other elements and $224 million for asset write downs. Also in the fourth quarter of 2005, operating results of the Commercial Printing Papers segment were positively impacted by $53 million from the sale of timberlands and were negatively impacted by $124 million for asset write downs. Operating results of the Wood Products segment were negatively impacted, in the fourth quarter of 2005, by $1 million of mill closure and other elements. In the fourth quarter of 2004, operating results of the Newsprint segment were negatively impacted by $30 million of mill closure and other elements and $364 million for asset write downs. Also in the fourth quarter of 2004, operating results of the Commercial Printing Papers segment were negatively impacted by $3 million of mill closure and other elements. Operating results of the Wood Products segment were positively impacted, in the fourth quarter of 2004, by a credit of $57 million related to the partial reversal of the CVD/AD deposited since May of 2002 up to September of 2004. Newsprint Table 4: Newsprint variance (in millions of dollars) Fav/(unfav) variance due to: Fourth -------------------------------------- Fourth Quarter Foreign Quarter 2005 Volume exchange Prices Costs 2004 -------- -------- -------- -------- -------- ----------- Sales $ 731 ($40) ($31) $ 77 $ - $ 725 Mill closure and other elements 71 - - - (41) 30 EBITDA 27 (6) (18) 77 (75) 49 Amortization 71 - 3 - 11 85 Amortization (other) 224 - - - 140 364 Operating loss from continuing operations (268) (6) (15) 77 76 (400) Operating profit (loss) from continuing operations bef. specific items(1) 27 (6) (15) 77 (23) (6) Note (1) Not in accordance with GAAP In the Newsprint segment, the $132 million improvement in operating results from continuing operations is mainly due to lower asset write downs and higher U.S. dollar selling prices partly offset by higher manufacturing costs per tonne as well as mill closure and other elements, and a stronger Canadian dollar. According to the Pulp and Paper Products Council (PPPC), North American newsprint production declined 4.4% in the fourth quarter of 2005 compared to the same period in 2004. Total U.S. consumption was down by 4.9% in the fourth quarter of 2005, compared to the fourth quarter of 2004, as daily publishers' advertising volume and circulation continued on a downward trend as well as a result of the ongoing increase in usage of lighter basis weight paper. According to PPPC, average basis weight of tonnes shipped in the fourth quarter of 2005 fell to 47.2 grams per square meter, 2.1% less than the same period in 2004. However, lighter basis weights also reduced industry production capacity by approximately the same proportion. According to the PPPC, at the end of December 2005, total producer and customer newsprint inventories were lower by 75,000 tonnes, or 5.7%, compared to the end of September 2005 and lower by 103,000 tonnes, or 7.7%, compared to the end of December 2004. At the end of the fourth quarter of 2005, the Company's overall inventories declined by 48% compared to the end of the third quarter of 2005 and 49% compared to the end of December 2004. The Company's newsprint shipments in the fourth quarter of 2005 were 1,000,000 tonnes compared to 1,056,000 tonnes in the fourth quarter of 2004. After all machine and mill closures described in this MD&A and the production of lower basis weights as well as the sale of PanAsia are taken into consideration, the Company's annual capacity stands at 3,853,000 tonnes of newsprint including 150,000 tonnes of idled capacity. During the fourth quarter of 2005, the Company completed the implementation of the October newsprint price increase in the United States. Also, Abitibi-Consolidated announced a newsprint price increase of US$40 per tonne in the United States and $40 per tonne in Canada, effective February 1, 2006. In other parts of the world, newsprint prices have generally continued on an upward trend due to high industry operating rates except for Western Europe, where prices were contractually maintained until the end of 2005. The Company expects 2006 newsprint consumption in the United States to decline by approximately 4% on a tonnage basis, resulting mainly from continued increase in sales of lower basis weight paper, as well as reductions in circulation and continued conservation measures among daily newspaper publishers. However, the Company believes announced capacity reductions and the impact on capacity of lower basis weights should result in high industry operating rates in North America. Global consumption growth is expected to be slightly positive in 2006. Management expects demand in Europe to grow by approximately 1% in 2006, resulting mainly from a continued rise in advertising spending and the growth of free dailies. Latin American demand should record slightly positive growth in 2006. On a per tonne basis, cost of goods sold for newsprint in the fourth quarter of 2005 was $20 higher than in the same quarter of 2004. The increase in costs was mainly due to higher input prices for energy and virgin fibre, combined with lower production mainly attributable to lower basis weights. This was partly offset by lower usage and by the stronger Canadian dollar reducing costs, in Canadian dollars, of the Company's U.S. mills. Commercial Printing Papers Table 5: Commercial Printing Papers variance (in millions of dollars) Fav/(unfav) variance due to: Fourth -------------------------------------- Fourth Quarter Foreign Quarter 2005 Volume exchange Prices Costs 2004 -------- ------- -------- -------- -------- ----------- Sales $ 387 ($1) ($16) $ 29 $ - $ 375 Mill closure and other elements (53) - - - 56 3 EBITDA 83 - (15) 29 49 20 Amortization 41 - 3 - 1 45 Amortization (other) 124 - - - (124) - Operating loss from continuing operations (82) - (12) 29 (74) (25) Operating loss from continuing operations bef. specific items(1) (11) - (12) 29 (6) (22) Note (1) Not in accordance with GAAP In the Commercial Printing Papers segment, the $57 million reduction in operating results from continuing operations is mainly due to asset write downs of $124 million, higher production costs and a stronger Canadian dollar partly offset by a profit on the sale of timberlands and higher U.S. dollar selling prices. According to the PPPC, North American demand for uncoated groundwood papers decreased 1.3% in the fourth quarter of 2005 compared to the same period of 2004 and increased by 2.3% in 2005. The decrease in North American uncoated groundwood demand, which represents the sum of domestic shipments and imports, is mainly attributable to a decline in demand for standard grades and a reduction in imports in the fourth quarter of 2005. The Company believes that the imports have not fully rebounded to historical levels since the Finnish strike which caused imports to fall by more than 16.6% in the fourth quarter of 2005 and by 22.9% for 2005. North American producers benefited from the reduction in imports with North American uncoated groundwood shipments increasing 4.8% in 2005. The Company's shipments of commercial printing papers totalled 448,000 tonnes in the fourth quarter of 2005 compared to 451,000 tonnes in the fourth quarter of 2004. The Company's uncoated freesheet substitute grades, ALTERNATIVE OFFSET(R) and EQUAL OFFSET(R), part of the ABIOFFSET(TM) product line, continue to be successful with shipments increasing 4.1% in the fourth quarter of 2005 compared to the fourth quarter of 2004. On January 6, 2006, Abitibi-Consolidated announced its newest paper product, INNOVATIVE OFFSET(TM). Building on the success of ALTERNATIVE OFFSET(R) and EQUAL OFFSET(R), INNOVATIVE OFFSET(TM) is also an environmentally-friendly and cost-effective paper, delivering up to 20% savings through a lighter basis weight that provides stiffness and print quality. Produced at the Beaupre and Alma paper mills in Quebec, INNOVATIVE OFFSET(TM) delivers a brightness level of 81 and a whiteness of 90 and is surface-treated to assure better ink hold-out and on-press performance. During the fourth quarter of 2005, the Company implemented price increases announced in the third quarter for its ABIBRITE(R) and ABIBOOK(R) grades. Also, in the fourth quarter of 2005, Abitibi-Consolidated announced a price increase of US$60 per short ton effective February 1, 2006 for its ABIOFFSET(TM) grades. For 2006, the Company expects print advertising to remain healthy and uncoated groundwood paper demand growth will range between 2% to 3%, driven mainly by high-end glossy and superbrite grades. On a per tonne basis, cost of goods sold for commercial printing papers in the fourth quarter of 2005 was $29 higher than in the same quarter of 2004. The cost increase was mainly due to higher input prices in energy and virgin fibre, as well as pension and other employee future benefits. This was partly offset by better efficiency, lower usage and cost improvements tied to the Company's product development initiatives. Wood Products Table 6: Wood products variance (in millions of dollars) Fav/(unfav) variance due to: Fourth -------------------------------------- Fourth Quarter Foreign Quarter 2005 Volume exchange Prices Costs 2004 -------- -------- -------- -------- -------- ----------- Sales $ 192 ($46) ($3) ($6) $ - $ 247 CVD/AD 13 3 1 - (57) (40) Mill closure and other elements 1 - - - (1) - EBITDA 10 (8) (2) (6) (67) 93 Amortization 12 - - - 2 14 Operating profit (loss) from continuing operations (2) (8) (2) (6) (65) 79 Operating profit (loss) from continuing operations bef. specific items(1) (1) (8) (2) (6) (7) 22 Note (1) Not in accordance with GAAP In the Wood Products segment, the $81 million reduction in operating results from continuing operations is mainly due to a $57 million credit in relation to the lumber CVD and AD revised rates recorded in 2004, lower sales volume and prices, higher manufacturing costs per thousand boardfeet and a stronger Canadian dollar. U.S. housing starts decreased by 5.7% from an annual rate of 2.05 million units during December of 2004 to 1.933 million units during December of 2005. During the fourth quarter of 2005, average U.S. dollar lumber prices (f.o.b. Great Lakes) decreased by 5% for 2x4 Stud and 3.6% for 2x4 Random Length compared to the same period of 2004. Sales volume in the fourth quarter of 2005, totalled 446 million boardfeet (MBf) compared to 549 MBf for the same period in 2004. Average selling prices in Canadian dollars for the fourth quarter of 2005 were 4% lower than in the same quarter in 2004 as a result of lower U.S. dollar lumber prices and a stronger Canadian dollar. On a per thousand boardfeet basis, cost of goods sold for wood products in the fourth quarter of 2005 was $11 higher than in the fourth quarter of 2004. This was mainly due to higher wood and fuel prices and lower productivity mainly attributable to smaller diameter logs. On November 15, 2005, Abitibi-Consolidated announced to its employees the permanent closure of the Champneuf sawmill, as a result of the consolidation of two sawmills located in Champneuf and Senneterre, Quebec into one operation. With respect to the ongoing softwood lumber dispute, on November 15, 2005, the World Trade Organization (WTO) panel upheld the U.S. International Trade Commission's (USITC) new threat of injury determination. Canada has filed an appeal. The Company believes that neither the USITC decision responding to the WTO nor the WTO panel's ruling that the USITC decision complies with WTO obligations, should affect the outcome of the softwood lumber appeals under U.S. domestic law as applied by the North American Free Trade Agreement (NAFTA) dispute panel. The NAFTA panel has ruled that only a negative injury determination is consistent with U.S. domestic law. Therefore, the Company believes that, because NAFTA appeal process was concluded in Canada's favour, the Company is entitled to a full refund of all duty deposits paid to date, and should not be obligated to pay duty deposits on future exports to the United States. However, the U.S. government disputes this position and continues to impose both AD and CVD duties. The Company has joined in litigation to force termination of the AD and CVD orders and to obtain refunds of all duty deposits paid. With respect to the CVD case, on November 22, 2005, the U.S. Department of Commerce (USDOC) issued a decision following the latest NAFTA panel ruling in the appeal of the original investigation, finding that Canadian producers had received only de minimis subsidies of 0.8%. If the NAFTA panel confirms the USDOC determination of a country-wide subsidy rate below 1.0%, under U.S. law, such a low rate should result in case dismissal. However, the U.S. government has indicated it may consider prolonging the NAFTA litigation with an extraordinary challenge proceeding. The U.S. government has also stated that it believes any final decision resulting from the NAFTA process will apply only prospectively, and thus it is not required to refund any duties already deposited. On December 12, 2005, USDOC published final results for the second administrative AD review, covering the period of May 1, 2003 through April 30, 2004, and for the second administrative CVD review covering April 1, 2003 through March 31, 2004. Based on these reviews, the Company's AD assessment rate and CVD assessment rate will be 3.2% and 8.7% respectively, for entries occurring during the second review periods. The Company has appealed the USDOC second review AD determinations, and other parties have appealed the CVD determination. The duty assessment rates may change as a result of these appeals. Once the results of the second administrative reviews become final after these appeals are concluded, assuming the case is not ended and all cash deposits returned on the basis of the USITC failure to find injury or threat of injury, the Company will be entitled to a refund with interest of the difference between the amounts of estimated duties deposited from May 1, 2003 through April 30, 2004 for the AD case and April 1, 2003 through March 31, 2004 for the CVD case, and the final assessment rates determined in the second reviews provided the deposits made exceed the final assessed amount. If, on the other hand, the amounts deposited turned out to be insufficient to cover the duties assessed, the Company will owe the difference, with interest. On November 23, 2005, USDOC announced its selection of respondents for the third administrative AD review, which will cover the period of May 1, 2004 through April 30, 2005. Instead of individually examining the largest exporters, as in prior reviews, USDOC decided to select respondents using a random sampling approach. The Company was not selected as a respondent. The Company has, however, requested its own rate by submitting its data to USDOC voluntarily. On January 6, 2006, USDOC indicated it would not consider such data. The Company is evaluating its options, but it appears likely that the Company will not receive its own individual margin of dumping in that review, unless the Company successfully appeals USDOC's decision. Instead, as with all other non-selected producers, it likely will receive a rate determined on the basis of the selected respondents. In light of the little progress in the lumber dispute case in 2005 and considering the fact that Abitibi-Consolidated has not been selected as a respondent for the third administrative AD review, the Company revised its estimated amount receivable by applying the estimated revised rates published on December 20, 2004 for the first administrative reviews and the estimated revised rates published on December 12, 2005 for the second administrative reviews to their respective covered periods. As a result, the estimated recoverable cost reduction is US$52 million, an amount similar to that already recorded in the Company's books. Also, the Company classified the totality of the amount receivable in long-term assets under "Other assets" due to the uncertainty of receiving any amount within the next 12 months because of the various appeal possibilities. The US$52 million receivable is applicable to CVD for an amount of US$23 million and AD for an amount of US$29 million. The distribution between the first and the second review period is US$16 million and US$36 million respectively and between fiscal years 2002, 2003 and 2004, US$10 million, US$30 million and US$12 million respectively. Dividends and Shares Outstanding On October 25, 2005, the Company's Board of Directors declared a dividend of 2.5 cents per share paid on December 1, 2005 to shareholders of record as at November 7, 2005. On January 31, 2006, the Company's Board of Directors declared a dividend of 2.5 cents per share payable on March 1, 2006 to shareholders of record as at February 13, 2006. As at December 31, 2005, the number of shares outstanding has remained constant at 440 million compared to the end of the same period in 2004 while there were 13.6 million options outstanding at the end of December 2005 compared to 13.9 million at the end of December 2004. Financial Position and Liquidity Cash generated from continuing operating activities totalled $93 million for the fourth quarter ended December 31, 2005, compared to cash generated from continuing operations of $49 million in the corresponding period of 2004. The increase in cash flows generated from operating activities is mainly due to a reduction in working capital requirements mainly attributable to the increase in accounts payable, lower accounts receivable and lower inventories partly offset by a reduction in operating results from continuing operations. Capital expenditures were $177 million for the twelve-month period ended December 31, 2005 compared to $256 million in the corresponding period last year. This reduction is mainly attributable to the capital spent on the Alma, Quebec machine in the first half of 2004. In the fourth quarter of 2005, the Company purchased co-generation assets located at its Fort Frances, Ontario paper mill and previously owned by a third party. The purchase price of the transaction was $10 million plus a possible additional amount of $4 million depending on certain conditions. Total long-term debt amounted to $3,762 million for a ratio of net debt to total capitalization of 0.598, as at December 31, 2005, compared to $4,612 million for a net debt to total capitalization ratio of 0.616 at December 31, 2004. The decrease in the Company's long-term debt is mainly attributable to debt repayment from the proceeds of the sale of PanAsia and the timberlands in Ontario. The reduction is also due to the variation at the end of the fourth quarter, when compared to December 31, 2004, in the exchange rate between the Canadian dollar and the U.S. dollar, in which most of the Company's long-term debt is denominated. The current portion of the long-term debt decreased from $491 million at the end of 2004 to $18 million as at December 31, 2005, mainly attributable to debt repayment by Abitibi- Consolidated and Augusta Newsprint Company. Also, as at December 31, 2005, cash and cash equivalents stood at $67 million, a decrease of $48 million compared to December 31, 2004. On December 16, 2005, the Company announced the expiration and the completion of its cash tender offer for certain series of its outstanding notes (collectively, the "Notes"). A total of US$1,065.5 million in aggregate principal amount of Notes were tendered prior to the expiration date and a total of US$578.8 million aggregate principal amount of Notes were accepted for purchase. Table 7 below shows, among other things, the series of Notes subject to the tender offer, the principal amount of Notes tendered prior to the expiration of the tender offer, the principal amount of Notes accepted for purchase by Abitibi-Consolidated and the principal amount remaining outstanding. Table 7: Details of the tender offer for certain outstanding Notes completed on December 16, 2005 Principal Amount (in millions of US dollars) -------------------------------------------------- Outstanding Tendered Accepted Remaining as at prior to for Outstan- Dec. 1, 2005 expiration purchase ding -------------- ----------- ---------- ------------ Security 6.95% Notes due Dec. 15, 2006 $200.0 $184.8 $184.8 $15.2 7.625% Notes due May 15, 2007 200.0 139.0 139.0 61.0 6.95% Notes due April 1, 2008 250.0 209.2 50.0 200.0 7.875% Notes due Aug. 1, 2009 250.0 204.7 100.0 150.0 8.55% Notes due Aug. 1, 2010 500.0 327.8 105.0 395.0 -------------- ----------- ---------- ------------ $1,400.0 $1,065.5 $578.8 $821.2 On October 3, 2005, the Company renewed its revolving credit facility arrangements. Two new banking facilities were put into place maturing in December 2008: a $550 million facility secured by certain fixed assets and a $150 million facility secured by certain working capital elements, as permitted under bond indentures. The facilities require the Company to maintain certain financial ratios namely, an interest coverage ratio of not less than 1.5x for the life of the agreement and a net funded debt to capitalization ratio of not more than 70% until December 31, 2007 and of not more than 65% thereafter. Exempt from the calculation of the net funded debt to capitalization ratio is up to $500 million of non-cash asset write downs on an after-tax basis, including $235 million already taken in December 2004. The interest coverage ratio was 1.9x for the twelve-month period ended December 31, 2005 and the net funded debt to capitalization ratio amounted to 59.1% at the end of December 2005. At the end of December 2005, the Company had drawn $70 million on its credit facility. In the fourth quarter of 2005, the Company replaced its securitization program with two new programs. On October 28, 2005, the Company finalized a US$300 million North American program, and on December 9, 2005, it completed a US$125 million International program. The North American program is committed for three years while the International program is uncommitted. The programs do not require the Company to maintain a specific credit rating or company- specific financial covenants. Under these programs, the outstanding balance in Canadian dollars, as at December 31, 2005 was $459 million. Under the previous program, the outstanding balance in Canadian dollars, as at December 31, 2004, was $441 million. On November 3, 2005, Dominion Bond Rating Service (DBRS) downgraded the Company's debt ratings to BB (low) with the trend negative. On December 1, 2005, Standard & Poor's lowered the Company's debt ratings to B plus and the outlook was revised to stable. On December 8, 2005 Moody's downgraded the Company's long-term debt ratings to B1 and restored the outlook to stable. At the same time, Moody's upgraded the liquidity rating to SGL-2. Finally, on December 12, 2005 Fitch initiated coverage of the Company's debt and rated the senior unsecured bonds B+ and the secured bank debt BB -. The issuer default rating is also B + and the rating outlook stable. Other Noteworthy Events In the fourth quarter of 2005, the Company performed an impairment test of some long-lived assets on the Lufkin paper mill in light of a scenario of the mill's restart producing lightweight coated paper under a partnership structure. As a result of this test, Abitibi-Consolidated recorded an impairment charge of $125 million of which $81 million is attributed to the Commercial Printing Papers segment and $44 million to the Newsprint segment. On December 28, 2005, Abitibi-Consolidated announced the completion of the sale of its privately owned timberlands (about 196,000 hectares or 485,000 acres) located near Thunder Bay to North Star Forestry Ltd., a subsidiary of Wagner Forest Management Ltd for $55 million. In light of the fact that the Fort William paper mill has not been sold, it remains subject to the ongoing in-depth operations' review. The objective is to improve the mill's performance and cost structure to ensure a long-term cost competitive operation. However, the Company evaluated the paper mill at its net realizable value and recognized an impairment of $43 million. With respect to the in-depth operations' review, Abitibi-Consolidated announced on December 14, 2005, the permanent closure of the Kenora and Stephenville paper mills. These decisions have resulted in the permanent removal of 344,000 tonnes of capacity, in addition to 90,000 tonnes already announced in the third quarter. In the fourth quarter of 2005, Abitibi- Consolidated recorded, on a pre-tax basis, asset write downs of $180 million. The Company also recorded mill closure costs, including additional pension expenses, of $68 million, of which $45 million is cash. As a result of these closures, the Company expects pension expense to be higher by about $26 million in 2007, which amount will be almost totally offset by reductions in other years. Also resulting from the in-depth operations' review, on December 21, 2005, Abitibi-Consolidated announced to its employees the intention to permanently close one paper machine at the Bridgewater mill, in Ellesmere Port, UK. The closure of the machine is scheduled for April 2006 at the latest and is expected to impact 65 people. The closure will remove 60,000 tonnes of annual newsprint capacity. On November 17, 2005, Abitibi-Consolidated announced that it had completed the sale of its 50% share ownership in PanAsia to Norske Skog of Norway. Initially announced in September 2005, the transaction generated cash considerations of US$600 million plus a cash purchase price adjustment of up to US$30 million depending on the achievement of certain financial performance objectives in 2006. In total, this transaction reduced Abitibi-Consolidated's net debt level by approximately $1 billion, compared to the second quarter of 2005, improving its balance sheet and liquidity position, as well as providing financial flexibility for the future. Divesting PanAsia also reflects a choice by the Company to sharpen its strategic focus on its North American portfolio of assets, where it has direct access to free cash flows. Abitibi-Consolidated initially invested US$200 million in the original three-way partnership created in 1999 to form PanAsia. When South Korean partner Hansol decided to exit in 2001, the Company invested an additional US$175 million. The Company received US$85 million of dividends since 1999. The Company's share of PanAsia's 2005 newsprint capacity was 705,000 tonnes. Table 8: Selected reclassified Quarterly information from continuing operations (in millions of dollars, except otherwise mentioned) Wood Products segment is not shown as it is not affected by the sale of PanAsia. 2005 2004 --------------------------- --------------------------- Q-4 Q-3 Q-2 Q-1 Q-4 Q-3 Q-2 Q-1 ------ ------ ------ ------ ----- ------ ------- ------ Newsprint --------- Sales volume (Thousands of tonnes) 1,000 1,014 979 979 1,056 993 928 994 Sales $731 $748 $722 $691 $725 $711 $670 $689 Amortization 295 94 72 70 449 85 84 84 Operating profit (loss) from continuing operations (268) 9 27 4 (400) 34 11 (7) Commercial Printing Papers ---------- Sales volume (Thousands of tonnes) 448 451 436 447 451 450 422 415 Sales $387 $395 $388 $382 $375 $390 $368 $346 Amortization 165 43 44 45 45 46 43 43 Operating profit (loss) from continuing operations (82) 1 7 (15) (25) (8) (1) (18) Consolidated ------------ Sales $1,310 $1,355 $1,354 $1,323 $1,347 $1,405 $1,308 $1,239 Amortization 472 150 129 128 508 145 141 141 Operating profit (loss) from continuing operations (352) 8 57 11 (346) 75 41 (26) Earnings (loss) from continuing operations (345) 95 (49) (54) (115) 179 (84) (106) Earnings (loss) from continuing operations per share (0.79) 0.22 (0.11) (0.13) (0.26) 0.40 (0.19) (0.24) Please refer to historical segmented financial information for details of specific elements that impacted results since the beginning of 2004. Note 3 of the consolidated financial statements gives more details on discontinued operations. Table 8 shows certain information from continuing operations that have been affected by the announcement of PanAsia's sale. It should be noted that reclassified financial information does not take into account the use of proceeds from the sale of PanAsia and the resulting reduction in interest cost. Disclosure Controls and Procedures and Internal Controls In the quarter ended December 31, 2005, 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 fourth 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. Contacts: -------- Investors: Frank Alessi Director, Investor Relations (514) 394-2341 Media: Seth Kursman Vice President, Communications and Government Affairs (514) 394-2398 DATASOURCE: ABITIBI-CONSOLIDATED INC. CONTACT: Investors: Frank Alessi, Director, Investor Relations, (514) 394-2341, ; Media: Seth Kursman, Vice President, Communications and Government Affairs, (514) 394-2398,

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