Attached files
file | filename |
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EX-31.1 - EX-31.1 - Resolute Forest Products Inc. | g24338exv31w1.htm |
EX-31.2 - EX-31.2 - Resolute Forest Products Inc. | g24338exv31w2.htm |
EX-32.1 - EX-32.1 - Resolute Forest Products Inc. | g24338exv32w1.htm |
EX-32.2 - EX-32.2 - Resolute Forest Products Inc. | g24338exv32w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
FOR THE TRANSITION PERIOD FROM TO |
COMMISSION FILE NUMBER: 001-33776
ABITIBIBOWATER INC.
(Exact name of registrant as specified in its charter)
Delaware | 98-0526415 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) |
1155 Metcalfe Street, Suite 800; Montreal, Quebec; Canada H3B 5H2
(Address of principal executive offices) (Zip Code)
(514) 875-2160
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
As of July 30, 2010, there were 54,704,593 shares of AbitibiBowater Inc. common stock outstanding.
ABITIBIBOWATER INC.
TABLE OF CONTENTS
TABLE OF CONTENTS
Table of Contents
ABITIBIBOWATER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions except per share amounts)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Sales |
$ | 1,182 | $ | 1,036 | $ | 2,282 | $ | 2,149 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales, excluding depreciation, amortization and
cost of timber harvested |
951 | 784 | 1,866 | 1,572 | ||||||||||||
Depreciation, amortization and cost of timber harvested |
125 | 148 | 257 | 314 | ||||||||||||
Distribution costs |
141 | 119 | 278 | 234 | ||||||||||||
Selling and administrative expenses |
39 | 31 | 69 | 111 | ||||||||||||
Closure costs, impairment and other related charges |
3 | 240 | 8 | 270 | ||||||||||||
Net gain on disposition of assets |
(4 | ) | (1 | ) | (13 | ) | (53 | ) | ||||||||
Operating loss |
(73 | ) | (285 | ) | (183 | ) | (299 | ) | ||||||||
Interest expense (contractual interest of $172 and $194
in the three months ended June 30, 2010 and 2009,
respectively, and $369 and $386 in the six months ended
June 30, 2010 and 2009, respectively) |
(129 | ) | (143 | ) | (318 | ) | (335 | ) | ||||||||
Other income (expense), net |
41 | (30 | ) | 38 | (31 | ) | ||||||||||
Loss before reorganization items and income taxes |
(161 | ) | (458 | ) | (463 | ) | (665 | ) | ||||||||
Reorganization items, net (Note 3) |
(148 | ) | (89 | ) | (353 | ) | (99 | ) | ||||||||
Loss before income taxes |
(309 | ) | (547 | ) | (816 | ) | (764 | ) | ||||||||
Income tax benefit |
9 | 34 | 10 | 41 | ||||||||||||
Net loss including noncontrolling interests |
(300 | ) | (513 | ) | (806 | ) | (723 | ) | ||||||||
Net loss (income) attributable to noncontrolling interests |
3 | 3 | 9 | (5 | ) | |||||||||||
Net loss attributable to AbitibiBowater Inc. |
$ | (297 | ) | $ | (510 | ) | $ | (797 | ) | $ | (728 | ) | ||||
Net loss per share attributable to AbitibiBowater Inc.
common shareholders: |
||||||||||||||||
Basic and diluted |
$ | (5.15 | ) | $ | (8.84 | ) | $ | (13.83 | ) | $ | (12.62 | ) | ||||
Weighted-average number of AbitibiBowater Inc. common
shares outstanding: |
||||||||||||||||
Basic and diluted |
57.7 | 57.7 | 57.7 | 57.7 | ||||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
1
Table of Contents
ABITIBIBOWATER INC.
CONSOLIDATED BALANCE SHEETS
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions, except per share amount)
CONSOLIDATED BALANCE SHEETS
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions, except per share amount)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 708 | $ | 756 | ||||
Accounts receivable, net |
828 | 644 | ||||||
Inventories, net |
515 | 581 | ||||||
Assets held for sale |
9 | 52 | ||||||
Other current assets |
111 | 139 | ||||||
Total current assets |
2,171 | 2,172 | ||||||
Fixed assets, net |
3,402 | 3,897 | ||||||
Goodwill |
53 | 53 | ||||||
Amortizable intangible assets, net |
462 | 473 | ||||||
Other assets |
561 | 517 | ||||||
Total assets |
$ | 6,649 | $ | 7,112 | ||||
Liabilities and deficit |
||||||||
Liabilities not subject to compromise: |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 511 | $ | 462 | ||||
Debtor in possession financing |
206 | 206 | ||||||
Secured borrowings |
120 | | ||||||
Short-term bank debt |
680 | 680 | ||||||
Current portion of long-term debt |
300 | 305 | ||||||
Liabilities associated with assets held for sale |
3 | 35 | ||||||
Total current liabilities |
1,820 | 1,688 | ||||||
Long-term debt, net of current portion |
273 | 308 | ||||||
Pension and other postretirement projected benefit obligations |
96 | 89 | ||||||
Other long-term liabilities |
87 | 162 | ||||||
Deferred income taxes |
96 | 107 | ||||||
Total liabilities not subject to compromise |
2,372 | 2,354 | ||||||
Liabilities subject to compromise (Note 3) |
7,065 | 6,727 | ||||||
Total liabilities |
9,437 | 9,081 | ||||||
Commitments and contingencies |
||||||||
Deficit: |
||||||||
AbitibiBowater Inc. shareholders deficit: |
||||||||
Common stock, $1 par value. 54.7 shares outstanding
as of June 30, 2010 and December 31, 2009 |
55 | 55 | ||||||
Exchangeable shares, no par value. 3.0 shares outstanding
as of June 30, 2010 and December 31, 2009 |
173 | 173 | ||||||
Additional paid-in capital |
2,525 | 2,522 | ||||||
Deficit |
(5,188 | ) | (4,391 | ) | ||||
Accumulated other comprehensive loss |
(466 | ) | (450 | ) | ||||
Total AbitibiBowater Inc. shareholders deficit |
(2,901 | ) | (2,091 | ) | ||||
Noncontrolling interests |
113 | 122 | ||||||
Total deficit |
(2,788 | ) | (1,969 | ) | ||||
Total liabilities and deficit |
$ | 6,649 | $ | 7,112 | ||||
See accompanying notes to unaudited interim consolidated financial statements.
2
Table of Contents
ABITIBIBOWATER INC.
CONSOLIDATED STATEMENT OF CHANGES IN DEFICIT
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions)
CONSOLIDATED STATEMENT OF CHANGES IN DEFICIT
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions)
AbitibiBowater Inc. Shareholders Deficit | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Non- | ||||||||||||||||||||||||||
Common | Exchangeable | Paid-In | Comprehensive | controlling | Total | |||||||||||||||||||||||
Stock | Shares | Capital | Deficit | Loss | Interests (1) | Deficit | ||||||||||||||||||||||
Balance as of December 31, 2009 |
$ | 55 | $ | 173 | $ | 2,522 | $ | (4,391 | ) | $ | (450 | ) | $ | 122 | $ | (1,969 | ) | |||||||||||
Share-based compensation costs for
equity-classified awards |
| | 3 | | | | 3 | |||||||||||||||||||||
Net loss |
| | | (797 | ) | | (9 | ) | (806 | ) | ||||||||||||||||||
Other comprehensive loss, net of tax |
| | | | (16 | ) | | (16 | ) | |||||||||||||||||||
Balance as of June 30, 2010 |
$ | 55 | $ | 173 | $ | 2,525 | $ | (5,188 | ) | $ | (466 | ) | $ | 113 | $ | (2,788 | ) | |||||||||||
(1) | As of December 31, 2008, the balance of noncontrolling interests was $136 million. During the six months ended June 30, 2009, amounts attributable to noncontrolling interests consisted of $5 million of net income, $6 million of other comprehensive income, net of tax, and $7 million of dividends paid to noncontrolling interests, which resulted in a balance of noncontrolling interests of $140 million as of June 30, 2009. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions)
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net loss including noncontrolling interests |
$ | (806 | ) | $ | (723 | ) | ||
Other comprehensive income (loss): |
||||||||
Change in unamortized prior service costs, net of tax of $0 in 2010 and 2009 |
3 | (4 | ) | |||||
Change in unamortized actuarial gains and losses, net of tax of $1 and $0
in 2010 and 2009, respectively |
(17 | ) | (2 | ) | ||||
Foreign currency translation |
(2 | ) | 12 | |||||
Other comprehensive (loss) income, net of tax |
(16 | ) | 6 | |||||
Comprehensive loss including noncontrolling interests |
(822 | ) | (717 | ) | ||||
Less: Comprehensive loss (income) attributable to noncontrolling interests: |
||||||||
Net loss (income) |
9 | (5 | ) | |||||
Foreign currency translation |
| (6 | ) | |||||
Comprehensive loss (income) attributable to noncontrolling interests |
9 | (11 | ) | |||||
Comprehensive loss attributable to AbitibiBowater Inc. |
$ | (813 | ) | $ | (728 | ) | ||
See accompanying notes to unaudited interim consolidated financial statements.
3
Table of Contents
ABITIBIBOWATER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
(Unaudited, in millions)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss including noncontrolling interests |
$ | (806 | ) | $ | (723 | ) | ||
Adjustments to reconcile net loss including noncontrolling interests
to net cash (used in) provided by operating activities: |
||||||||
Share-based compensation |
3 | 3 | ||||||
Depreciation, amortization and cost of timber harvested |
257 | 314 | ||||||
Closure costs, impairment and other related charges |
8 | 270 | ||||||
Write-downs of inventory |
| 12 | ||||||
Deferred income taxes |
(7 | ) | 10 | |||||
Net pension expense (contributions) |
6 | (188 | ) | |||||
Net gain on disposition of assets |
(13 | ) | (53 | ) | ||||
Amortization of debt discount (premium) and debt issuance costs, net |
8 | 48 | ||||||
(Gain) loss on translation of foreign currency denominated debt |
(5 | ) | 6 | |||||
Non-cash reorganization items, net |
306 | 46 | ||||||
Debtor in possession financing costs |
5 | 29 | ||||||
Changes in working capital: |
||||||||
Accounts receivable |
(56 | ) | 148 | |||||
Inventories |
32 | 37 | ||||||
Other current assets |
25 | (25 | ) | |||||
Accounts payable and accrued liabilities |
199 | 78 | ||||||
Other, net |
35 | 51 | ||||||
Net cash (used in) provided by operating activities |
(3 | ) | 63 | |||||
Cash flows from investing activities: |
||||||||
Cash invested in fixed assets |
(26 | ) | (53 | ) | ||||
Disposition of assets |
62 | 69 | ||||||
Increase in restricted cash |
(55 | ) | | |||||
Decrease in deposit requirements for letters of credit, net |
| 39 | ||||||
Cash received in monetization of derivative financial instruments |
| 5 | ||||||
Net cash (used in) provided by investing activities |
(19 | ) | 60 | |||||
Cash flows from financing activities: |
||||||||
Decrease in secured borrowings, net |
(21 | ) | | |||||
Cash dividends, including noncontrolling interests |
| (7 | ) | |||||
Debtor in possession financing |
| 236 | ||||||
Debtor in possession financing costs |
(5 | ) | (27 | ) | ||||
Short-term financing, net |
| (24 | ) | |||||
Payments of long-term debt |
| (5 | ) | |||||
Payments of financing and bank credit facility fees |
| (9 | ) | |||||
Net cash (used in) provided by financing activities |
(26 | ) | 164 | |||||
Net (decrease) increase in cash and cash equivalents |
(48 | ) | 287 | |||||
Cash and cash equivalents: |
||||||||
Beginning of period |
756 | 192 | ||||||
End of period |
$ | 708 | $ | 479 | ||||
See accompanying notes to unaudited interim consolidated financial statements.
4
Table of Contents
ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Note 1. Organization and Basis of Presentation
Nature of operations
AbitibiBowater Inc. (with its subsidiaries and affiliates, either individually or collectively,
unless otherwise indicated, referred to as AbitibiBowater, we, our, us or the Company) is
incorporated in Delaware and is a leading producer of newsprint and coated and specialty papers. In
addition, we produce and sell market pulp and wood products. We operate pulp and paper
manufacturing facilities in Canada, the United States and South Korea, as well as wood products
manufacturing facilities and hydroelectric facilities in Canada.
Financial statements
The consolidated balance sheets as of June 30, 2010 and December 31, 2009, the related statements
of operations for the three and six months ended June 30, 2010 and 2009, the related statement of
changes in deficit for the six months ended June 30, 2010 and the related statements of
comprehensive loss and cash flows for the six months ended June 30, 2010 and 2009 are unaudited and
have been prepared in accordance with the requirements of the United States Securities and Exchange
Commission (SEC) for interim reporting. Under those rules, certain footnotes and other financial
information that are normally required by United States generally accepted accounting principles
(U.S. GAAP) may be condensed or omitted. In our opinion, all adjustments (consisting of normal
recurring adjustments) necessary for the fair presentation of the interim financial statements have
been made. All amounts are expressed in U.S. dollars, unless otherwise indicated. The results for
the interim period ended June 30, 2010 are not necessarily indicative of the results to be expected
for the full year. These financial statements should be read in conjunction with our Annual Report
on Form 10-K for the year ended December 31, 2009, filed on March 31, 2010, as amended. Certain
prior year amounts in the unaudited interim consolidated financial statements and the related notes
have been reclassified to conform to the 2010 presentation. The reclassifications had no effect on
total deficit or net loss.
Creditor Protection Proceedings
On April 16, 2009 and December 21, 2009, AbitibiBowater Inc. and certain of its U.S. and Canadian
subsidiaries filed voluntary petitions (collectively, the Chapter 11 Cases) in the United States
Bankruptcy Court for the District of Delaware (the U.S. Court) for relief under the provisions of
Chapter 11 of the United States Bankruptcy Code, as amended (Chapter 11). In addition, on April
17, 2009, certain of AbitibiBowater Inc.s Canadian subsidiaries sought creditor protection (the
CCAA Proceedings) under the Companies Creditors Arrangement Act (the CCAA) with the Superior
Court of Quebec in Canada (the Canadian Court). On April 17, 2009, Abitibi-Consolidated Inc.
(Abitibi), a subsidiary of AbitibiBowater Inc., and its wholly-owned subsidiary,
Abitibi-Consolidated Company of Canada (ACCC), each filed a voluntary petition for provisional
and final relief (the Chapter 15 Cases) in the U.S. Court under the provisions of Chapter 15 of
the United States Bankruptcy Code, as amended, to obtain recognition and enforcement in the United
States of certain relief granted in the CCAA Proceedings and also on that date, AbitibiBowater Inc.
and certain of its subsidiaries in the Chapter 11 Cases obtained orders under Section 18.6 of the
CCAA in respect thereof (the 18.6 Proceedings). The Chapter 11 Cases, the Chapter 15 Cases, the
CCAA Proceedings and the 18.6 Proceedings are collectively referred to as the Creditor Protection
Proceedings. The entities subject to the Creditor Protection Proceedings are referred to herein as
the Debtors. The U.S. Court and the Canadian Court are collectively referred to as the Courts.
Our wholly-owned subsidiary that operates our Mokpo, South Korea operations and almost all of our
less than wholly-owned subsidiaries continue to operate outside of the Creditor Protection
Proceedings.
On August 2, 2010, the U.S Court approved the solicitation materials in respect of our Debtors
Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the Chapter
11 Plan). On July 9, 2010, the Canadian Court approved the mailing of solicitation materials
related to the CCAA Plan of Reorganization and Compromise (the CCAA Plan and, together with the
Chapter 11 Plan, the Plans of Reorganization). These approvals enable us to begin soliciting
votes from creditors to accept or reject our Plans of Reorganization in accordance with the
applicable Court orders. The Plans of Reorganization describe a proposed treatment of creditor
claims and certain other matters. The Plans of Reorganization are subject to creditor approval and
must also be approved by the applicable Court.
For additional information, see Note 2, Creditor Protection Proceedings.
5
Table of Contents
ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Basis of presentation and going concern issues
Our unaudited interim consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. However, the Creditor Protection Proceedings, which are discussed
further in Note 2, Creditor Protection Proceedings, raise substantial doubt about our ability to
continue as a going concern.
The Creditor Protection Proceedings and our debtor in possession financing arrangements, which are
discussed in Note 12, Liquidity and Debt, have provided us with a period of time to stabilize our
operations and financial condition and develop our Plans of Reorganization. Management believes
that these actions make the going concern basis of presentation appropriate. However, given the
uncertainty involved in these proceedings, the realization of assets and discharge of liabilities
are each subject to significant uncertainty. Further, our ability to continue as a going concern is
dependent on market conditions and our ability to obtain the approval of the Plans of
Reorganization from affected creditors and the Courts, successfully implement the
Plans of Reorganization, improve profitability, obtain exit financing to replace our debtor in
possession financing arrangements and renew or extend our current debtor in possession financing
arrangements if the need to do so should arise. However, it is not possible to predict whether the
actions taken in our restructuring will result in improvements to our financial condition
sufficient to allow us to continue as a going concern. If the going concern basis is not
appropriate, adjustments will be necessary to the carrying amounts and/or classification of our
assets and liabilities.
Further, the implementation of the Plans of Reorganization could materially change the carrying
amounts and classifications reported in our consolidated financial statements. The assets and
liabilities in our unaudited interim consolidated financial statements do not reflect any
adjustments related to the Plans of Reorganization, except for certain charges discussed in Note 3,
Creditor Protection Proceedings Related Disclosures Reorganization items, net. In addition, our
unaudited interim consolidated financial statements do not purport to reflect or provide for all of
the consequences of the Creditor Protection Proceedings, such as: (i) the realizable value of our
assets on a liquidation basis or their availability to satisfy liabilities, (ii) the amounts of
pre-petition liabilities that may be allowed for claims or contingencies or the status and priority
thereof, (iii) the effect of any changes in our deficit that may be made in our recapitalization or
(iv) the effect on our Consolidated Statements of Operations regarding any changes made to our
business resulting from the Plans of Reorganization, except for certain charges discussed in Note
3, Creditor Protection Proceedings Related Disclosures Reorganization items, net.
Effective upon the commencement of the Creditor Protection Proceedings, we applied the guidance in
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 852,
Reorganizations
(FASB ASC 852), in preparing our consolidated financial statements and we continue to apply this
guidance while we operate under the Creditor Protection Proceedings.
The guidance in FASB ASC 852
does not change the manner in which financial statements are prepared. However, it requires that
the financial statements distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the business. Accordingly, certain expenses,
provisions for losses, gains on disposition of assets and other charges directly associated with or
resulting from the reorganization and restructuring of the business that have been realized or
incurred in the Creditor Protection Proceedings have been recorded in Reorganization items, net
in our Consolidated Statements of Operations. For additional information, see Note 3, Creditor
Protection Proceedings Related Disclosures - Reorganization items, net. Pre-petition
obligations that may be impaired by the reorganization process have been classified in our
Consolidated Balance Sheets as Liabilities subject to compromise. For additional information, see
Note 3, Creditor Protection Proceedings Related Disclosures - Liabilities subject to
compromise. Additionally, we have continued to record interest expense on certain of our
pre-petition debt obligations. For additional information, see Note 12, Liquidity and Debt.
Bridgewater Administration
On February 2, 2010, Bridgewater Paper Company Limited (BPCL), a subsidiary of AbitibiBowater
Inc., filed for administration in the United Kingdom pursuant to the United Kingdom Insolvency Act
1986, as amended (the BPCL Administration). BPCLs board of directors appointed Ernst & Young LLP
as joint administrators for the BPCL Administration, whose responsibilities are to manage the
affairs, business and assets of BPCL. In May 2010, the joint administrators announced the sale of
the paper mill and all related machinery and equipment. As a result of the filing for
administration, we lost control over and the ability to influence BPCLs operations. As a result,
effective as of the date of the BPCL Administration filing, we are no longer consolidating BPCL in
our consolidated financial statements and are now
6
Table of Contents
ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
accounting for BPCL using the cost method of accounting. For additional information, see Note 3,
Creditor Protection Proceedings Related Disclosures Reorganization items, net.
BPCL was a party to a contract with NPower Cogen Limited (NPower) for the cogeneration building
and equipment lease and for the purchase of steam and electricity to operate the paper mill. This
contract also contained two embedded derivative features, which are no longer included in our
consolidated financial statements as a result of the deconsolidation of BPCL. Abitibi had provided
a guarantee in favor of NPower as it relates to BPCLs obligations under this agreement, which it
repudiated on July 7, 2009. NPower filed a related claim in the Creditor Protection Proceedings
against Abitibi in November 2009. In the first quarter of 2010, we recorded a liability for
NPowers repudiated claim. For additional information, see Note 3, Creditor Protection Proceedings
Related Disclosures Reorganization items, net.
Recently adopted accounting guidance
On January 1, 2010, we prospectively adopted new accounting guidance which eliminates the concept
of a qualified special-purpose entity (QSPE), changes the requirements for derecognizing
financial assets and requires additional disclosures. The new guidance requires entities to provide
additional information about transfers of financial assets, including securitization transactions,
and where companies have continuing exposure to the risks related to transferred financial assets.
The adoption of this accounting guidance did not have a material impact on our results of
operations or financial position as it applies to the QSPEs that were established for note
monetization purposes. However, as a result of the adoption of this new accounting guidance, the
transfers of accounts receivable interests under our accounts receivable securitization program no
longer qualify as sales. Such transfers and the proceeds received thereon are now accounted for as
secured borrowings. For additional information, see Note 12, Liquidity and Debt.
On January 1, 2010, we adopted new accounting guidance which changes how a company determines when
an entity that is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. QSPEs will no longer be excepted from current accounting guidance.
The determination of whether a company is required to consolidate an entity is based on, among
other things, an entitys purpose and design and a companys ability to direct the activities of
the entity that most significantly impact the entitys economic performance. We are not the primary
beneficiary of any of the QSPEs that were established for note monetization purposes and therefore,
such QSPEs will remain unconsolidated entities. The adoption of this accounting guidance did not
have an impact on our results of operations or financial position.
Note 2. Creditor Protection Proceedings
Overview
As discussed in Note 1, Organization and Basis of Presentation Creditor Protection Proceedings,
AbitibiBowater Inc. and certain of its subsidiaries commenced Creditor Protection Proceedings on
April 16 and 17, 2009 and December 21, 2009 in order to enable us to pursue reorganization efforts
under the protection of Chapter 11 and the CCAA, as applicable. We remain in possession of our
assets and properties and are continuing to operate our business and manage our properties as
debtors in possession under the jurisdiction of the Courts and in accordance with the applicable
provisions of Chapter 11 and the CCAA. In general, the Debtors are authorized to continue to
operate as ongoing businesses, but may not engage in transactions outside the ordinary course of
business without the approval of the applicable Court(s) or the Monitor (as defined below), as
applicable.
The commencement of the Creditor Protection Proceedings constituted an event of default under
substantially all of our pre-petition debt obligations, and those debt obligations became
automatically and immediately due and payable by their terms, although any action to enforce such
payment obligations is stayed as a result of the commencement of the Creditor Protection
Proceedings. Due to the commencement of the Creditor Protection Proceedings, unsecured pre-petition
debt obligations of $4,851 million are included in Liabilities subject to compromise in our
Consolidated Balance Sheets as of June 30, 2010. Secured pre-petition debt obligations of $980
million and $34 million are included in current liabilities and Long-term debt, net of current
portion, respectively, in our Consolidated Balance Sheets as of June 30, 2010. See Note 3,
Creditor Protection Proceedings Related Disclosures - Liabilities subject to compromise.
7
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Debtor in possession financing arrangements
In the Creditor Protection Proceedings, we sought and obtained: (i) final approval by the Courts to
enter into a debtor in possession financing facility for the benefit of AbitibiBowater Inc.,
Bowater Incorporated (Bowater), a wholly-owned subsidiary of AbitibiBowater Inc., and certain of
Bowaters subsidiaries, (ii) final approval by the Canadian Court to enter into a debtor in
possession financing facility for the benefit of Abitibi with a wholly-owned subsidiary of ACCC and
(iii) final approval by the Courts to amend and restate, in its entirety, the accounts receivable
securitization program, as further amended on June 11, 2010, of Abitibi and Donohue Corp.
(Donohue), an indirect, wholly-owned subsidiary of AbitibiBowater Inc. Each of these financing
arrangements is discussed in further detail in Note 12, Liquidity and Debt.
Reorganization process
General
The Courts have issued a variety of orders on either a final or interim basis intended to support
our business continuity throughout the restructuring process. These orders include, among other
things, authorization to:
| make payments relating to certain employees pre-petition wages, salaries and benefit programs in the ordinary course; | ||
| ensure the continuation of existing cash management systems; | ||
| honor certain ongoing customer obligations; | ||
| repudiate or reject certain customer, supplier and other contracts; | ||
| enter into our debtor in possession financing arrangements and the Abitibi and Donohue second amended and restated accounts receivable securitization program, as further amended, which are discussed in Note 12, Liquidity and Debt; | ||
| conduct certain asset sales; | ||
| settle certain intercompany obligations; | ||
| restructure our European sales structure; and | ||
| transfer certain properties from one subsidiary of AbitibiBowater to another subsidiary of AbitibiBowater, as well as the placement of the latter subsidiary into receivership. |
We also obtained an order from the Canadian Court on May 8, 2009 specifying that the payment of
special contributions for past service to Canadian pension plans maintained by Abitibi and Bowater
could be suspended. Abitibi and Bowater continue to make their respective Canadian pension plan
contributions for current service costs. Special contributions to our Canadian pension plans for
past service that were suspended amounted to approximately $102 million for Abitibi and
approximately $57 million for Bowater on an annual basis. We have continued to meet our obligations
to our U.S. pension plans in the ordinary course.
We have retained legal and financial professionals to advise us on the Creditor Protection
Proceedings and may, from time to time, retain additional professionals, subject to any applicable
Court approval.
On April 28, 2009, the United States Trustee for the District of Delaware appointed an official
committee of unsecured creditors (the Creditors Committee) in the Chapter 11 Cases pursuant to
the requirements of Chapter 11. The Creditors Committee and its legal representatives have a right
to be heard on all matters that come before the U.S. Court with respect to us.
Under the terms of a Canadian Court order, Ernst & Young Inc. serves as the court-appointed monitor
under the CCAA Proceedings (the Monitor) and assisted us in formulating our CCAA
restructuring plan.
Stay of proceedings
Subject to certain exceptions under Chapter 11 and the CCAA, our filings (and in Canada, the
Initial Order, as defined below) automatically enjoined, or stayed, the continuation of any
judicial or administrative proceedings or other actions
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
against us and our property to recover, collect or secure a claim arising prior to the filing of
the Creditor Protection Proceedings. Thus, for example, most creditor actions to obtain possession
of property from us, or to create, perfect or enforce any lien against our property, or to collect
on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim, are
enjoined unless and until the Courts lift such stay.
We began notifying all known current or potential creditors regarding these filings shortly after
the commencement of the Creditor Protection Proceedings. We have successfully applied on several
occasions to the Courts in order to enforce the stay of proceedings against creditors acting in
breach of the stay.
Rejection and repudiation of contractual obligations
Under Section 365 and other relevant sections of Chapter 11, we may assume, assign or reject
certain executory contracts and unexpired leases, including leases of real property and equipment,
subject to the approval of the U.S. Court and certain other conditions. Similarly, pursuant to the
initial order issued by the Canadian Court on April 17, 2009 (the Initial Order), we have the
right to, among other things, repudiate or reject agreements, contracts or arrangements of any
nature whatsoever, whether oral or written, subject to the approval of the Monitor or further order
of the Canadian Court. Any description of an agreement, contract, unexpired lease or arrangement in
these notes to our unaudited interim consolidated financial statements must be read in light of
these overriding rights pursuant to Section 365 of Chapter 11 and the relevant provisions of the
CCAA, as applicable.
Since initiating the Creditor Protection Proceedings, we have engaged and will continue to engage
in a review of our various agreements in light of the overriding rights described above. We have
rejected and repudiated a number of leases, including leases of real estate and equipment, and have
assumed or assigned certain others. Some of the more significant agreements we repudiated or
rejected, as the case may be, include the following:
| We repudiated certain supply contracts between Abitibi and SFK Pate S.E.N.C. and on May 21, 2009, the Canadian Court rejected a motion by SFK Pate S.E.N.C. to overturn that repudiation. | ||
| On June 15, 2009, we filed a motion with the U.S. Court to reject an amended and restated call agreement (the Call Agreement) in respect of Augusta Newsprint Inc. (ANI), an indirect subsidiary of The Woodbridge Company Limited (Woodbridge) and our partner in Augusta Newsprint Company (ANC). ANC is the partnership that owns and operates the Augusta, Georgia newsprint mill. The Call Agreement obligated Abitibi Consolidated Sales Corporation (ACSC), an indirect, wholly-owned subsidiary of AbitibiBowater Inc., to either buy out ANI at a price well above market, or risk losing all of its equity in the joint venture pursuant to forced sale provisions. The U.S. Court granted our motion on October 27, 2009 and approved our rejection of the Call Agreement. Our counterparties to the Call Agreement filed a Notice of Appeal with the U.S. Court on November 3, 2009. Also, on March 9, 2010, Woodbridge filed a motion in the U.S. Court to force ACSC to reject the partnership agreement governing ANC. We filed an objection to such motion on April 9, 2010. The matter was heard on May 26, 2010 but the hearing was not dispositive. The motion thus remains before the U.S. Court. | ||
| On July 7, 2009, we repudiated a parental guarantee issued by Abitibi in favor of NPower relating to BPCLs obligations under an energy supply contract for the Bridgewater newsprint mill. For additional information, see Note 1, Organization and Basis of Presentation Bridgewater Administration. | ||
| Effective July 13, 2009, Bowater Canadian Forest Products Inc. (BCFPI, an indirect subsidiary of Bowater), Abitibi and ACCC repudiated contracts with Boralex Dolbeau Inc. and on July 28, 2009, we obtained a motion De Bene Esse to confirm our repudiation of those contracts in light of injunctions issued by the Canadian Court and the Court of Appeal of Quebec on January 22, 2008 and October 8, 2008, respectively, initially preventing such actions. Following the repudiation of these contracts, our Dolbeau, Quebec facility has been effectively idled. | ||
| On September 14, 2009, we repudiated certain of Abitibis shipping contracts with Spliethoff Transport B.V. based on expected savings and more favorable contractual terms with a new shipper. The Canadian Court rejected Spliethoff Transport B.V.s motion to overturn the repudiation on November 24, 2009. | ||
| We rejected a number of pre-petition engagement letters with financial advisors retained to provide advisory services on an exclusive basis in connection with pre-petition restructuring activities and certain transactions that ultimately were not consummated. |
9
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
The creditors affected by these repudiations and rejections have filed proofs of claims in the
Creditor Protection Proceedings. For additional information, see Note 3, Creditor Protection
Proceedings Related Disclosures Reorganization items, net and Liabilities subject to
compromise.
Procedures for the filing, review and determination of creditors claims in the U.S. and in Canada
On August 26, 2009 and September 3, 2009, the Canadian Court and the U.S. Court, respectively,
granted our motions to establish November 13, 2009 (the General Claims Bar Date) as the bar date
for the filing of claims, generally representing the majority of our creditors. We notified the
majority of our creditors and potential creditors of the General Claims Bar Date and the
requirement to file a proof of claim with the Courts before that deadline in order for a claimant
to receive any distribution in the Creditor Protection Proceedings. Individuals who were employed
by us as of April 16, 2009 (the date on which we filed for creditor protection in the U.S.) or
thereafter (Post-filing Employees) were excluded from the General Claims Bar Date in the U.S. and
Canada, as were certain other Excluded Claims in Canada.
On January 18, 2010, the Canadian Court issued an order setting out the process for the review,
determination and adjudication of contested claims with a view to determining their amounts for an
eventual vote by the holders of such claims on a plan of arrangement to be presented by us. No such
order has been issued in the U.S., where the applicable procedure for the investigation of
discrepancies between liability amounts estimated by us and claims filed by our creditors and for
the valuation of liabilities is generally governed by the rules under Chapter 11.
On February 18, 2010, the U.S. Court granted our motion to establish April 7, 2010 (the Second
Claims Bar Date) as the date by which Post-filing Employees were required to file employee proofs
of claim against us on account of: (i) any claim against us owing as of April 16, 2009 and (ii) any
claim or expense asserted against us for the period from April 16, 2009 through and including
February 28, 2010 (but excluding amounts owed for ordinary course payroll obligations that were
scheduled to be paid on the next pay date occurring after February 28, 2010, or for the
reimbursement of expenses scheduled to be paid in the ordinary course).
On February 23, 2010, the Canadian Court granted our motion to establish an identical Second Claims
Bar Date of
April 7, 2010 for Post-filing Employees and most previously Excluded Claims, including a category
of claims that includes claims arising out of contract repudiation after August 31, 2009
(Restructuring Claims). A rolling bar date, being the later of the Second Claims Bar Date or 30
days after the issuance of a notice giving rise to any Restructuring Claim, was established for
those Restructuring Claims that arise between the Second Claims Bar Date of April 7, 2010 and
emergence from the CCAA Proceedings.
There have been approximately 7,300 and 8,200 claims filed against the Chapter 11 filers and the
CCAA filers, respectively, that total, together with the Chapter 11 filers scheduled liabilities,
approximately $76 billion (which for purposes of this disclosure, for the claims filed against the
CCAA filers in Canadian dollars, reflects the exchange rate to U.S. dollars on the date of the
commencement of the CCAA Proceedings, which may not be the rate applicable to every claim). We are
currently in the process of reconciling such claims to the amounts we have recorded in Liabilities
subject to compromise as of June 30, 2010 in our Consolidated Balance Sheets. Differences in
amounts recorded and claims filed by creditors are being investigated and will be resolved,
including through the filing of objections with the Courts, where appropriate. We have identified,
and expect to continue to identify, many claims that we believe should be disallowed by the Courts
because they are duplicative, have been later amended or superseded, are without merit, are
overstated or for other reasons. In addition, as a result of this process, we may identify
additional liabilities that will need to be recorded or reclassified to liabilities subject to
compromise. Also, we have identified, and may continue to identify, recorded liabilities for which
no claim has been filed, which would result in a reorganization gain upon the elimination of the
recorded liabilities. Although we are continuing to make progress, in light of the substantial
number and amount of claims filed, the claims resolution process may take considerable time to
complete. Completion of the claims resolution process is not a condition to our emergence from the
Creditor Protection Proceedings.
In both the U.S. and Canada, the determination of how claims will ultimately be treated, as well as
how each class of affected claims will be settled, including payment terms, if applicable, cannot
be made until the Courts approve, if at all, the Plans of Reorganization. Accordingly, the ultimate
number and amount of allowed claims, as well as the ultimate treatment and recovery of allowed
claims, is not determinable at this time. Given the magnitude of the claims asserted, it is
possible that allowed claims may be materially in excess of the amounts recorded as liabilities
subject to compromise as of June 30, 2010 and adjustments to these liabilities may be recorded as
Reorganization items, net in our Consolidated Statements of
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Operations in future periods. Classification for purposes of our consolidated financial statements
of any pre-petition liabilities on any basis other than liabilities subject to compromise is not an
admission against interest or legal conclusion by the Debtors as to the manner of classification,
treatment, allowance or payment in the Creditor Protection Proceedings, including in connection
with the Plans of Reorganization that may be approved by the Courts and that may become effective
pursuant to the Courts orders.
For additional information, see Note 3, Creditor Protection Proceedings Related Disclosures
Reorganization items, net and Liabilities subject to compromise.
Plan or plans of reorganization
In order to successfully exit from Chapter 11 and the CCAA, we will be required to obtain approval
from affected creditors and the Courts of the Plans of Reorganization upon having
shown that they satisfy the requirements of Chapter 11 and the CCAA. Once approved, the Plans of
Reorganization will resolve our pre-petition obligations, set forth the revised capital structure
of the newly reorganized entity and provide for corporate governance following our exit from
Chapter 11 and the CCAA.
In the
United States, Chapter 11 provides that we have the exclusive
right for up to 18 months after the
filing of the Creditor Protection Proceedings to file a plan or plans of reorganization with the
U.S. Court. In successive orders, the U.S. Court further extended our exclusive right to file a
plan or plans of reorganization and solicit votes thereon,
and the current deadlines are September 14, 2010 and November 13, 2010, respectively. However, a motion is
pending before the U.S. Court to further extend these deadlines for the maximum periods, which would extend our
exclusive right to file a plan or plans of reorganization and solicit votes thereon until October 16, 2010 and
December 16, 2010, respectively.
We began soliciting votes from creditors for the
approval or rejection of our Plans of Reorganization on August 9, 2010. If our exclusivity period
were to lapse, any party in interest would be able to file a plan or plans of reorganization. In
addition to being voted on and approved by holders of impaired claims and equity interests, the
Chapter 11 Plan must satisfy certain requirements of Chapter 11 and must be confirmed
by the U.S. Court in order to become effective.
Similarly, in Canada, the Initial Order provides for a general stay of proceedings for an initial
period of 30 days. The Canadian Court has extended the stay of proceedings on a number of
occasions, most recently through September 8, 2010. We will likely file additional motions to
request further extensions of this stay of proceedings, which we believe are routinely granted for
up to 18 months in cases of this size and complexity. The Initial Order provides that a plan or
plans of reorganization under the CCAA must be filed with the Canadian Court before the termination
of the stay of proceedings or such other time or times as may be allowed by the Canadian Court.
Third parties could thereafter seek permission to file a plan or plans of reorganization. On July
9, 2010, we received the Canadian Courts approval to mail solicitation materials for our CCAA
Plan. In addition to being voted on by the required majority of affected creditors, the CCAA Plan
must satisfy certain requirements of the CCAA and must be approved by the Canadian
Court in order to become effective.
The Plans of Reorganization describe a proposed treatment of creditor claims and certain other
matters. The Plans of Reorganization are subject to creditor approval
and must also be approved by
the applicable Court. There can be no assurance that the Plans of Reorganization will be supported
and approved by affected creditors and approved by the Courts or that any such plan will be
implemented successfully. There are a number of significant conditions to the implementation of the
Plans of Reorganization, including the adopting of funding relief regulations in form and substance
satisfactory to the CCAA filers in Quebec and Ontario in respect of the material solvency deficits
in pension plans sponsored by Abitibi and Bowater.
The Plans of Reorganization include, among other things, the following key elements:
| each of the Debtors operations will continue in substantially their current form; | ||
| all amounts outstanding under the Bowater DIP Agreement (as defined below) will be paid in full in cash and the facility will be terminated; | ||
| all outstanding receivable interests sold under the Abitibi and Donohue accounts receivable securitization program will be repurchased in cash for a price equal to the par amount thereof and the program will be terminated; | ||
| the Bowater pre-petition secured bank credit facilities (which consist of separate credit agreements entered into by Bowater and BCFPI) will be paid in full in cash, including principal and accrued interest; |
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
| the Abitibi pre-petition senior secured term loan will be paid in full in cash, including principal and accrued interest; | ||
| the outstanding ACCC pre-petition 13.75% senior secured notes due 2011 will be paid in full in cash, including principal and accrued interest; | ||
| holders of allowed claims arising from the Debtors pre-petition unsecured indebtedness will receive their pro rata share of the new common stock to be issued by the reorganized Company upon emergence from the Creditor Protection Proceedings and will be entitled, to the extent eligible, to participate in the Rights Offering (as defined below); | ||
| the Debtors obligations to fund the prior service costs related to their pension and other postretirement benefit plans will be reinstated, subject to the resolution of funding relief, as further discussed in Note 15, Commitments and Contingencies Employees; | ||
| holders of pre-petition unsecured indebtedness with individual claim amounts less than $5,000 may be paid in cash in an amount equal to 50% of their claim amount, but under certain circumstances, these claim holders may be treated instead like all other holders of claims arising from pre-petition unsecured indebtedness; | ||
| all equity interests in the Company existing immediately prior to the emergence date will be discharged, canceled, released and extinguished; | ||
| the Debtors will conduct a rights offering (the Rights Offering) for the issuance of convertible senior subordinated notes (the Convertible Notes). Under the Rights Offering, each eligible unsecured creditor will receive a non-transferable right entitling such creditor to purchase its proportionate share of up to $500 million of Convertible Notes to be issued by the reorganized Company on the emergence date. Under certain circumstances, the amount of Convertible Notes may thereafter be increased by up to an additional $110 million. The Convertible Notes are expected to bear interest at the rate of 10% per annum (11% per annum if we elect to pay a portion of the interest through the issuance of additional Convertible Notes). We have entered into a backstop commitment agreement that provides for the purchase by certain investors of Convertible Notes to the extent that the Rights Offering is under-subscribed, which has been approved by the Courts; | ||
| subject to Court approval and applicable commitment and engagement letters, the reorganized Company will enter into a senior secured asset-based revolving credit facility; and | ||
| subject to Court approval and applicable commitment and engagement letters, the reorganized Company will enter into a senior secured term loan facility, which may be in the form of a loan, high-yield notes, bridge facility or other loan arrangement. |
Under the priority scheme established by Chapter 11 and the CCAA, unless creditors agree otherwise,
pre-petition liabilities and post-petition liabilities must be satisfied in full before
shareholders are entitled to receive any distribution or retain any property under any plan of
reorganization. The final recovery to creditors and/or shareholders, if any, will not be determined
until the Plans of Reorganization, as amended and/or supplemented,
have been approved by the
applicable Court. The recovery will depend on, among other things, the nature of the claim and the
debtor against whom the claim is properly made, as further described in the Plans of Reorganization
and the related disclosure documents. Accordingly, the value of our obligations, including our debt
securities, is highly speculative. The Plans of Reorganization provide that all of our currently
outstanding common stock and exchangeable shares will be canceled for no consideration. Appropriate
caution should be exercised with respect to existing and future investments in any of our
liabilities and/or securities.
Listing and trading of our common stock and the exchangeable shares of AbitibiBowater Canada Inc.
Due to the commencement of the Creditor Protection Proceedings, each of the New York Stock Exchange
and the Toronto Stock Exchange suspended the trading of our common stock at the opening of business
on April 16, 2009 and delisted our common stock at the opening of business on May 21, 2009 and the
close of market on May 15, 2009, respectively. Our common stock is currently traded in the
over-the-counter market and is quoted on the Pink Sheets Quotation Service and on the OTC Bulletin
Board under the symbol ABWTQ. In addition, the Toronto Stock Exchange suspended the trading of
the exchangeable shares of AbitibiBowater Canada Inc. at the opening of business on April 16, 2009
and delisted such shares at the close of market on May 15, 2009.
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Note 3. Creditor Protection Proceedings Related Disclosures
Reorganization items, net
FASB ASC 852 requires separate disclosure of reorganization items such as certain expenses,
provisions for losses and other charges directly associated with or resulting from the
reorganization and restructuring of the business that have been realized or incurred in the
Creditor Protection Proceedings. As a result, all charges related to the commencement of an
indefinite idling or permanent closure of a mill or a paper machine subsequent to the commencement
of the Creditor Protection Proceedings are recorded in Reorganization items, net; whereas all
charges related to the commencement of an indefinite idling or permanent closure of a mill or a
paper machine prior to the commencement of the Creditor Protection Proceedings are recorded in
Closure costs, impairment and other related charges in the consolidated statements of operations.
Also, professional fees, provision for repudiated or rejected executory contracts, gains on
disposition of assets, gains resulting from the loss of control of
subsidiaries and the subsequent deconsolidation, debtor in possession financing
costs and other expenses directly related to or resulting from our reorganization process under the
Creditor Protection Proceedings have been recorded in Reorganization items, net in our
Consolidated Statements of Operations. The recognition of Reorganization items, net, unless
specifically prescribed otherwise by FASB ASC 852, is in accordance with other applicable U.S.
GAAP, including accounting for impairments of long-lived assets, accelerated depreciation,
severance and termination benefits and costs associated with exit and disposal activities
(including costs incurred in a restructuring).
Reorganization items, net for the three and six months ended June 30, 2010 and 2009 were comprised
of the following:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Unaudited, in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Professional fees (1) |
$ | 27 | $ | 45 | $ | 53 | $ | 55 | ||||||||
Provision for repudiated or rejected executory contracts (2) |
8 | 15 | 149 | 15 | ||||||||||||
Charges related to indefinite idlings and a closed mill (3) |
210 | | 264 | | ||||||||||||
Gains on disposition of assets (4) |
(58 | ) | | (60 | ) | | ||||||||||
Gain on deconsolidation of BPCL (5) |
| | (27 | ) | | |||||||||||
Gain on deconsolidation of a variable interest entity (VIE)
(6) |
(16 | ) | | (16 | ) | | ||||||||||
Debtor in possession financing costs (7) |
5 | 29 | 5 | 29 | ||||||||||||
Other (8) |
(28 | ) | | (15 | ) | | ||||||||||
$ | 148 | $ | 89 | $ | 353 | $ | 99 | |||||||||
(1) | Professional fees directly related to the Creditor Protection Proceedings, ongoing monitoring and establishment of the Plans of Reorganization, including legal, accounting and other professional fees, as well as professional fees incurred by our creditors. | |
(2) | Provision for repudiated or rejected executory contracts represents provision for estimated claims arising from repudiated or rejected executory contracts, primarily the parental guarantee of BPCLs NPower contract, supply contracts and equipment leases. The provision for the three and six months ended June 30, 2010 is net of approximately $14 million of gains arising from liabilities adjusted in the claims reconciliation process. See Note 1, Organization and Basis of Presentation Bridgewater Administration, and Note 2, Creditor Protection Proceedings Reorganization process, for additional information. | |
(3) | Represents charges primarily related to the indefinite idling of our Gatineau, Quebec paper mill in the second quarter of 2010 and a de-inking line and paper machine at our Thorold, Ontario paper mill in the first quarter of 2010, as well as an impairment charge in the second quarter of 2010 related to our Lufkin, Texas paper mill to reduce the carrying value of the assets to their current estimated fair value. These actions were initiated subsequent to the commencement of the Creditor Protection Proceedings as part of our work towards a comprehensive restructuring plan. Accordingly, these charges are included in Reorganization items, net. Such charges for the three months ended June 30, 2010 included: (i) accelerated depreciation charges of $163 million; (ii) a long-lived asset impairment charge of $10 million; (iii) severance and pension curtailment charges of $23 million and (iv) charges for the write-downs of inventory of $14 million. Such charges for the six months ended June 30, 2010 included: (i) accelerated depreciation charges of $210 million; (ii) a long-lived asset impairment charge of $10 million; (iii) severance and pension curtailment charges of $29 million and (iv) charges for the write-downs of inventory of $15 million. The fair value of the Lufkin impaired assets was determined based on the mills estimated sale value. |
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(4) | Represents the gains on disposition of various mills and other assets as part of our work towards a comprehensive restructuring plan, including the write-off of related asset retirement obligations. Such gains for the three months ended June 30, 2010 included our Mackenzie, British Columbia paper mill and sawmills, four previously permanently closed paper mills that were bundled and sold together and various other assets, all of which we sold for proceeds of approximately $34 million. Such gains for the six months ended June 30, 2010 also included our Westover, Alabama sawmill and our recycling divisions material recycling facilities located in Arlington, Houston and San Antonio, Texas, which we sold for proceeds of approximately $15 million. | |
(5) | As discussed in Note 1, Organization and Basis of Presentation Bridgewater Administration, we are no longer consolidating BPCL in our consolidated financial statements. At the time of the BPCL Administration filing, we had a negative basis in our investment in BPCL. Upon the deconsolidation of BPCL, we derecognized our negative investment, which resulted in a gain of $27 million. | |
(6) | During the second quarter of 2010, a subsidiary that was a VIE that we had been consolidating was placed into receivership. As a result, we lost control over and the ability to influence this VIEs operations and are no longer the primary beneficiary of this VIE. Therefore, we are no longer consolidating this VIE in our consolidated financial statements. At such time, we had a negative basis in our investment in this VIE. Upon the deconsolidation of this VIE, we derecognized our negative investment, which resulted in a gain of $16 million. | |
(7) | Debtor in possession financing costs were incurred during the second quarter of 2010 in connection with: (i) the May 5, 2010 extension of the Bowater DIP Agreement to July 21, 2010 and (ii) the June 11, 2010 amendment to the Abitibi and Donohue second amended and restated accounts receivable securitization program. Debtor in possession financing costs were incurred during the second quarter of 2009 in connection with entering into: (i) the Bowater DIP Agreement, (ii) the debtor in possession financial facility for the benefit of Abitibi and Donohue, which was terminated on December 9, 2009, and (iii) the Abitibi and Donohue second amended and restated accounts receivable securitization program. For additional information, see Note 12, Liquidity and Debt. | |
(8) | For the three and six months ended June 30, 2010, Other primarily represents the write-off of approximately $23 million of environmental liabilities related to our Newfoundland and Labrador properties that were expropriated and for which no claim was filed. For the six months ended June 30, 2010, Other also includes environmental charges related to our estimated liability for an environmental claim filed against us by the current owner of a site previously owned by Abitibi, as well as employee termination charges resulting from our work towards a comprehensive restructuring plan related to a workforce reduction at our Catawba, South Carolina paper mill. Other for all periods also includes interest income, which was $1 million for the six months ended June 30, 2010 and less than $1 million for all other periods presented. |
In the three and six months ended June 30, 2010, we paid $28 million and $47 million, respectively,
relating to reorganization items, which were comprised of: (i) professional fees of $23 million and
$42 million, respectively, and (ii) debtor in possession financing costs of $5 million for both
periods. In the three and six months ended June 30, 2009, we paid $42 million and $51 million,
respectively, relating to reorganization items, which were comprised of: (i) professional fees of
$15 million and $24 million, respectively, and (ii) debtor in possession financing costs of $27
million for both periods. Payments relating to professional fees and debtor in possession financing
costs were included in cash flows from operating activities and cash flows from financing
activities, respectively, in our Consolidated Statements of Cash Flows.
Liabilities subject to compromise
Liabilities subject to compromise primarily represent unsecured pre-petition obligations of the
Debtors that are subject to impairment as part of the Plans of Reorganization and as a result, are
subject to settlement at lesser amounts. Generally, actions to enforce or otherwise effect payment
of such liabilities have been stayed by the Courts. Such liabilities are classified separately from
other liabilities in our Consolidated Balance Sheets as Liabilities subject to compromise and are
accounted for in accordance with our normal accounting policies except that: (i) other than our
debt obligations, these liabilities are recorded at the amounts expected to be allowed as claims by
the Courts, whether known or potential claims, under the Plans of Reorganization, even if the
claims may be settled for lesser amounts and (ii) debt obligations are recorded net of unamortized
debt discounts and premiums, which we are no longer amortizing as a result of the Creditor
Protection Proceedings. Such amounts are viewed as valuations of the related debt until the debt
obligations are allowed as claims by the Courts, at which time the recorded amounts will be
adjusted to the amounts of the allowed claims. For additional information, see Note 12, Liquidity
and Debt.
Liabilities subject to compromise remain subject to future potentially material adjustments arising
from negotiated settlements, actions of the Courts, further developments with respect to disputed
claims, repudiation or rejection of
14
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
executory contracts and unexpired leases and the determination of the secured status of
certain claims, as well as the value of collateral securing the claims, proofs of claims or other
events. The Debtors have repudiated or rejected certain pre-petition executory contracts and
unexpired leases with respect to the Debtors operations with the approval of the Courts and may
repudiate or reject additional ones in the future. Damages resulting from repudiations or
rejections of executory contracts and unexpired leases are typically treated as general unsecured
claims and are also classified as liabilities subject to compromise.
The classification of liabilities as not subject to compromise versus subject to compromise is
based on currently available information and analysis. As the Creditor Protection Proceedings
continue and additional information and analysis is completed or as the Courts rule on relevant
matters, the classification of amounts between these two categories may change. The amount of any
such changes could be significant. We classify liabilities subject to compromise as a long-term
liability because management does not believe we will use existing current assets or create
additional current liabilities to fund these obligations.
Liabilities subject to compromise of the Debtors as of June 30, 2010 and December 31, 2009 were
comprised of the following:
June 30, | December 31, | |||||||
(Unaudited, in millions) | 2010 | 2009 | ||||||
Unsecured pre-petition debt (Note 12) |
$ | 4,851 | $ | 4,852 | ||||
Accrued interest on unsecured pre-petition debt (Note 12) |
567 | 385 | ||||||
Accounts payable and accrued liabilities, excluding accrued
interest on unsecured pre-petition debt |
461 | 463 | ||||||
Pension and other postretirement projected benefit obligations |
786 | 791 | ||||||
Repudiated or rejected executory contracts |
373 | 228 | ||||||
Other liabilities |
27 | 8 | ||||||
$ | 7,065 | $ | 6,727 | |||||
We have not included the Debtors secured pre-petition debt obligations in liabilities subject to
compromise since we believe that the value of the underlying collateral of these obligations
significantly exceeds the amount of the expected claims by the secured creditors. As discussed in
Note 2, Creditor Protection Proceedings Reorganization process, the Courts have granted
approval for the Debtors to, among other things, make payments relating to certain employees
pre-petition wages, salaries and benefit programs in the ordinary course, ensure the continuation
of existing cash management systems, honor certain ongoing customer obligations, enter into our
debtor in possession financing arrangements, settle certain intercompany obligations, retain legal
and financial professionals and other business-related payments necessary to maintain the operation
of our business. Liabilities subject to compromise do not include: (i) liabilities held by
Non-Debtors (as defined below); (ii) liabilities incurred after the commencement of the Creditor
Protection Proceedings, except for accrued interest on unsecured pre-petition debt obligations of
the Debtors under the CCAA Proceedings and (iii) pre-petition liabilities that the Debtors expect
to be required to pay in full by applicable law, even
though certain of these amounts may not be paid until the Plans of Reorganization are approved.
Condensed combined financial statements of Debtors
The following unaudited condensed combined financial statements represent the financial statements
of the Debtors. Our subsidiaries that are not subject to the Creditor Protection Proceedings
(Non-Debtors) are not consolidated in these condensed combined financial statements and, as such,
their net loss is included in Equity in net loss of Non-Debtors, net of tax in the condensed
combined statements of operations and their net assets are included as Investments in and advances
to Non-Debtors in the condensed combined balance sheets. The Debtors condensed combined financial
statements have been prepared in accordance with the guidance of FASB ASC 852.
Intercompany transactions between the Debtors have been eliminated whereas intercompany
transactions between the Debtors and Non-Debtors have not been eliminated in these condensed
combined financial statements.
15
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
ABITIBIBOWATER INC.
CONDENSED COMBINED STATEMENTS OF OPERATIONS DEBTORS
(Unaudited, in millions)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Sales |
$ | 1,878 | $ | 1,651 | ||||
Costs and expenses |
2,033 | 1,760 | ||||||
Operating loss |
(155 | ) | (109 | ) | ||||
Interest expense (contractual interest of
$348 and $377 in 2010 and 2009,
respectively) |
(297 | ) | (326 | ) | ||||
Other income (expense), net |
58 | (47 | ) | |||||
Reorganization items, net |
(353 | ) | (99 | ) | ||||
Income tax
benefit (provision) |
7 | (10 | ) | |||||
Equity in net loss of Non-Debtors, net of tax |
(57 | ) | (137 | ) | ||||
Net loss attributable to AbitibiBowater Inc. |
$ | (797 | ) | $ | (728 | ) | ||
ABITIBIBOWATER INC.
| ||||||||
CONDENSED COMBINED BALANCE SHEETS DEBTORS
| ||||||||
(Unaudited, in millions)
| ||||||||
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Accounts receivable from Non-Debtors |
$ | 53 | $ | 63 | ||||
All other current assets |
1,691 | 1,806 | ||||||
Total current assets |
1,744 | 1,869 | ||||||
Fixed assets, net |
2,947 | 3,341 | ||||||
Amortizable intangible assets, net |
265 | 271 | ||||||
Investments in and advances to Non-Debtors |
658 | 648 | ||||||
All other assets |
556 | 486 | ||||||
Total assets |
$ | 6,170 | $ | 6,615 | ||||
Liabilities and deficit |
||||||||
Liabilities not subject to compromise: |
||||||||
Current liabilities: |
||||||||
Debtor in possession financing |
$ | 206 | $ | 206 | ||||
All other current liabilities |
1,545 | 1,496 | ||||||
Total current liabilities |
1,751 | 1,702 | ||||||
Long-term liabilities |
255 | 277 | ||||||
Total liabilities not subject to compromise |
2,006 | 1,979 | ||||||
Liabilities subject to compromise |
7,065 | 6,727 | ||||||
Total liabilities |
9,071 | 8,706 | ||||||
Shareholders deficit |
(2,901 | ) | (2,091 | ) | ||||
Total liabilities and deficit |
$ | 6,170 | $ | 6,615 | ||||
16
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
ABITIBIBOWATER INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS DEBTORS
(Unaudited, in millions)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net cash (used in) provided by operating activities |
$ | (44 | ) | $ | 21 | |||
Net cash (used in) provided by investing activities
(includes $17 and $(2) of advances from (to)
Non-Debtors, net in 2010 and 2009, respectively) |
(3 | ) | 79 | |||||
Cash flows from financing activities: |
||||||||
Debtor in possession financing |
| 236 | ||||||
Debtor in possession financing costs |
(5 | ) | (27 | ) | ||||
Other, net |
| (43 | ) | |||||
Net cash (used in) provided by financing activities |
(5 | ) | 166 | |||||
Net (decrease) increase in cash and cash equivalents |
(52 | ) | 266 | |||||
Cash and cash equivalents: |
||||||||
Beginning of period |
675 | 148 | ||||||
End of period |
$ | 623 | $ | 414 | ||||
Note 4. Closure Costs, Impairment and Other Related Charges
Closure costs, impairment and other related charges, which were not associated with our work
towards a comprehensive restructuring plan, for the three and six months ended June 30, 2010 and
2009 were comprised of the following:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Unaudited, in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Impairment of long-lived assets |
$ | | $ | 85 | $ | 2 | $ | 85 | ||||||||
Impairment of assets held for sale |
| 148 | | 178 | ||||||||||||
Severance and other costs |
3 | 7 | 6 | 7 | ||||||||||||
$ | 3 | $ | 240 | $ | 8 | $ | 270 | |||||||||
Impairment of long-lived assets
During the six months ended June 30, 2010, we recorded long-lived asset impairment charges of $2
million related to our previously permanently closed Covington, Tennessee facility to further
reduce the carrying value of the assets to their current estimated fair value of $3 million, which
was determined based on the mills estimated sales value.
During the second quarter of 2009, upon review of the recoverability of certain of our indefinitely
idled newsprint mill assets following a steep decline in market demand in early 2009, we recorded a
long-lived asset impairment charge of $85 million. The fair value of these assets of approximately
$6 million was determined based on their estimated sale or salvage values.
Impairment of assets held for sale
During
the three and six months ended June 30, 2009, we recorded long-lived asset impairment charges
of $148 million and $178 million, respectively, related to the assets held for sale for our
interest in Manicouagan Power Company (MPCo) to reduce the carrying value of our investment to
fair value less costs to sell. The fair value of these assets was determined based on the net
realizable value of the long-lived assets consistent with the terms of a non-binding agreement in
principle for the sale in effect at the end of each respective quarter. The sale of MPCo was
completed in the fourth quarter of 2009. For additional information, see Note 7, Closure Costs,
Impairment of Assets Other than Goodwill and Other Related Charges Impairment of assets held for
sale, and Note 8, Assets Held for Sale, Liabilities Associated with Assets Held
17
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
for Sale and Net Gain on Disposition of Assets, included in our consolidated financial
statements for the year ended December 31, 2009.
Severance and other costs
During the three months ended June 30, 2010, we recorded $3 million in severance and other costs,
primarily for miscellaneous adjustments to severance liabilities and asset retirement obligations.
During the six months ended June 30, 2010, we also recorded $3 million of other costs, primarily
related to a lawsuit related to a closed mill.
During the three and six months ended June 30, 2009, we recorded severance and other costs related
to the permanent closures of our Westover sawmill and Goodwater, Alabama planer mill.
Note 5. Assets Held for Sale, Liabilities Associated with Assets Held for Sale and Net Gain on
Disposition of Assets
Assets held for sale as of June 30, 2010 and December 31, 2009 were comprised of the following:
June 30, | December 31, | |||||||
(Unaudited, in millions) | 2010 | 2009 | ||||||
Inventories, net |
$ | 2 | $ | | ||||
Fixed assets, net |
7 | 52 | ||||||
$ | 9 | $ | 52 | |||||
Liabilities associated with assets held for sale as of June 30, 2010 and December 31, 2009 were
comprised of the following:
June 30, | December 31, | |||||||
(Unaudited, in millions) | 2010 | 2009 | ||||||
Accounts payable and accrued liabilities |
$ | 3 | $ | 35 | ||||
$ | 3 | $ | 35 | |||||
As of December 31, 2009, we held for sale the following assets (all of which were approved for
sale, as required, by the applicable Court or the Monitor): our Saint-Raymond, Quebec and Westover
sawmills; our recycling divisions material recycling facilities located in Arlington, Houston and
San Antonio, Texas; our Belgo, Quebec facility; a portion of land at our Port Alfred, Quebec
facility; certain assets associated with our Lufkin paper mill and other assets.
As of June 30, 2010, we held for sale our Albertville, Alabama sawmill and various other assets
(all of which were approved for sale, as required by the applicable Court or the Monitor). The
assets and liabilities held for sale are carried in our Consolidated Balance Sheets at the lower of
carrying value or fair value less costs to sell. As of June 30, 2010, we expected to complete a
sale of all of these assets within the next twelve months for amounts that exceed their individual
carrying values. We cease recording depreciation and amortization when assets are classified as
held for sale.
During the three months ended June 30, 2010, we sold, with Court or Monitor approval, as
applicable, various assets for proceeds of $5 million, resulting in a net gain on disposition of
assets of $4 million. During the six months ended June 30, 2010, we sold, with Court or Monitor
approval, as applicable, timberlands and other assets for proceeds of $13 million, resulting in a
net gain on disposition of assets of $13 million. Additionally, during the six months ended June
30, 2010, as part of our work towards a comprehensive restructuring plan, we sold, with Court
approval, various mills and other assets. For additional information, see Note 3, Creditor
Protection Proceedings Related Disclosures Reorganization items, net.
There were no material asset sales during the three months ended June 30, 2009. During the six
months ended June 30, 2009, we sold 191,838 acres of timberlands and other assets, including the
water system associated with our Lufkin mill, for proceeds of $69 million, resulting in a net gain
on disposition of assets of $53 million.
18
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Note 6. Other Income (Expense), Net
Other income (expense), net for the three and six months ended June 30, 2010 and 2009 was comprised
of the following:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Unaudited, in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Foreign exchange gain (loss) |
$ | 41 | $ | (10 | ) | $ | 37 | $ | (4 | ) | ||||||
Fees for waivers and amendments to
accounts receivable securitization
program (1) |
| (12 | ) | | (23 | ) | ||||||||||
Loss from equity method investments |
(1 | ) | (2 | ) | (3 | ) | (2 | ) | ||||||||
Loss on sale of ownership
interests in accounts receivable
(Note 12) |
| (4 | ) | | (7 | ) | ||||||||||
Miscellaneous income (loss) |
1 | (2 | ) | 4 | 5 | |||||||||||
$ | 41 | $ | (30 | ) | $ | 38 | $ | (31 | ) | |||||||
(1) | As consideration for entering into certain waivers and amendments to our former accounts receivable securitization program, we incurred fees of $12 million and $23 million in the three and six months ended June 30, 2009, respectively, prior to the commencement of the Creditor Protection Proceedings. |
Note 7. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss as of June 30, 2010 and December 31, 2009 was comprised of the
following:
June 30, | December 31, | |||||||
(Unaudited, in millions) | 2010 | 2009 | ||||||
Unamortized prior service costs (1) |
$ | (21 | ) | $ | (24 | ) | ||
Unamortized actuarial losses (2) |
(449 | ) | (432 | ) | ||||
Foreign currency translation (3) |
4 | 6 | ||||||
$ | (466 | ) | $ | (450 | ) | |||
(1) | Net of deferred tax provision of $16 million as of both June 30, 2010 and December 31, 2009. Net of noncontrolling interests of $1 million and $2 million of net income as of June 30, 2010 and December 31, 2009, respectively. | |
(2) | Net of deferred tax benefit of $65 million and $64 million as of June 30, 2010 and December 31, 2009, respectively. Net of noncontrolling interests of $5 million and $6 million of net losses as of June 30, 2010 and December 31, 2009, respectively. | |
(3) | No tax effect was recorded for foreign currency translation since the investment in foreign net assets translated is deemed indefinitely invested. Net of noncontrolling interests of zero as of both June 30, 2010 and December 31, 2009. |
Note 8. Loss Per Share
No adjustments to net loss attributable to AbitibiBowater Inc. common shareholders were necessary
to compute basic and diluted net loss per share attributable to AbitibiBowater Inc. common
shareholders for all periods presented. Additionally, no adjustments to our basic weighted-average
number of common shares outstanding were necessary to compute our diluted weighted-average number
of common shares outstanding for all periods presented. Options to purchase 3.3 million shares for
both the three and six months ended June 30, 2010 and 3.6 million shares for both the three and six
months ended June 30, 2009 were excluded from the calculation of diluted loss per share as the
impact would have been anti-dilutive. In addition, 0.1 million equity-classified restricted stock
units for both the three and six months ended June 30, 2010 and 0.2 million equity-classified
restricted stock units for both the three and six months ended June 30, 2009 were excluded from the
calculation of diluted loss per share for the same reason. In addition, no adjustments to net loss
attributable to AbitibiBowater Inc. common shareholders and the diluted weighted-average number of
common shares outstanding were necessary for all periods presented after giving effect to the
assumed conversion of the convertible notes representing 36.9 million additional common shares.
19
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Note 9. Inventories, Net
Inventories, net as of June 30, 2010 and December 31, 2009 were comprised of the following:
June 30, | December 31, | |||||||
(Unaudited, in millions) | 2010 | 2009 | ||||||
At lower of cost or market: |
||||||||
Raw materials and work in process |
$ | 93 | $ | 124 | ||||
Finished goods |
178 | 199 | ||||||
Mill stores and other supplies |
257 | 271 | ||||||
528 | 594 | |||||||
Excess of current cost over LIFO inventory value |
(13 | ) | (13 | ) | ||||
$ | 515 | $ | 581 | |||||
During the three months ended June 30, 2010, we recorded charges of $14 million for write-downs of
inventory associated with our indefinitely idled Gatineau paper mill. During the six months ended
June 30, 2010, we also recorded charges of $1 million for write-downs of inventory associated with
an indefinitely idled paper machine and de-inking line at our Thorold paper mill. These charges
were incurred as part of our restructuring and were included in Reorganization items, net in our
Consolidated Statements of Operations. During the six months ended June 30, 2009, we recorded
charges of $12 million for write-downs of inventory associated with our indefinitely idled Alabama
River, Alabama paper mill, as well as our Dalhousie, New Brunswick paper mill. These charges were
not associated with our restructuring and were included in Cost of sales, excluding depreciation,
amortization and cost of timber harvested in our Consolidated Statements of Operations.
Note 10. Restricted Cash
Restricted cash included in Other assets in our Consolidated Balance Sheets as of June 30, 2010
and December 31, 2009 was comprised of the following:
June 30, | December 31, | |||||||
(Unaudited, in millions) | 2010 | 2009 | ||||||
ULC reserve (Note 12) |
$ | 49 | $ | 49 | ||||
ULC DIP Facility (Note 12) |
47 | 48 | ||||||
Proceeds sharing arrangement related to a
third-partys sale of timberlands
(1) |
27 | 27 | ||||||
Proceeds from asset sales (2) |
59 | | ||||||
ACH Limited Partnership (3) |
9 | 11 | ||||||
Other |
3 | 3 | ||||||
$ | 194 | $ | 138 | |||||
(1) | These proceeds are held in trust with the Monitor, pending further order from the Courts. | |
(2) | Represents proceeds from the sale of various assets, which primarily include our Mackenzie paper mill and sawmills of $29 million, our recycling divisions material recycling facilities located in Arlington, Houston and San Antonio of $12 million, our West Tacoma, Washington paper mill of $4 million and our four previously permanently closed paper mills (that we bundled and sold together) of $6 million. These proceeds are either held in escrow or in a designated account pending further order from the applicable Court. | |
(3) | Represents cash restricted for capital expenditures, as well as reserves required under the partnerships credit agreement. |
In addition, in connection with the accounts receivable securitization program, as of June 30, 2010
and December 31, 2009, we had cash of approximately $17 million and $18 million, respectively, in
lockbox accounts, which were included as restricted cash in Other current assets in our
Consolidated Balance Sheets. For additional information, see Note 12, Liquidity and Debt.
20
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Note 11. Severance Related Liabilities
The activity in our severance related liabilities for the six months ended June 30, 2010 was as
follows:
2010 | 2009 | 2008 | 2007 | |||||||||||||||||
(Unaudited, in millions) | Initiatives | Initiatives | Initiatives | Initiatives | Total | |||||||||||||||
Balance as of December 31, 2009 |
$ | | $ | 43 | $ | 27 | $ | 17 | $ | 87 | ||||||||||
Charges (credits) |
22 | 5 | | (2 | ) | 25 | ||||||||||||||
Payments |
| | | | | |||||||||||||||
Other |
| (1 | ) | 1 | (1 | ) | (1 | ) | ||||||||||||
Balance as of June 30, 2010 |
$ | 22 | $ | 47 | $ | 28 | $ | 14 | $ | 111 | ||||||||||
During the six months ended June 30, 2010, we recorded employee termination costs resulting from
our work towards a comprehensive restructuring plan, primarily related to: (i) the indefinite
idling of our Gatineau paper mill, (ii) the indefinite idling of a paper machine and a de-inking
line at our Thorold paper mill, (iii) a workforce reduction at our Catawba paper mill and (iv) the
continued indefinite idling of our Dolbeau paper mill and a paper machine at our Thunder Bay,
Ontario paper mill.
As a result of the Creditor Protection Proceedings, severance payments may only be made pursuant to
a Court order or the approval of the Plans of Reorganization.
Employee termination and severance costs incurred as part of our restructuring were included in
Reorganization items, net in our Consolidated Statements of Operations. The severance accruals
were included in Accounts payable and accrued liabilities or Liabilities subject to compromise
in our Consolidated Balance Sheets.
Note 12. Liquidity and Debt
Overview
In addition to cash-on-hand and cash provided by operations, our external sources of liquidity are
comprised of the following (which are defined and discussed below): (i) the Bowater DIP Agreement,
(ii) the ULC DIP Facility and (iii) the Abitibi and Donohue accounts receivable securitization
program.
The commencement of the Creditor Protection Proceedings constituted an event of default under
substantially all of our pre-petition debt obligations, and those debt obligations became
automatically and immediately due and payable by their terms, although any action to enforce such
payment obligations is stayed as a result of the commencement of the Creditor Protection
Proceedings. Due to the commencement of the Creditor Protection Proceedings, unsecured pre-petition
debt obligations of $4,851 million are included in Liabilities subject to compromise in our
Consolidated Balance Sheets as of June 30, 2010. Secured pre-petition debt obligations of $980
million (consisting of ACCCs $300 million 13.75% senior secured notes due 2011, Abitibis $347
million pre-petition senior secured term loan and Bowaters $333 million pre-petition secured bank
credit facilities) are included in current liabilities and secured pre-petition debt obligations of
$34 million (consisting of Bowaters floating rate industrial revenue bonds due 2029) are included
in Long-term debt, net of current portion in our Consolidated Balance Sheets as of June 30, 2010.
See Note 3, Creditor Protection Proceedings Related Disclosures - Liabilities subject to
compromise.
FASB ASC 852 requires that debt discounts and premiums, as well as debt issuance costs, be viewed
as part of the valuation of the related pre-petition debt. When the debt has become an allowed
claim and the allowed claim differs from the net carrying amount of the debt, the recorded amount
should be adjusted to the amount of the allowed claim (thereby adjusting existing debt discounts,
premiums and issuance costs to the extent necessary to report the debt at this allowed amount). As
of August 16, 2010, the Courts had not confirmed any of our outstanding debt obligations as allowed
claims. Therefore, we have not adjusted debt discounts, premiums and issuance costs, totaling $674
million as of June 30, 2010, related to our outstanding debt. We will be required to expense these
amounts or a portion thereof as reorganization items if the Courts ultimately allow claim amounts
that differ from the net carrying amount of the debt.
For purposes of determining the amounts of allowed unsecured claims, any claims filed against a
CCAA filer or Chapter 11
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
filer denominated in a currency other than the local currency will be translated to Canadian
dollars and U.S. dollars, respectively, using the exchange rate in effect as of the date of the
commencement of the Creditor Protection Proceedings for all Chapter 11 claims and for CCAA claims
that existed as of the filing date, or the exchange rate in effect as of the date of the notice or
event that gave rise to the claim for CCAA claims that arose after the filing date (the fixed
exchange rate). The majority of our CCAA filers unsecured pre-petition debt obligations are
denominated in U.S. dollars. The amounts recorded for these unsecured pre-petition debt obligations
in our Liabilities subject to compromise as of June 30, 2010 do not reflect the impact of this
fixed exchange rate since we do not record our unsecured pre-petition debt obligations at the
estimated amounts of the allowed claims. These amounts will be adjusted to the allowed claim
amounts once the amounts of the claims are approved by the Courts. As noted above, as of August 16,
2010, the Courts had not confirmed any of our outstanding debt obligations as allowed claims. The
impact of the fixed exchange rate on our unsecured pre-petition debt obligations, assuming the
contractual principal amounts were to be allowed by the Courts, would be an increase of
approximately $431 million as of June 30, 2010. We will be required to record an expense for a
similar amount as a reorganization item once the Courts determine the allowed amounts of the claims
for our unsecured pre-petition debt obligations, assuming foreign exchange rates remain constant.
In accordance with FASB ASC 852, we have continued to record interest expense on our pre-petition
debt obligations only to the extent that: (i) interest will be paid during the Creditor Protection
Proceedings or (ii) it is probable that interest will be an allowed priority, secured or unsecured
claim. As such, we have continued to accrue interest on the Debtors pre-petition secured debt
obligations and the CCAA filers pre-petition unsecured debt obligations (based on the expectation
that accrued interest on the CCAA filers pre-petition debt obligations will be a permitted claim
under the CCAA Proceedings). Interest expense recorded in our Consolidated Statements of Operations
totaled $129 million for the three months ended June 30, 2010 and $318 million for the six months
ended June 30, 2010, which included a cumulative adjustment of $43 million to adjust the accrued
interest on the unsecured U.S. dollar denominated debt obligations of the CCAA filers to the fixed
exchange rate discussed above. Interest expense recorded in our Consolidated Statements of
Operations totaled $143 million and $335 million for the three and six months ended June 30, 2009,
respectively. Contractual interest expense would have been $172 million and $369 million for the
three and six months ended June 30, 2010, respectively, and $194 million and $386 million for the
three and six months ended June 30, 2009, respectively. We are currently making cash payments for
interest on the Bowater DIP Agreement (as defined below), the Abitibi and Donohue accounts
receivable securitization program, the Bowater pre-petition secured bank credit facilities,
Abitibis pre-petition senior secured term loan and Bowaters floating rate industrial revenue
bonds due 2029.
Abitibi and Donohue liquidity
Abitibis and Donohues primary sources of liquidity and capital resources are cash-on-hand, cash
provided by operations, the ULC DIP Facility (defined below) and an accounts receivable
securitization program. As of June 30, 2010, Abitibi and Donohue had cash and cash equivalents of
approximately $205 million and $19 million, respectively. As of June 30, 2010, Abitibi had $94
million of availability under its ULC DIP Facility, of which $47 million was included in Cash and
cash equivalents and $47 million was included as restricted cash in Other assets in our
Consolidated Balance Sheets. Abitibi and Donohue also had the ability to receive additional
proceeds of up to $33 million under their accounts receivable securitization program.
ULC DIP Facility
On December 9, 2009, Abitibi entered into a Cdn$230 million ($218 million) Super Priority
Debtor-In-Possession Credit Facility (the ULC DIP Facility) with 3239432 Nova Scotia Company, a
wholly-owned subsidiary of ACCC (the ULC), which is an intercompany facility that was created
upon the sale of MPCo and was funded by a portion of the sale proceeds. On the same date, Cdn$130
million ($123 million) of the ULC DIP Facility was drawn pursuant to the Canadian Courts approval.
Subsequent draws of up to Cdn$50 million ($47 million, based on the exchange rate in effect on June
30, 2010) in the aggregate will be advanced upon not less than five business days notice, subject
to meeting certain draw down requirements and certain conditions determined by the Canadian Court,
and the remaining Cdn$50 million ($47 million, based on the exchange rate in effect on June 30,
2010) will become available only upon further order of the Canadian Court.
The obligations of Abitibi under its ULC DIP Facility are guaranteed by certain of Abitibis
subsidiaries and secured by superpriority liens on all present and after-acquired property of
Abitibi and the subsidiary guarantors, but subordinate to:
(i) an administrative charge in the aggregate amount not exceeding Cdn$6 million ($6 million) of
professional fees and
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
disbursements in connection with the CCAA Proceedings; (ii) a directors charge not exceeding
Cdn$22.5 million ($21 million) and (iii) the Cdn$140 million ($130 million) charge granted by the
Canadian Court in connection with Abitibis former debtor in possession financing arrangement (but
only to the extent of the subrogation rights of certain secured creditors of Abitibi, estimated to
be in an aggregate amount of approximately Cdn$40 million ($38 million)). These U.S. dollar amounts
reflect the exchange rate to U.S. dollars in effect on December 9, 2009.
Loans made under the ULC DIP Facility bear no interest, except in the case of an overdue payment.
All loans advanced under the ULC DIP Facility are to be repaid in full and the ULC DIP Facility
will terminate on the earliest of: (i) December 31, 2010, (ii) the effective date of a plan or
plans of reorganization or a plan of compromise or arrangement confirmed by order of the Courts or
(iii) the acceleration of the ULC DIP Facility or the occurrence of an event of default. Loans must
be prepaid to the extent the ULC does not have sufficient funds to make a payment under the
guarantee agreement with Alcoa Canada Ltd. (Alcoa), which was our partner in MPCo and continues
to own a 40% interest in MPCo. As of June 30, 2010, the ULC maintained an approximate Cdn$52
million ($49 million) reserve for this purpose, which was included as restricted cash in Other
assets in our Consolidated Balance Sheets.
The ULC DIP Facility contains usual and customary events of default and covenants for debtor in
possession financings of this type, including, among other things, the obligation for Abitibi to
provide to Alcoa and the trustee for the 13.75% senior secured notes due 2011 a weekly cash flow
forecast and certain monthly financial information.
In accordance with its stated purpose, the proceeds of the loans under the ULC DIP Facility can be
used by Abitibi and certain of its subsidiaries for working capital and other general corporate
purposes, costs of the Creditor Protection Proceedings and fees and expenses associated with the
ULC DIP Facility.
Abitibi and Donohue accounts receivable securitization program
Abitibi and ACSC, a subsidiary of Donohue, (the Participants) participate in an accounts
receivable securitization program (the Program) whereby the Participants share among themselves
the proceeds received under the Program. On June 16, 2009, with the approval of the Courts, the
former accounts receivable securitization program was amended and restated in its entirety and, as
further amended on June 11, 2010, with the approval of the Courts, now provides for a maximum
outstanding limit of $180 million (the Purchase Limit) for the purchase of ownership interests in
the Participants eligible trade accounts receivable by the third-party financial institutions
party to the agreement (the Banks).
The Participants sell most of their receivables to Abitibi-Consolidated U.S. Funding Corp.
(Funding), which is a bankruptcy-remote, special-purpose, indirect consolidated subsidiary of
Donohue. On a revolving basis, Funding transfers to the agent for the Banks (the Agent) undivided
percentage ownership interests (Receivable Interests) in the pool of receivables that Funding
acquired from the Participants. The outstanding balance of Receivable Interests increases as new
Receivable Interests are transferred to the Agent and decreases as collections reduce previously
transferred Receivable Interests. The amount of Receivable Interests that can be transferred to the
Agent depends on the amount and nature of the receivables available to be transferred and cannot
result in the outstanding balance of Receivable Interests exceeding the Purchase Limit. The pool of
receivables is collateral for the Receivable Interests transferred to the Agent. The Banks can
pledge or sell their Receivable Interests, but cannot pledge or sell any receivable within the pool
of receivables.
As discussed in Note 1, Organization and Basis of Presentation Recently adopted accounting
guidance, effective January 1, 2010, we prospectively applied new accounting guidance relating to
the transfers of financial assets. As a result, transfers of the Receivable Interests to the Agent
no longer qualify as sales. Such transfers and the proceeds received from the Banks are now
accounted for as secured borrowings in accordance with FASB ASC 860, Transfers and Servicing. As
of June 30, 2010, the interest rate charged by the Banks to Funding on the secured
borrowings was 6.25% per annum and the commitment fee for the unused portion of the Purchase Limit
was 0.75% per annum. These amounts, which totaled approximately $3 million and $7 million for the
three and six months ended June 30, 2010, respectively, are included in Interest expense in our
Consolidated Statements of Operations. For the three and six months ended June 30, 2009, the
transfer of Receivable Interests were recorded as a sale to the Banks, and the proceeds received
from the Banks were net of an amount based on the Banks funding cost plus a margin, which resulted
in a loss on the sale of ownership interests in accounts receivable of $4 million and $7 million,
respectively, which was included in Other expense, net in our Consolidated Statements of
Operations.
As of June 30, 2010, the balance of the pool of receivables, net of an allowance for doubtful
accounts was included in
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Accounts receivable, net in our Consolidated Balance Sheets. The outstanding balance
of the proceeds received from the Banks was approximately $120 million and was recorded as Secured
borrowings in our Consolidated Balance Sheets. In addition, based on the level and eligibility of
the pool of receivables as of June 30, 2010, we could have borrowed an additional $33 million.
Abitibi and ACSC act as servicing agents and administer the collection of the receivables under the
Program. The fees received from the Banks for servicing their Receivable Interests approximate the
value of services rendered.
In connection with the Program, Abitibi and ACSC maintain lockboxes into which certain collection
receipts are deposited. These lockbox accounts are in Abitibis or Fundings name, but are
controlled by the Banks. The cash balances in these lockbox accounts, which totaled approximately
$17 million and $18 million as of June 30, 2010 and December 31, 2009, respectively, were included
as restricted cash in Other current assets in our Consolidated Balance Sheets.
The Program contains usual and customary events of termination and covenants for accounts
receivable securitization programs of this type, including, among other things, the requirement for
Funding to provide to the Agent financial statements and other reports and to provide to the Agent
copies of any reports the Participants or their subsidiaries file with the SEC or any other U.S.,
Canadian or other national or provincial securities exchange.
Unless terminated earlier due to the occurrence of certain events of termination, or the
substantial consummation of a plan or plans of reorganization or a plan of compromise or
arrangement confirmed by order of the Courts, the Program, as further amended on June 11, 2010,
will terminate on June 10, 2011.
As consideration for entering into the amendment to the Program on June 11, 2010, we incurred fees
of approximately $4 million during the second quarter of 2010. As consideration for entering into
the amended and restated accounts receivable securitization program on June 16, 2009, we incurred
fees of approximately $11 million during the second quarter of 2009. These fees were recorded in
Reorganization items, net in our Consolidated Statements of Operations for the three and six
months ended June 30, 2010 and 2009 (see Note 3, Creditor Protection Proceedings Related
Disclosures - Reorganization items, net).
Bowater liquidity
Bowaters primary sources of liquidity and capital resources are cash-on-hand, cash provided by
operations and the Bowater DIP Agreement (defined below). As of June 30, 2010, Bowater had cash and
cash equivalents of approximately $484 million.
Bowater DIP Agreement
In the Creditor Protection Proceedings, we sought and obtained final approval by the Courts to
enter into a debtor in possession financing facility for the benefit of AbitibiBowater Inc.,
Bowater and certain of Bowaters subsidiaries. On April 21, 2009, we entered into a Senior Secured
Superpriority Debtor In Possession Credit Agreement (the Bowater DIP Agreement) among
AbitibiBowater Inc., Bowater and BCFPI, as borrowers, Fairfax Financial Holdings Limited
(Fairfax), as administrative agent, collateral agent and an initial lender, and Avenue
Investments, L.P., as an initial lender. On May 8, 2009, Law Debenture Trust Company of New York
replaced Fairfax as the administrative agent and collateral agent under the Bowater DIP Agreement.
The Bowater DIP Agreement provides for term loans in an aggregate principal amount of $206 million
(the Initial Advance), consisting of a $166 million term loan facility to AbitibiBowater Inc. and
Bowater (the U.S. Borrowers) and a $40 million term loan facility to BCFPI. Following the payment
of fees payable to the lenders in connection with the Bowater DIP Agreement, the U.S. Borrowers and
BCFPI received aggregate loan proceeds of $196 million. The Bowater DIP Agreement also permits the
U.S. Borrowers to request, subject to the approval of the requisite lenders under the Bowater DIP
Agreement, an incremental term loan facility (the Incremental Facility) and an asset
based-revolving credit facility (the ABL Facility), provided that the aggregate principal amount
of the Initial Advance and the Incremental Facility may not exceed $360 million and the aggregate
principal amount of the Initial Advance, Incremental Facility and the ABL Facility may not exceed
$600 million. In connection with an amendment we entered into on July 15, 2010, which was approved
by the U.S. Court on July 14, 2010 and the Canadian Court on July 21, 2010, we prepaid $166 million
of the outstanding principal amount of the Initial Advance on July 21, 2010, which reduced the
outstanding principal balance to
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
$40 million. As amended, the
outstanding principal amount of loans under the Bowater DIP Agreement, plus accrued and unpaid
interest, will be due and payable on the earliest of: (i) December 31, 2010, (ii) the effective
date of a plan or plans of reorganization or (iii) the acceleration of loans and termination of the
commitments (the Maturity Date).
Borrowings under the Bowater DIP Agreement bear interest, at our election, at either a rate tied to
the U.S. Federal Funds Rate (the base rate) or the London interbank offered rate for deposits in
U.S. dollars (LIBOR), in each case plus a specified margin. The interest margin for base rate
loans was 6.50% through April 20, 2010 and effective April 21, 2010 was 7.00%, with a base rate
floor of 4.50%. The interest margin for base rate loans was reduced to 5.00% effective July 15,
2010 in connection with the July 15, 2010 amendment. The interest margin for LIBOR loans was 7.50%
through April 20, 2010 and effective April 21, 2010 was 8.00%, with a LIBOR floor of 3.50%. The
interest margin for LIBOR loans was reduced to 6.00% with a LIBOR floor of 2.00% effective July 15,
2010 in connection with the July 15, 2010 amendment. We incurred an extension fee and an amendment
fee in connection with the May 5, 2010 extension and the July 15, 2010 amendment, respectively, in
each case in an amount of 0.5% of the outstanding principal balance of $206 million, or
approximately $1 million for each. We will be required to pay a duration fee of 0.5% of the
outstanding principal balance (estimated to be $40 million), or approximately $200,000, if the
aggregate principal amount of the advances under the Bowater DIP Agreement have not been repaid in
full on or prior to October 15, 2010. In addition, on the earlier of the final Maturity Date or the
date that the Bowater DIP Agreement is repaid in full, an exit fee of 2.00% of the aggregate amount
of the advances will be payable to the lenders.
The obligations of the U.S. Borrowers under the Bowater DIP Agreement are guaranteed by
AbitibiBowater Inc., Bowater, Bowater Newsprint South LLC (Newsprint South), a direct,
wholly-owned subsidiary of AbitibiBowater Inc., and each of the U.S. subsidiaries of Bowater and
Newsprint South that are debtors in the Chapter 11 Cases (collectively, the U.S. Guarantors) and
secured by all or substantially all of the assets of each of the U.S. Borrowers and the U.S.
Guarantors. The obligations of BCFPI under the Bowater DIP Agreement are guaranteed by the U.S.
Borrowers and the U.S. Guarantors and each of the Bowater Canadian subsidiaries (other than BCFPI)
that are debtors in the CCAA Proceedings (collectively, the Canadian Guarantors) and secured by
all or substantially all of the assets of the U.S. Borrowers, the U.S. Guarantors, BCFPI and the
Canadian Guarantors. On June 24, 2009, Bowater Canadian Finance Corporation was released from its
obligations under the Bowater DIP Agreement.
The Bowater DIP Agreement contains customary covenants for debtor in possession financings of this
type, including, among other things: (i) requirements to deliver financial statements, other
reports and notices; (ii) restrictions on the incurrence and repayment of indebtedness; (iii)
restrictions on the incurrence of liens; (iv) restrictions on making certain payments; (v)
restrictions on investments; (vi) restrictions on asset dispositions and (vii) restrictions on
modifications to material indebtedness. Additionally, the Bowater DIP Agreement contains certain
financial covenants, including, among other things: (i) maintenance of a minimum consolidated
EBITDA; (ii) compliance with a minimum fixed charge coverage ratio and (iii) a maximum amount of
capital expenditures.
In accordance with its stated purpose, the proceeds of the Bowater DIP Agreement can be used by us
for, among other things, working capital, general corporate purposes, to pay adequate protection to
holders of secured debt under Bowaters and BCFPIs pre-petition secured bank credit facilities, to
pay the costs associated with administration of the Creditor Protection Proceedings and to pay
transaction costs, fees and expenses in connection with the Bowater DIP Agreement.
As consideration for the May 5, 2010 extension of the Bowater DIP Agreement to July 21, 2010,
during the second quarter of 2010, we incurred fees of approximately $1 million. As consideration
for entering into the Bowater DIP Agreement, during the second quarter of 2009, we incurred fees of
approximately $14 million. These fees were recorded in Reorganization items, net in our
Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009
(see Note 3, Creditor Protection Proceedings Related Disclosures - Reorganization items,
net).
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Note 13. Pension and Other Postretirement Benefit Plans
The components of net periodic benefit cost (credit) relating to our pension and other
postretirement benefit plans (OPEB plans) for the three and six months ended June 30, 2010 and
2009 were as follows:
Pension Plans:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Unaudited, in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost |
$ | 10 | $ | 9 | $ | 20 | $ | 19 | ||||||||
Interest cost |
86 | 82 | 171 | 164 | ||||||||||||
Expected return on plan assets |
(90 | ) | (87 | ) | (180 | ) | (175 | ) | ||||||||
Amortization of prior service cost |
1 | 1 | 2 | 2 | ||||||||||||
Recognized net actuarial loss (gain) |
1 | (2 | ) | 2 | (4 | ) | ||||||||||
Curtailments |
4 | | 4 | (10 | ) | |||||||||||
$ | 12 | $ | 3 | $ | 19 | $ | (4 | ) | ||||||||
OPEB Plans:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Unaudited, in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost |
$ | 1 | $ | 1 | $ | 2 | $ | 2 | ||||||||
Interest cost |
6 | 6 | 12 | 12 | ||||||||||||
Amortization of prior service credit |
(2 | ) | (3 | ) | (4 | ) | (6 | ) | ||||||||
Recognized net actuarial loss |
1 | 1 | 1 | 2 | ||||||||||||
Curtailments |
| (1 | ) | | (2 | ) | ||||||||||
$ | 6 | $ | 4 | $ | 11 | $ | 8 | |||||||||
Event impacting net periodic benefit cost for the three and six months ended June 30, 2010
In May 2010, as a result of the indefinite idling of our Gatineau paper mill, approximately 330
positions were impacted. As a result, a curtailment loss of $4 million was included in the net
periodic benefit cost of our pension plans.
Events impacting net periodic benefit cost (credit) for the three and six months ended June 30,
2009
In June 2009, as a result of the permanent closure of our Westover sawmill and Goodwater planer
mill operations, approximately 60 positions were eliminated. As a result, a curtailment gain of $1
million was included in the net periodic benefit cost of our OPEB plans.
In February 2009, upon the permanent closure of our Grand Falls, Newfoundland and Labrador
newsprint mill, approximately 473 positions were eliminated. As a result, a curtailment gain of $10
million was included in the net periodic benefit credit of our pension plans and a curtailment gain
of $1 million was included in the net periodic benefit cost of our OPEB plans.
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Note 14. Income Taxes
The income tax benefit attributable to loss before income taxes differs from the amounts computed
by applying the United States federal statutory income tax rate of 35% for the three and six months
ended June 30, 2010 and 2009 as a result of the following:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Unaudited, in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Loss before income taxes |
$ | (309 | ) | $ | (547 | ) | $ | (816 | ) | $ | (764 | ) | ||||
Income tax benefit (provision): |
||||||||||||||||
Expected income tax benefit |
108 | 191 | 286 | 267 | ||||||||||||
(Decrease) increase in income taxes resulting from: |
||||||||||||||||
Valuation allowance |
(139 | ) | (75 | ) | (211 | ) | (146 | ) | ||||||||
Foreign exchange |
73 | (48 | ) | 20 | (37 | ) | ||||||||||
State income taxes, net of federal income tax
benefit |
1 | | 2 | | ||||||||||||
Foreign taxes |
(38 | ) | (17 | ) | (97 | ) | (23 | ) | ||||||||
Other, net |
4 | (17 | ) | 10 | (20 | ) | ||||||||||
$ | 9 | $ | 34 | $ | 10 | $ | 41 | |||||||||
Income tax benefits generated on the majority of our losses for all periods presented were entirely
offset by tax charges to increase our valuation allowance related to these tax benefits.
Additionally, any income tax benefit recorded on any future losses will probably be offset by
additional increases to the valuation allowance (tax charge). During the three and six months ended
June 30, 2009, we recorded a tax recovery of approximately $41 million and $49 million,
respectively, related to the asset impairment charges recorded associated with our assets held for
sale for our investment in MPCo. For additional information, see Note 4, Closure Costs, Impairment
and Other Related Charges.
During the six months ended June 30, 2009, we reversed $36 million of liabilities for unrecognized
tax benefits as a result of pending Canadian legislation that was enacted during the first quarter
of 2009. This reversal had no impact on income tax expense as it was offset by an adjustment to the
valuation allowance.
Note 15. Commitments and Contingencies
Creditor Protection Proceedings
On April 16, 2009 and December 21, 2009, AbitibiBowater Inc. and certain of its U.S. and Canadian
subsidiaries filed voluntary petitions for relief under Chapter 11. In addition, on April 17, 2009,
certain of AbitibiBowater Inc.s Canadian subsidiaries sought creditor protection under the CCAA.
On April 17, 2009, Abitibi and ACCC each filed Chapter 15 Cases to obtain recognition and
enforcement in the United States of certain relief granted in the CCAA Proceedings and also on that
date, AbitibiBowater Inc. and certain of its subsidiaries in the Chapter 11 Cases obtained orders
under the 18.6 Proceedings. Our wholly-owned subsidiary that operates our Mokpo operations and
almost all of our less than wholly-owned subsidiaries continue to operate outside of the Creditor
Protection Proceedings.
On July 9, 2010, the Canadian Court approved the mailing of solicitation materials related to the
CCAA Plan and on August 2, 2010, the U.S. Court approved the solicitation materials related to our
Chapter 11 Plan. These approvals enable us to begin soliciting votes from creditors to accept or
reject our Plans of Reorganization in accordance with the applicable Court orders.
For additional information, see Note 2, Creditor Protection Proceedings.
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Legal items
We are involved in various legal proceedings relating to contracts, commercial disputes, taxes,
environmental issues, employment and workers compensation claims and other matters. We
periodically review the status of these proceedings with both inside and outside counsel. Although
the final outcome of any of these matters is subject to many variables and cannot be predicted with
any degree of certainty, we establish reserves for a matter (including legal costs expected to be
incurred) when we believe an adverse outcome is probable and the amount can be reasonably
estimated. We believe that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material adverse effect on our
results of operations in any given quarter or year.
Subject to certain exceptions, all litigation against the Debtors that arose or may arise out of
pre-petition conduct or acts is subject to the automatic stay provisions of Chapter 11 and the CCAA
and the orders of the Courts rendered thereunder. In addition, any recovery by the plaintiffs in
those matters will be treated consistent with all other general unsecured claims in the Creditor
Protection Proceedings.
Information on our commitments and contingencies is presented in Note 22, Commitments and
Contingencies, included in our consolidated financial statements for the year ended December 31,
2009, incorporated herein by reference, as updated in Note 15, Commitments and Contingencies,
included in our unaudited interim consolidated financial statements for the quarter ended March 31,
2010, incorporated herein by reference, as further updated above. Except as otherwise updated in
our unaudited interim consolidated financial statements for the quarter ended March 31, 2010 or as
described above, there have been no material developments to the legal proceedings described in our
consolidated financial statements for the year ended December 31, 2009.
Employees
As of June 30, 2010, we employed approximately 11,200 people, of whom approximately 8,100 were
represented by bargaining units. Our unionized employees are represented predominantly by the
Communications, Energy and Paperworkers Union (the CEP) in Canada and predominantly by the United
Steelworkers International in the U.S.
A significant number of our collective bargaining agreements with respect to our paper operations
in Eastern Canada expired at the end of April 2009. At the beginning of March 2010, we reached an
agreement in principle with the CEP and the Confederation des syndicats nationaux (the CSN),
subject to the resolution of ongoing discussions with the governments of Quebec and Ontario
regarding funding relief in respect of the material solvency deficits in pension plans sponsored by
Abitibi and Bowater. Ratification of these agreements has been completed in all locations.
On April 29, 2010, a coalition of U.S. labor unions led by the United Steelworkers International
ratified a new master bargaining agreement covering mills in Calhoun, Catawba, Coosa Pines, Alabama
and Augusta. The individual mill collective bargaining agreements adopted in connection therewith
will extend through April 27, 2014 in the case of Calhoun and Catawba and April 27, 2015 in the
case of Coosa Pines and Augusta. The master bargaining agreement will become effective upon
consummation of the Plans of Reorganization.
In May and June 2010, we reached agreements with sawmills and woodland workers in the Mauricie
region of the province of Quebec represented by the CSN and most of the unions representing trades
and office employees in our four Ontario paper mills. We are still negotiating the renewal of
collective bargaining agreements with other unions also representing trades and office employees in
those four Ontario mills.
In June 2010, we reached an agreement for the renewal of the collective bargaining agreements of
four sawmills affiliated with the CEP. The CEP union agreement has since been serving as a model
agreement for three other sawmills located in Saint-Felicien, Normandin and Comtois,
Quebec. Except for the agreement related to the sawmill in Comtois, these agreements have been ratified.
We started discussions at the end of June 2010 with the CEP for the reopening and/or renewal of
eight woodland unions representing 800 employees working in the Lac
Saint-Jean, Quebec region.
The employees at the Mokpo facility have complied with all conditions necessary to strike, but the
possibility of a strike or lockout of those employees is not clear; we served the six-month notice
necessary to terminate the collective bargaining
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ABITIBIBOWATER INC.
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
agreement related to the Mokpo facility on June 19, 2009.
We may not be able to reach satisfactory agreements with all of our employees, which could result
in strikes or work stoppages by affected employees. Renewals could also result in higher wage or
benefit costs.
Note 16. Segment Information
We manage our business based on the products that we manufacture and sell to external customers.
Our reportable segments are newsprint, coated papers, specialty papers, market pulp and wood
products.
None of the income or loss items following Operating loss in our Consolidated Statements of
Operations are allocated to our segments, since those items are reviewed separately by management.
For the same reason, closure costs, impairment and other related charges, employee termination
costs, net gain on disposition of assets, costs associated with our unsuccessful refinancing
efforts and other discretionary charges or credits are not allocated to our segments. Share-based
compensation expense is, however, allocated to our segments. We also allocate depreciation expense
to our segments, although the related fixed assets are not allocated to segment assets.
Information about segment sales and operating income (loss) for the three and six months ended June
30, 2010 and 2009 was as follows:
Coated | Specialty | Market | Wood | Corporate | Consolidated | |||||||||||||||||||||||||||
(Unaudited, in millions) | Newsprint | Papers | Papers | Pulp (1) | Products | and Other | Total | |||||||||||||||||||||||||
Sales |
||||||||||||||||||||||||||||||||
Second quarter |
2010 | $ | 456 | $ | 114 | $ | 329 | $ | 172 | $ | 111 | $ | | $ | 1,182 | |||||||||||||||||
Second quarter |
2009 | 441 | 94 | 328 | 117 | 56 | | 1,036 | ||||||||||||||||||||||||
First six months |
2010 | 889 | 220 | 628 | 335 | 210 | | 2,282 | ||||||||||||||||||||||||
First six months |
2009 | 935 | 208 | 673 | 219 | 109 | 5 | 2,149 | ||||||||||||||||||||||||
Operating income (loss) (2) |
||||||||||||||||||||||||||||||||
Second quarter |
2010 | $ | (49 | ) | $ | 5 | $ | (25 | ) | $ | 24 | $ | 3 | $ | (31 | ) | $ | (73 | ) | |||||||||||||
Second quarter (3) |
2009 | (81 | ) | 27 | 21 | 38 | (20 | ) | (270 | ) | (285 | ) | ||||||||||||||||||||
First six months |
2010 | (151 | ) | 1 | (33 | ) | 37 | 5 | (42 | ) | (183 | ) | ||||||||||||||||||||
First six months (3) |
2009 | (62 | ) | 50 | 61 | 27 | (47 | ) | (328 | ) | (299 | ) | ||||||||||||||||||||
(1) | Market pulp sales excluded inter-segment sales of $2 million and $4 million for the three months ended June 30, 2010 and 2009, respectively, and $12 million and $6 million for the six months ended June 30, 2010 and 2009, respectively. | |
(2) | Corporate and other operating income (loss) for the three and six months ended June 30, 2010 and 2009 included the following special items: |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Unaudited, in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net gain on disposition of assets |
$ | 4 | $ | 1 | $ | 13 | $ | 53 | ||||||||
Closure costs, impairment and other related charges |
(3 | ) | (240 | ) | (8 | ) | (270 | ) | ||||||||
Write-downs of inventory |
| (12 | ) | | (12 | ) | ||||||||||
Reversal of previously recorded Canadian capital
tax liabilities due to new legislation |
| 16 | | 16 | ||||||||||||
Fees for unsuccessful refinancing efforts |
| (4 | ) | | (10 | ) | ||||||||||
$ | 1 | $ | (239 | ) | $ | 5 | $ | (223 | ) | |||||||
(3) | Operating income (loss) for newsprint, coated papers, specialty papers and market pulp included $4 million, $17 million, $8 million and $56 million, respectively, for the alternative fuel mixture tax credits for the three months ended June 30, 2009 and $6 million, $27 million, $13 million and $72 million, respectively, for the six months ended June 30, 2009. Reference is made to Note 17, Alternative Fuel Mixture Tax Credits, for additional information. |
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(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
(Under Creditor Protection Proceedings as of April 16 and 17, 2009 Notes 1, 2 and 3)
Notes to Unaudited Interim Consolidated Financial Statements
Note 17. Alternative Fuel Mixture Tax Credits
During 2009, the U.S. Internal Revenue Code of 1986, as amended (the Code) provided a tax credit
for companies that use alternative fuel mixtures to produce energy to operate their businesses. The
credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, was refundable to
the taxpayer. During the three and six months ended June 30, 2009, we recorded $85 million and $118
million, respectively, of these credits, which were included in Cost of sales, excluding
depreciation, amortization and cost of timber harvested in our Consolidated Statements of
Operations. According to the Code, the tax credit expired at the end of 2009.
Note 18. Subsequent Events
The following significant events occurred subsequent to June 30, 2010:
| On July 9, 2010, the Canadian Court approved the mailing of solicitation materials related to the CCAA Plan and on August 2, 2010, the U.S. Court approved the solicitation materials related to our Chapter 11 Plan. These approvals enable us to begin soliciting votes from creditors to accept or reject our Plans of Reorganization in accordance with the applicable Court orders. For additional information, see Note 2, Creditor Protection Proceedings - Reorganization process. | ||
| As more fully discussed in Note 12, Liquidity and Debt, on July 15, 2010, with the approval of the Courts, we entered into an amendment to the Bowater DIP Agreement whereby, among other things, on July 21, 2010, we prepaid $166 million of the outstanding principal amount of advances under this agreement. |
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following managements discussion and analysis of financial condition and results of operations
(MD&A) of AbitibiBowater Inc. (with its subsidiaries and affiliates, either individually or
collectively, unless otherwise indicated, referred to as AbitibiBowater, we, our, us or the
Company) provides information that we believe is useful in understanding our results of
operations, cash flows and financial condition for the three and six months ended June 30, 2010.
This discussion should be read in conjunction with, and is qualified in its entirety by reference
to, our unaudited interim consolidated financial statements and related notes appearing in Item 1
of this Quarterly Report on Form 10-Q (Unaudited Interim Consolidated Financial Statements),
which have been prepared assuming that AbitibiBowater will continue as a going concern. For a
discussion of the going concern assumption, as well as the ramifications if the going concern basis
is not appropriate, see Going Concern below. On April 16 and 17, 2009 and December 21, 2009,
AbitibiBowater Inc. and certain of its U.S. and Canadian subsidiaries filed voluntary petitions for
creditor protection. See Creditor Protection Proceedings below.
Cautionary Statements Regarding Forward-Looking Information and Use of Third-Party Data
Statements in this Quarterly Report on Form 10-Q that are not reported financial results or other
historical information of AbitibiBowater are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. They include, for example, statements relating to
our: Creditor Protection Proceedings (as defined below); debtor in possession financing
arrangements and reorganization process; ability to successfully restructure our debt and other
obligations; efforts to reduce costs and increase revenues and profitability, including our cost
reduction initiatives regarding selling, general and administrative expenses; business outlook;
curtailment of production of certain of our products; assessment of market conditions; financial
projections in the disclosure documents in respect of the Plans of Reorganization (as defined
below), including the values and assumptions used in those projections; ability to sell non-core
assets in light of the current global economic conditions and the requirements under the Creditor
Protection Proceedings to obtain court approval for certain asset sales; and strategies for
achieving our goals generally. Forward-looking statements may be identified by the use of
forward-looking terminology such as the words should, would, could, will, may, expect,
believe, anticipate, attempt and other terms with similar meaning indicating possible future
events or potential impact on our business or AbitibiBowaters shareholders.
The reader is cautioned not to place undue reliance on these forward-looking statements, which are
not guarantees of future performance. These statements are based on managements current
assumptions, beliefs and expectations, all of which involve a number of business risks and
uncertainties that could cause actual results to differ materially. The potential risks and
uncertainties that could cause our actual financial condition, results of operations and future
performance to differ materially from those expressed or implied in this Quarterly Report on Form
10-Q include:
| risks and uncertainties associated with the Creditor Protection Proceedings, including limitations against debtors in connection therewith, the values, if any, that will be assigned to our various pre-petition liabilities and securities and the Plans of Reorganization, as further described in Exhibit 99.5 to our Current Report on Form 8-K filed with the United States Securities and Exchange Commission (SEC) on May 28, 2010; | ||
| growth in alternative media that would further reduce the demand for print media and our products; | ||
| the ability of our customers to afford to pay for our products; | ||
| general industry, economic and market conditions, including the new residential construction market in the U.S.; | ||
| our capital intensive operations and the adequacy of our capital resources; | ||
| our ability to obtain permits to operate our facilities and continue to remain in compliance with environmental laws and regulations; | ||
| strikes and other labor-related supply chain disruptions that may impact our ability to operate our facilities; | ||
| fluctuations in foreign currency exchange rates, especially those relative to the U.S. dollar and the Canadian dollar; | ||
| our significant degree of leverage, underfunding of our pension plans and concerns about our financial viability; | ||
| the prices and terms under which we would be able to sell assets; | ||
| the success of our implementation of additional measures to enhance our operating efficiency and productivity; |
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| the costs of raw materials such as energy, chemicals and fiber; | ||
| our ability to obtain fair compensation for our expropriated assets in the province of Newfoundland and Labrador, Canada; | ||
| the possibility that we could lose any or all of our equity interest in Augusta Newsprint Company (ANC); | ||
| the post-emergence impact of the Creditor Protection Proceedings on our operations, including the impact on our ability to negotiate favorable terms with suppliers, customers, counterparties and others; and | ||
| other risk factors described in Exhibit 99.5 to our Current Report on Form 8-K filed with the SEC on May 28, 2010. |
All forward-looking statements in this Quarterly Report on Form 10-Q are expressly qualified by the
cautionary statements contained or referred to in this section and in our other filings with the
SEC and the Canadian securities regulatory authorities. We disclaim any obligation to publicly
update or revise any forward-looking information, whether as a result of new information, future
events or otherwise.
The final recovery to creditors and/or
shareholders, if any, will not be determined until the Plans
of Reorganization, as amended and/or supplemented, have been approved
by the applicable Court, as defined below. The
recovery will depend on, among other things, the nature of the claim and the debtor against whom
the claim is properly made, as further described in the Plans of Reorganization and the related
disclosure documents. Accordingly, the value of our obligations, including our debt securities, is
highly speculative. The Plans of Reorganization provide that all of our currently outstanding
common stock and exchangeable shares will be canceled for no consideration. Appropriate caution
should be exercised with respect to existing and future investments in any of our liabilities
and/or securities. None of the statements in this Quarterly Report on Form 10-Q or incorporated
herein by reference is a solicitation of votes for or against the Plans of Reorganization. Any such
solicitation will only be made through appropriate disclosure documents approved by the applicable
Court.
Market and industry data
Information about industry or general economic conditions contained in this Quarterly Report on
Form 10-Q is derived from third-party sources and certain trade publications (Third-Party Data)
that we believe are widely accepted and accurate; however, we have not independently verified this
information and cannot provide assurances of its accuracy.
Creditor Protection Proceedings
U.S. and Canadian filings for creditor protection
On April 16, 2009 and December 21, 2009, AbitibiBowater Inc. and certain of its U.S. and Canadian
subsidiaries filed voluntary petitions (collectively, the Chapter 11 Cases) in the United States
Bankruptcy Court for the District of Delaware (the U.S. Court) for relief under the provisions of
Chapter 11 of the United States Bankruptcy Code, as amended (Chapter 11). In addition, on April
17, 2009, certain of AbitibiBowater Inc.s Canadian subsidiaries sought creditor protection (the
CCAA Proceedings) under the Companies Creditors Arrangement Act (the CCAA) with the Superior
Court of Quebec in Canada (the Canadian Court). On April 17, 2009, Abitibi-Consolidated Inc.
(Abitibi), a subsidiary of AbitibiBowater Inc., and its wholly-owned subsidiary,
Abitibi-Consolidated Company of Canada (ACCC), each filed a voluntary petition for provisional
and final relief (the Chapter 15 Cases) in the U.S. Court under the provisions of Chapter 15 of
the United States Bankruptcy Code, as amended, to obtain recognition and enforcement in the United
States of certain relief granted in the CCAA Proceedings and also on that date, AbitibiBowater Inc.
and certain of its subsidiaries in the Chapter 11 Cases obtained orders under Section 18.6 of the
CCAA in respect thereof (the 18.6 Proceedings). The Chapter 11 Cases, the Chapter 15 Cases, the
CCAA Proceedings and the 18.6 Proceedings are collectively referred to as the Creditor Protection
Proceedings. The entities subject to the Creditor Protection Proceedings are referred to herein as
the Debtors. The U.S. Court and the Canadian Court are collectively referred to as the Courts.
Our wholly-owned subsidiary that operates our Mokpo, South Korea operations and almost all of our
less than wholly-owned subsidiaries continue to operate outside of the Creditor Protection Proceedings.
We initiated the Creditor Protection Proceedings in order to enable us to pursue reorganization
efforts under the protection of Chapter 11 and the CCAA, as applicable. We remain in possession of
our assets and properties and are continuing to operate our business and manage our properties as
debtors in possession under the jurisdiction of the Courts and in accordance with the applicable
provisions of Chapter 11 and the CCAA. In general, the Debtors are authorized to continue
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to operate as ongoing businesses, but may not engage in transactions outside the ordinary course of
business without the approval of the applicable Court(s) or the Monitor (as defined below), as
applicable.
The commencement of the Creditor Protection Proceedings constituted an event of default under
substantially all of our pre-petition debt obligations, and those debt obligations became
automatically and immediately due and payable by their terms, although any action to enforce such
payment obligations is stayed as a result of the commencement of the Creditor Protection
Proceedings. See Note 3, Creditor Protection Proceedings Related Disclosures - Liabilities
subject to compromise, and Note 12, Liquidity and Debt, to our Unaudited Interim Consolidated
Financial Statements.
On August 2, 2010, the U.S Court approved the solicitation materials in respect of our Debtors
Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the Chapter
11 Plan). On July 9, 2010, the Canadian Court approved the mailing of solicitation materials
related to the CCAA Plan of Reorganization and Compromise (the CCAA Plan and, together with the
Chapter 11 Plan, the Plans of Reorganization). These approvals enable us to begin soliciting
votes from creditors to accept or reject our Plans of Reorganization in accordance with the
applicable Court orders. The Plans of Reorganization describe a proposed treatment of creditor
claims and certain other matters. The Plans of Reorganization are subject to creditor approval and
must also be approved by the applicable Court.
Debtor in possession financing arrangements
In the Creditor Protection Proceedings, we sought and obtained: (i) final approval by the Courts to
enter into a debtor in possession financing facility for the benefit of AbitibiBowater Inc.,
Bowater Incorporated (Bowater), a wholly-owned subsidiary of AbitibiBowater Inc., and certain of
Bowaters subsidiaries, (ii) final approval by the Canadian Court to enter into a debtor in
possession financing facility for the benefit of Abitibi with a wholly-owned subsidiary of ACCC and
(iii) final approval by the Courts to amend and restate, in its entirety, the accounts receivable
securitization program, as further amended on June 11, 2010, of Abitibi and Donohue Corp.
(Donohue), an indirect, wholly-owned subsidiary of AbitibiBowater Inc. Each of these financing
arrangements is discussed in further detail below under Liquidity and Capital Resources.
Reorganization process
General
The Courts have issued a variety of orders on either a final or interim basis intended to support
our business continuity throughout the restructuring process. These orders include, among other
things, authorization to:
| make payments relating to certain employees pre-petition wages, salaries and benefit programs in the ordinary course; | ||
| ensure the continuation of existing cash management systems; | ||
| honor certain ongoing customer obligations; | ||
| repudiate or reject certain customer, supplier and other contracts; | ||
| enter into our debtor in possession financing arrangements and the Abitibi and Donohue second amended and restated accounts receivable securitization program, as further amended, which are discussed below under Liquidity and Capital Resources; | ||
| conduct certain asset sales; | ||
| settle certain intercompany obligations; | ||
| restructure our European sales structure; and | ||
| transfer certain properties from one subsidiary of AbitibiBowater to another subsidiary of AbitibiBowater, as well as the placement of the latter subsidiary into receivership. |
We also obtained an order from the Canadian Court on May 8, 2009 specifying that the payment of
special contributions for past service to Canadian pension plans maintained by Abitibi and Bowater
could be suspended. Abitibi and Bowater continue to make their respective Canadian pension plan
contributions for current service costs. Special contributions to our Canadian pension plans for
past service that were suspended amounted to approximately $102 million for Abitibi and
approximately $57 million for Bowater on an annual basis. We have continued to meet our obligations
to our U.S. pension plans in the ordinary course.
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We have retained legal and financial professionals to advise us on the Creditor Protection
Proceedings and may, from time to time, retain additional professionals, subject to any applicable
Court approval.
On April 28, 2009, the United States Trustee for the District of Delaware appointed an official
committee of unsecured creditors (the Creditors Committee) in the Chapter 11 Cases pursuant to
the requirements of Chapter 11. The Creditors Committee and its legal representatives have a right
to be heard on all matters that come before the U.S. Court with respect to us.
Under the terms of a Canadian Court order, Ernst & Young Inc. serves as the court-appointed monitor
under the CCAA Proceedings (the Monitor) and assisted us in formulating our CCAA
restructuring plan.
Stay of proceedings
Subject to certain exceptions under Chapter 11 and the CCAA, our filings (and in Canada, the
Initial Order, as defined below) automatically enjoined, or stayed, the continuation of any
judicial or administrative proceedings or other actions against us and our property to recover,
collect or secure a claim arising prior to the filing of the Creditor Protection Proceedings. Thus,
for example, most creditor actions to obtain possession of property from us, or to create, perfect
or enforce any lien against our property, or to collect on monies owed or otherwise exercise rights
or remedies with respect to a pre-petition claim, are enjoined unless and until the Courts lift
such stay.
We began notifying all known current or potential creditors regarding these filings shortly after
the commencement of the Creditor Protection Proceedings. We have successfully applied on several
occasions to the Courts in order to enforce the stay of proceedings against creditors acting in
breach of the stay.
Rejection and repudiation of contractual obligations
Under Section 365 and other relevant sections of Chapter 11, we may assume, assign or reject
certain executory contracts and unexpired leases, including leases of real property and equipment,
subject to the approval of the U.S. Court and certain other conditions. Similarly, pursuant to the
initial order issued by the Canadian Court on April 17, 2009 (the Initial Order), we have the
right to, among other things, repudiate or reject agreements, contracts or arrangements of any
nature whatsoever, whether oral or written, subject to the approval of the Monitor or further order
of the Canadian Court. Any description of an agreement, contract, unexpired lease or arrangement in
this Quarterly Report on Form 10-Q must be read in light of these overriding rights pursuant to
Section 365 of Chapter 11 and the relevant provisions of the CCAA, as applicable.
Since initiating the Creditor Protection Proceedings, we have engaged and will continue to engage
in a review of our various agreements in light of the overriding rights described above. We have
rejected and repudiated a number of leases, including leases of real estate and equipment, and have
assumed or assigned certain others. Some of the more significant agreements we repudiated or
rejected, as the case may be, include the following:
| We repudiated certain supply contracts between Abitibi and SFK Pate S.E.N.C. and on May 21, 2009, the Canadian Court rejected a motion by SFK Pate S.E.N.C. to overturn that repudiation. | ||
| On June 15, 2009, we filed a motion with the U.S. Court to reject an amended and restated call agreement (the Call Agreement) in respect of Augusta Newsprint Inc. (ANI), an indirect subsidiary of The Woodbridge Company Limited (Woodbridge) and our partner in ANC. ANC is the partnership that owns and operates the Augusta, Georgia newsprint mill. The Call Agreement obligated Abitibi Consolidated Sales Corporation (ACSC), an indirect, wholly-owned subsidiary of AbitibiBowater Inc., to either buy out ANI at a price well above market, or risk losing all of its equity in the joint venture pursuant to forced sale provisions. The U.S. Court granted our motion on October 27, 2009 and approved our rejection of the Call Agreement. Our counterparties to the Call Agreement filed a Notice of Appeal with the U.S. Court on November 3, 2009. Also, on March 9, 2010, Woodbridge filed a motion in the U.S. Court to force ACSC to reject the partnership agreement governing ANC. We filed an objection to such motion on April 9, 2010. The matter was heard on May 26, 2010 but the hearing was not dispositive. The motion thus remains before the U.S. Court. | ||
| On July 7, 2009, we repudiated a parental guarantee issued by Abitibi in favor of NPower Cogen Limited (NPower) relating to the obligations of Bridgewater Paper Company Limited (BPCL), a subsidiary of AbitibiBowater Inc., under an energy supply contract for the Bridgewater, United Kingdom newsprint mill. For additional information, see Bridgewater Administration below. | ||
| Effective July 13, 2009, Bowater Canadian Forest Products Inc. (BCFPI, an indirect subsidiary of Bowater), |
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Abitibi and ACCC repudiated contracts with Boralex Dolbeau Inc. and
on July 28, 2009, we obtained a motion De Bene Esse to confirm our repudiation of those
contracts in light of injunctions issued by the Canadian Court and the Court of Appeal of
Quebec on January 22, 2008 and October 8, 2008, respectively, initially preventing such
actions. Following the repudiation of these contracts, our Dolbeau, Quebec facility has
been effectively idled.
| On September 14, 2009, we repudiated certain of Abitibis shipping contracts with Spliethoff Transport B.V. based on expected savings and more favorable contractual terms with a new shipper. The Canadian Court rejected Spliethoff Transport B.V.s motion to overturn the repudiation on November 24, 2009. | ||
| We rejected a number of pre-petition engagement letters with financial advisors retained to provide advisory services on an exclusive basis in connection with pre-petition restructuring activities and certain transactions that ultimately were not consummated. |
The creditors affected by these repudiations and rejections have filed proofs of claims in the
Creditor Protection Proceedings. For additional information, see Note 3, Creditor Protection
Proceedings Related Disclosures Reorganization items, net and Liabilities subject to
compromise, to our Unaudited Interim Consolidated Financial Statements.
Procedures for the filing, review and determination of creditors claims in the U.S. and in Canada
On August 26, 2009 and September 3, 2009, the Canadian Court and the U.S. Court, respectively,
granted our motions to establish November 13, 2009 (the General Claims Bar Date) as the bar date
for the filing of claims, generally representing the majority of our creditors. We notified the
majority of our creditors and potential creditors of the General Claims Bar Date and the
requirement to file a proof of claim with the Courts before that deadline in order for a claimant
to receive any distribution in the Creditor Protection Proceedings. Individuals who were employed
by us as of April 16, 2009 (the date on which we filed for creditor protection in the U.S.) or
thereafter (Post-filing Employees) were excluded from the General Claims Bar Date in the U.S. and
Canada, as were certain other Excluded Claims in Canada.
On January 18, 2010, the Canadian Court issued an order setting out the process for the review,
determination and adjudication of contested claims with a view to determining their amounts for an
eventual vote by the holders of such claims on a plan of arrangement to be presented by us. No such
order has been issued in the U.S., where the applicable procedure for the investigation of
discrepancies between liability amounts estimated by us and claims filed by our creditors and for
the valuation of liabilities is generally governed by the rules under Chapter 11.
On February 18, 2010, the U.S. Court granted our motion to establish April 7, 2010 (the Second
Claims Bar Date) as the date by which Post-filing Employees were required to file employee proofs
of claim against us on account of: (i) any claim against us owing as of April 16, 2009 and (ii) any
claim or expense asserted against us for the period from April 16, 2009 through and including
February 28, 2010 (but excluding amounts owed for ordinary course payroll obligations that were
scheduled to be paid on the next pay date occurring after February 28, 2010, or for the
reimbursement of expenses scheduled to be paid in the ordinary course).
On February 23, 2010, the Canadian Court granted our motion to establish an identical Second Claims
Bar Date of April 7, 2010 for Post-filing Employees and most previously Excluded Claims, including
a category of claims that includes claims arising out of contract repudiation after August 31, 2009
(Restructuring Claims). A rolling bar date, being the later of the Second Claims Bar Date or 30
days after the issuance of a notice giving rise to any Restructuring Claim, was
established for those Restructuring Claims that arise between the Second Claims Bar Date of April
7, 2010 and emergence from the CCAA Proceedings.
There have been approximately 7,300 and 8,200 claims filed against the Chapter 11 filers and the
CCAA filers, respectively, that total, together with the Chapter 11 filers scheduled liabilities,
approximately $76 billion (which for purposes of this disclosure, for the claims filed against the
CCAA filers in Canadian dollars, reflects the exchange rate to U.S. dollars on the date of the
commencement of the CCAA Proceedings, which may not be the rate applicable to every claim). We are
currently in the process of reconciling such claims to the amounts we have recorded in Liabilities
subject to compromise as of June 30, 2010 in our Consolidated Balance Sheets included in our
Unaudited Interim Consolidated Financial Statements (Consolidated Balance Sheets). Differences in
amounts recorded and claims filed by creditors are being investigated and will be resolved,
including through the filing of objections with the Courts, where appropriate. We have identified,
and expect to continue to identify, many claims that we believe should be disallowed by the Courts
because they are duplicative, have been later amended or superseded, are without merit, are
overstated or for other reasons. In addition, as a result of this process, we may identify
additional liabilities that will need to be recorded or reclassified to liabilities subject to
compromise. Also, we have identified, and may continue to identify, recorded liabilities for which no
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claim has
been filed, which would result in a reorganization gain upon the
elimination of the recorded liabilities. Although we are continuing to
make progress, in light of the substantial number and amount of claims filed, the claims resolution
process may take considerable time to complete. Completion of the claims resolution process is not
a condition to our emergence from the Creditor Protection Proceedings.
In both the U.S. and Canada, the determination of how claims will ultimately be treated, as well as
how each class of affected claims will be settled, including payment terms, if applicable, cannot
be made until the Courts approve, if at all, the Plans of Reorganization. Accordingly, the ultimate
number and amount of allowed claims, as well as the ultimate treatment and recovery of allowed
claims, is not determinable at this time. Given the magnitude of the claims asserted, it is
possible that allowed claims may be materially in excess of the amounts recorded as liabilities
subject to compromise as of June 30, 2010 and adjustments to these liabilities may be recorded as
Reorganization items, net in our Consolidated Statements of Operations included in our Unaudited
Interim Consolidated Financial Statements (Consolidated Statements of Operations) in future
periods. Classification for purposes of our Unaudited Interim Consolidated Financial Statements of
any pre-petition liabilities on any basis other than liabilities subject to compromise is not an
admission against interest or legal conclusion by the Debtors as to the manner of classification,
treatment, allowance or payment in the Creditor Protection Proceedings, including in connection
with the Plans of Reorganization that may be approved by the Courts and that may become effective
pursuant to the Courts orders.
For additional information, see Note 3, Creditor Protection Proceedings Related Disclosures
Reorganization items, net and Liabilities subject to compromise, to our Unaudited Interim
Consolidated Financial Statements.
Plan or plans of reorganization
In order to successfully exit from Chapter 11 and the CCAA, we will be required to obtain approval
from affected creditors and the Courts of the Plans of Reorganization upon having
shown that they satisfy the requirements of Chapter 11 and the CCAA. Once approved, the Plans of
Reorganization will resolve our pre-petition obligations, set forth the revised capital structure
of the newly reorganized entity and provide for corporate governance following our exit from
Chapter 11 and the CCAA.
In the
United States, Chapter 11 provides that we have the exclusive
right for up to 18 months after the
filing of the Creditor Protection Proceedings to file a plan or plans of reorganization with the
U.S. Court. In successive orders, the U.S. Court further extended our exclusive right to file a
plan or plans of reorganization and solicit votes thereon,
and the current deadlines are September 14, 2010 and November 13, 2010,
respectively. However, a motion is pending before the U.S. Court to further
extend these deadlines for the maximum periods, which would extend our exclusive
right to file a plan or plans of reorganization and solicit votes thereon until
October 16, 2010 and December 16, 2010, respectively.
We began soliciting votes from creditors for the
approval or rejection of our Plans of Reorganization on August 9, 2010. If our exclusivity period
were to lapse, any party in interest would be able to file a plan or plans of reorganization. In
addition to being voted on and approved by holders of impaired claims and equity interests, the
Chapter 11 Plan must satisfy certain requirements of Chapter 11 and must be confirmed
by the U.S. Court in order to become effective.
Similarly, in Canada, the Initial Order provides for a general stay of proceedings for an initial
period of 30 days. The Canadian Court has extended the stay of proceedings on a number of
occasions, most recently through September 8, 2010. We will likely file additional motions to
request further extensions of this stay of proceedings, which we believe are routinely granted for
up to 18 months in cases of this size and complexity. The Initial Order provides that a plan or
plans of reorganization under the CCAA must be filed with the Canadian Court before the termination of the
stay of proceedings or such other time or times as may be allowed by the Canadian Court. Third
parties could thereafter seek permission to file a plan or plans of reorganization. On July 9,
2010, we received the Canadian Courts approval to mail solicitation materials for our CCAA Plan.
In addition to being voted on by the required majority of affected creditors, the CCAA Plan must
satisfy certain requirements of the CCAA and must be approved by the Canadian Court in
order to become effective.
The Plans of Reorganization describe a proposed treatment of creditor claims and certain other
matters. The Plans of Reorganization are subject to creditor approval
and must also be approved by
the applicable Court. There can be no assurance that the Plans of Reorganization will be supported
and approved by affected creditors and approved by the Courts or that any such plan will be
implemented successfully. There are a number of significant conditions to the implementation of the
Plans of Reorganization, including the adopting of funding relief regulations in form and substance
satisfactory to the CCAA filers in Quebec and Ontario in respect of the material solvency deficits
in pension plans sponsored by Abitibi and Bowater. Subject to the foregoing, we believe we are on
track to emerge from the Creditor Protection Proceedings in the fall of 2010.
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The Plans of Reorganization include, among other things, the following key elements:
| each of the Debtors operations will continue in substantially their current form; | ||
| all amounts outstanding under the Bowater DIP Agreement (as defined below) will be paid in full in cash and the facility will be terminated; | ||
| all outstanding receivable interests sold under the Abitibi and Donohue accounts receivable securitization program will be repurchased in cash for a price equal to the par amount thereof and the program will be terminated; | ||
| the Bowater pre-petition secured bank credit facilities (which consist of separate credit agreements entered into by Bowater and BCFPI) will be paid in full in cash, including principal and accrued interest; | ||
| the Abitibi pre-petition senior secured term loan will be paid in full in cash, including principal and accrued interest; | ||
| the outstanding ACCC pre-petition 13.75% senior secured notes due 2011 will be paid in full in cash, including principal and accrued interest; | ||
| holders of allowed claims arising from the Debtors pre-petition unsecured indebtedness will receive their pro rata share of the new common stock to be issued by the reorganized Company upon emergence from the Creditor Protection Proceedings and will be entitled, to the extent eligible, to participate in the Rights Offering (as defined below); | ||
| the Debtors obligations to fund the prior service costs related to their pension and other postretirement benefit plans will be reinstated, subject to the resolution of funding relief, as further discussed below under Employees; | ||
| holders of pre-petition unsecured indebtedness with individual claim amounts less than $5,000 may be paid in cash in an amount equal to 50% of their claim amount, but under certain circumstances, these claim holders may be treated instead like all other holders of claims arising from pre-petition unsecured indebtedness; | ||
| all equity interests in the Company existing immediately prior to the emergence date will be discharged, canceled, released and extinguished; | ||
| the Debtors will conduct a rights offering (the Rights Offering) for the issuance of convertible senior subordinated notes (the Convertible Notes). Under the Rights Offering, each eligible unsecured creditor will receive a non-transferable right entitling such creditor to purchase its proportionate share of up to $500 million of Convertible Notes to be issued by the reorganized Company on the emergence date. Under certain circumstances, the amount of Convertible Notes may thereafter be increased by up to an additional $110 million. The Convertible Notes are expected to bear interest at the rate of 10% per annum (11% per annum if we elect to pay a portion of the interest through the issuance of additional Convertible Notes). We have entered into a backstop commitment agreement that provides for the purchase by certain investors of Convertible Notes to the extent that the Rights Offering is under-subscribed, which has been approved by the Courts; | ||
| subject to Court approval and applicable commitment and engagement letters, the reorganized Company will enter into a senior secured asset-based revolving credit facility; and | ||
| subject to Court approval and applicable commitment and engagement letters, the reorganized Company will enter into a senior secured term loan facility, which may be in the form of a loan, high-yield notes, bridge facility or other loan arrangement. |
Under the priority scheme established by Chapter 11 and the CCAA, unless creditors agree otherwise,
pre-petition liabilities and post-petition liabilities must be satisfied in full before
shareholders are entitled to receive any distribution or retain any property under any plan of
reorganization. The final recovery to creditors and/or shareholders, if any, will not be determined
until the Plans of Reorganization, as amended and/or supplemented,
have been approved by the
applicable Court. The recovery will depend on, among other things, the nature of the claim and the
debtor against whom the claim is properly made, as further described in the Plans of Reorganization
and the related disclosure documents. Accordingly, the value of our obligations, including our debt
securities, is highly speculative. The Plans of Reorganization provide that all of our currently
outstanding common stock and exchangeable shares will be canceled for no consideration. Appropriate
caution should be exercised with respect to existing and future investments in any of our
liabilities and/or securities. At this time, there can be no assurance that we will be able to
restructure as a going concern, as described below, or successfully implement the Plans of
Reorganization.
See Exhibit 99.5 of our Current Report on Form 8-K filed with the SEC on May 28, 2010, for, among
other things, the
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strategic, financial, operational and procedural risks resulting from the Creditor Protection
Proceedings, as well as a discussion of risks relating to our financial condition, the Plans of
Reorganization and the new common stock to be issued by the
reorganized Company in connection with the emergence from the
Creditor Protection Proceedings.
Further information pertaining to our Creditor Protection Proceedings may be obtained through our
website at www.abitibibowater.com. Certain information regarding the CCAA Proceedings, including
the reports of the Monitor, is available at the Monitors website at www.ey.com/ca/abitibibowater.
Documents filed with the U.S. Court and other general information about the Chapter 11 Cases are
available at http://chapter11.epiqsystems.com/abh. Information contained on these websites does not
constitute a part of this Quarterly Report on Form 10-Q.
Listing and trading of our common stock and the exchangeable shares of AbitibiBowater Canada Inc.
Due to the commencement of the Creditor Protection Proceedings, each of the New York Stock Exchange
and the Toronto Stock Exchange (TSX) suspended the trading of our common stock at the
opening of business on April 16, 2009 and delisted our common stock at the opening of business on
May 21, 2009 and the close of market on May 15, 2009, respectively. Our common stock is currently
traded in the over-the-counter market and is quoted on the Pink Sheets Quotation Service and on the
OTC Bulletin Board under the symbol ABWTQ. In addition, the TSX suspended the trading of the
exchangeable shares of AbitibiBowater Canada Inc. at the opening of business on April 16, 2009 and
delisted such shares at the close of market on May 15, 2009.
Reporting requirements
Effective upon the commencement of the Creditor Protection Proceedings, we applied the guidance in
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 852,
Reorganizations
(FASB ASC 852), in preparing our Unaudited Interim Consolidated Financial Statements and we
continue to apply this guidance while we operate under the Creditor Protection Proceedings. The
guidance in FASB ASC 852 does not change the manner in which financial statements are prepared.
However, it requires that the financial statements distinguish transactions and events that are
directly associated with the reorganization from the ongoing operations of the business.
Accordingly, certain expenses, provisions for losses, gains on disposition of assets and other
charges directly associated with or resulting from the reorganization and restructuring of the
business that have been realized or incurred in the Creditor Protection Proceedings have been
recorded in Reorganization items, net in our Consolidated Statements of Operations. For
additional information, see Note 3, Creditor Protection Proceedings Related Disclosures -
Reorganization items, net, to our Unaudited Interim Consolidated Financial Statements.
Pre-petition obligations that may be impaired by the reorganization process have been classified in
our Consolidated Balance Sheets as Liabilities subject to compromise. For additional information,
see Note 3, Creditor Protection Proceedings Related Disclosures - Liabilities subject to
compromise, to our Unaudited Interim Consolidated Financial Statements. Additionally, we have
continued to record interest expense on certain of our pre-petition debt obligations. For
additional information, see Note 12, Liquidity and Debt, to our Unaudited Interim Consolidated
Financial Statements.
As a result of the Creditor Protection Proceedings, we are required to periodically file various
documents with and provide certain information to the Courts, the Monitor and the Creditors
Committee. Depending on the jurisdiction, such documents and information include statements of
financial affairs, schedules of assets and liabilities, monthly operating reports and information
relating to forecasted cash flows, as well as certain other financial information. Such documents
and information, to the extent they are prepared or provided by us, are prepared and provided
according to the requirements of the relevant legislation, subject to variation as approved by an
order of the applicable Court. Such documents and information are prepared or provided on an
unconsolidated, unaudited or preliminary basis, or in a format different from that used in the
consolidated financial statements and the Debtors condensed combined financial statements included
in our periodic reports filed with the SEC. Accordingly, the substance and format of these
documents and information does not allow meaningful comparison with our regular publicly disclosed
consolidated financial statements. Moreover, such documents and information are not prepared for
the purpose of providing a basis for an investment decision relating to our securities or for
comparison with other financial information filed with the SEC.
Going Concern
Our Unaudited Interim Consolidated Financial Statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. However, the Creditor Protection Proceedings raise substantial doubt
about our ability to continue as a going concern.
The Creditor Protection Proceedings and our debtor in possession financing arrangements, which are
discussed under
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Liquidity and Capital Resources, have provided us with a period of time to stabilize our
operations and financial condition and develop our Plans of Reorganization. Management believes
that these actions make the going concern basis of presentation appropriate. However, given the
uncertainty involved in these proceedings, the realization of assets and discharge of liabilities
are each subject to significant uncertainty. Further, our ability to continue as a going concern is
dependent on market conditions and our ability to obtain the approval of the Plans of
Reorganization from affected creditors and the Courts, successfully implement the
Plans of Reorganization, improve profitability, obtain exit financing to replace our debtor in
possession financing arrangements and renew or extend our current debtor in possession financing
arrangements if the need to do so should arise. However, it is not possible to predict whether the
actions taken in our restructuring will result in improvements to our financial condition
sufficient to allow us to continue as a going concern. If the going concern basis is not
appropriate, adjustments will be necessary to the carrying amounts and/or classification of our
assets and liabilities.
Further, the implementation of the Plans of Reorganization could materially change the carrying
amounts and classifications reported in our Unaudited Interim Consolidated Financial Statements and
could result in additional long-lived asset impairment charges. The assets and liabilities in our
Unaudited Interim Consolidated Financial Statements do not reflect any adjustments related to the
Plans of Reorganization, except for certain charges discussed in Note 3, Creditor Protection
Proceedings Related Disclosures Reorganization items, net, to our Unaudited Interim
Consolidated Financial Statements.
Bridgewater Administration
On February 2, 2010, BPCL filed for administration in the United Kingdom pursuant to the United
Kingdom Insolvency Act 1986, as amended (the BPCL Administration). BPCLs board of directors
appointed Ernst & Young LLP as joint administrators for the BPCL Administration, whose
responsibilities are to manage the affairs, business and assets of BPCL. In May 2010, the joint
administrators announced the sale of the paper mill and all related machinery and equipment. As a
result of the filing for administration, we lost control over and the ability to influence BPCLs
operations. As a result, effective as of the date of the BPCL Administration filing, we are no
longer consolidating BPCL in our Unaudited Interim Consolidated Financial Statements and are now
accounting for BPCL using the cost method of accounting. For additional information, see Note 3,
Creditor Protection Proceedings Related Disclosures - Reorganization items, net, to our
Unaudited Interim Consolidated Financial Statements.
BPCL was a party to a contract with NPower for the cogeneration building and equipment lease and
for the purchase of steam and electricity to operate the paper mill. This contract also contained
two embedded derivative features, which are no longer included in our Unaudited Interim
Consolidated Financial Statements as a result of the deconsolidation of BPCL. Abitibi had provided
a guarantee in favor of NPower as it relates to BPCLs obligations under this agreement, which it
repudiated on July 7, 2009. NPower filed a related claim in the Creditor Protection Proceedings
against Abitibi in November 2009. In the first quarter of 2010, we recorded a liability for
NPowers repudiated claim. For additional information, see Note 3, Creditor Protection Proceedings
Related Disclosures - Reorganization items, net, to our Unaudited Interim Consolidated
Financial Statements.
Business Strategy and Outlook
As we enter the latter stages of the Creditor Protection Proceedings, we are carefully evaluating
our various operations, corporate structure and headcount to restructure in an effective and timely
manner. In consultation with the Monitor and the Creditors Committee, we have prepared the Plans
of Reorganization, which remain subject to the approval of the affected creditors and the Courts.
There can be no assurance that the Plans of Reorganization will be approved by any of
the affected creditors or the Courts, or that they will be implemented successfully.
In the years leading up to the commencement of the Creditor Protection Proceedings, we experienced
significant recurring losses and negative operating cash flows, primarily due to: (i) the weakness
in the global economy which has reduced the level and extent of publishing and advertising, which
in turn has adversely affected the demand for our pulp and paper products and (ii) the weakness in
the construction and real estate markets which has reduced the level of building and remodeling,
which has adversely impacted the demand for our wood products. There was a precipitous decline in
demand for all of our products and a corresponding decline in selling prices starting in the fourth
quarter of 2008, which continued in 2009 as a result of the global economy and weakness in our
North American market. In 2007, 2008, 2009 and the first six months of 2010, we took numerous
actions to mitigate these losses and negative cash flows, including, among other things: (i) the
permanent closures and indefinite idling of certain non-profitable facilities, as well as
market-related downtime at other facilities, to reduce our production, (ii) the idling of more than
50% of our lumber production and the consolidation of certain of our wood products operations in
Eastern Canada, which materially improved our cost
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competitiveness
and our operating results of the business as the business segment continues to be
challenged by severe economic conditions and (iii) the successful implementation of price increases
in newsprint, coated papers, specialty papers and market pulp prior to the precipitous decline in
demand and selling prices.
Market and pricing conditions continued to worsen subsequent to the commencement of our Creditor
Protection Proceedings for most of our paper grades and the price of newsprint in North America
collapsed to extremely low levels in the summer of 2009. As a result, we curtailed significant
capacity in 2009 and the first six months of 2010 in response to declining market conditions, which
included the following actions:
| We repudiated contracts with Boralex Dolbeau Inc. (see Creditor Protection Proceedings Reorganization process above), and following such repudiations, our Dolbeau facility has been effectively idled, representing 244,000 short tons of specialty papers annually; | ||
| We announced the indefinite idling of our two newsprint machines at our Thunder Bay, Ontario facility effective August 21, 2009, representing 392,000 metric tons annually, one of which was restarted in February 2010; | ||
| In August 2009, we announced that we would continue to work on selling, general and administrative (SG&A) austerity measures with a target reduction of approximately $100 million on an annualized basis, as compared to 2008. The SG&A reduction efforts included, among other items, a 25% corporate headcount reduction and the suspension of 2009 incentive compensation plans, including equity awards; | ||
| We implemented further production curtailments by indefinitely idling certain additional non-profitable facilities and machines, including our Beaupre, Quebec paper mill (which was subsequently permanently closed and sold), representing 241,000 metric tons of specialty papers annually; a specialty paper machine at our Fort Frances, Ontario facility, representing 70,000 metric tons annually; and a newsprint machine at our Coosa Pines, Alabama paper mill, representing 170,000 metric tons annually; | ||
| In March 2010, we announced the indefinite idling of one of our newsprint machines at our Thorold, Ontario facility, effective April 12, 2010, representing approximately 207,000 metric tons of newsprint annually; and | ||
| In May 2010, we announced the indefinite idling of our Gatineau, Quebec facility, representing 358,000 metric tons annually. |
Further non-profitable capacity curtailments for 2010 may become necessary if newsprint demand
declines or if global conditions worsen for any of our product lines. In our wood products business
segment, we expect our 2010 operating rate to continue at extremely low levels and we will continue
to take curtailment and other actions to minimize the financial impact as a result of the economic
conditions.
Markets began to improve in the fourth quarter of 2009, continuing into the first six months of
2010 in most of our paper and pulp grades, as well as in the lumber market with better than
expected lumber pricing. As reported by third-party sources, we have announced price increases in
the following paper and pulp grades:
| North American newsprint price increases of $35 per metric ton in each of September and October 2009 and $25 per metric ton in each of March, April, May and June 2010; | ||
| Coated mechanical price increases of $30 per short ton on all new orders and shipments and for all shipments on or after May 1, 2010, an additional $60 per short ton effective June 1, 2010 and an additional $60 per short ton effective for all North American shipments on or after September 15, 2010; | ||
| Specialty (supercalendered grades) price increases of $30 per short ton on all new orders and shipments and for all shipments on or after May 1, 2010, an additional $60 per short ton effective June 1, 2010 and an additional $60 per short ton effective for all North American shipments on or after September 15, 2010; and | ||
| Pulp price increases of $30 to $50 per metric ton effective March 1, 2010, an additional $50 per metric ton effective April 1, 2010, an additional $20 to $50 per metric ton, depending on the grade, effective May 1, 2010 and an additional $20 per metric ton on softwood and hardwood grades and $30 per metric ton on fluff pulp effective June 1, 2010. |
We continue to divest non-core assets, subject to the approval of the Courts or the Monitor, as
applicable, as a source of additional liquidity. For the duration of the Creditor Protection
Proceedings, any divestiture not subject to certain de minimis asset sale thresholds under the
Creditor Protection Proceedings must be approved by the applicable Court or the Monitor, as
applicable. No assurances can be provided that such approvals will be obtained or as to the timing
of any such approvals. Proceeds generated as a result of any divestiture: (i) may be deposited in
trust with the Monitor, and require
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Court approval to release the proceeds or (ii) may have to be used to repay amounts outstanding
pursuant to the terms of our debtor in possession financing arrangements or pre-petition secured
indebtedness.
We continue to take a restricted approach to capital spending until market conditions improve and
translate into positive cash flow. In light of the Creditor Protection Proceedings, any significant
capital spending is subject to the approval of the applicable Court, and there can be no assurance
that such approval would be granted.
As we look toward emergence from the Creditor Protection Proceedings, our strategy focuses on the
following key elements: (i) improving our business mix, (ii) continuing to reduce our cost
structure and (iii) targeting export markets with better newsprint demand.
We plan to improve our business mix by focusing on paper grades that have or are expected to offer
better returns. We believe we have cost effective opportunities to grow or convert newsprint
capacity into coated and specialty papers and lightweight containerboard, which generally offer
better demand characteristics and margins compared to other, more commodity-like paper grades. In
this regard, in the second quarter of 2010, we converted our Coosa Pines newsprint mill to produce
lightweight containerboard and other packaging grades. We continue to evaluate additional
opportunities to convert some of our production capacity from less attractive grades to more
attractive ones.
As we continue to focus on reducing SG&A expenses, we are also exploring a variety of capital
investment opportunities, similar to the recent conversion of newsprint capacity at Coosa Pines. We
believe such projects will further improve our cost position and improve the cost competitiveness
of our assets.
Finally, in our newsprint segment, we intend to focus more on the export market, which currently
exhibits better demand characteristics. Although North American newsprint demand has declined and
is expected to continue to decline, world newsprint demand is expected to increase over the next
several years, particularly in Asia, Latin America and the Middle East. We will continue to focus
on targeting the growth of these markets.
Business and Financial Review
Overview
Through our subsidiaries, we manufacture newsprint, coated and specialty papers, market pulp and
wood products. We operate pulp and paper manufacturing facilities in Canada, the United States and
South Korea, as well as wood products manufacturing facilities and hydroelectric facilities in
Canada.
As discussed further below, the newsprint industry experienced a slight decrease in North American
demand in the first six months of 2010 compared to the same period of 2009; however, the newsprint
market was much improved compared to the same period of 2009 when North American demand declined
30.5% compared to the same period of 2008. North American demand for coated mechanical papers
improved in the first six months of 2010 compared to the same period of 2009. The specialty papers
industry experienced an increase in North American demand in the first six months of 2010 compared
to the same period of 2009, particularly for supercalendered high gloss papers. Global shipments of
market pulp increased slightly in the first six months of 2010 compared to the same period of 2009,
despite a significant decline in China, which was offset by increases in North America and Western
Europe. Our wood products segment benefited from a significant increase in pricing in the first six
months of 2010 compared to the same period of 2009.
Due to the Creditor Protection Proceedings and the significant uncertainties associated with such
proceedings, our past operating results and financial condition are not likely to be indicative of
our future operating results and financial condition.
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Consolidated Results of Operations
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
(Unaudited, in millions, except | June 30, | June 30, | ||||||||||||||||||||||
per share amounts) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Sales |
$ | 1,182 | $ | 1,036 | $ | 146 | $ | 2,282 | $ | 2,149 | $ | 133 | ||||||||||||
Operating loss |
(73 | ) | (285 | ) | 212 | (183 | ) | (299 | ) | 116 | ||||||||||||||
Net loss attributable to AbitibiBowater Inc. |
(297 | ) | (510 | ) | 213 | (797 | ) | (728 | ) | (69 | ) | |||||||||||||
Net loss per share attributable to
AbitibiBowater Inc. basic and diluted |
(5.15 | ) | (8.84 | ) | 3.69 | (13.83 | ) | (12.62 | ) | (1.21 | ) | |||||||||||||
Significant items that favorably (unfavorably) impacted operating loss: |
||||||||||||||||||||||||
Product pricing |
$ | 67 | $ | (64 | ) | |||||||||||||||||||
Shipments |
79 | 197 | ||||||||||||||||||||||
Change in sales |
146 | 133 | ||||||||||||||||||||||
Change in cost of sales and depreciation, amortization and cost of timber harvested |
(144 | ) | (237 | ) | ||||||||||||||||||||
Change in distribution costs |
(22 | ) | (44 | ) | ||||||||||||||||||||
Change in selling and administrative expenses |
(8 | ) | 42 | |||||||||||||||||||||
Change in closure costs, impairment and other related charges |
237 | 262 | ||||||||||||||||||||||
Change in net gain on disposition of assets |
3 | (40 | ) | |||||||||||||||||||||
$ | 212 | $ | 116 | |||||||||||||||||||||
Three months ended June 30, 2010 versus June 30, 2009
Sales
Sales increased $146 million, or 14.1%, from $1,036 million in the second quarter of 2009 to $1,182
million in the second quarter of 2010. The increase was primarily due to significantly higher
transaction prices for market pulp and wood products, as well as higher shipments for coated
papers, specialty papers and wood products, partially offset by lower transaction prices for
specialty papers. The impact of each of these items is discussed further below under Segment
Results of Operations.
Operating loss
Operating loss improved $212 million from $285 million in the second quarter of 2009 to $73 million
in the second quarter of 2010. The above table analyzes the major items that improved operating
loss. A brief explanation of these major items follows.
Manufacturing costs increased $144 million in the second quarter of 2010 compared to the second
quarter of 2009, primarily due to a significantly unfavorable currency exchange ($68 million,
primarily due to the Canadian dollar), benefits from the alternative fuel mixture tax credits of
$85 million in the second quarter of 2009 (the fuel tax credit program expired at the end of 2009),
higher volumes ($59 million) and higher costs for maintenance ($19 million). These higher costs
were partially offset by lower costs for wood and fiber ($7 million), energy ($10 million),
chemicals ($7 million), labor and benefits ($7 million), depreciation ($23 million) and other
favorable cost variances. For additional information regarding the alternative fuel mixture tax
credits, reference is made to Note 17, Alternative Fuel Mixture Tax Credits, to our Unaudited
Interim Consolidated Financial Statements.
Distribution costs increased $22 million in the second quarter of 2010 compared to the second
quarter of 2009, due to significantly higher shipment volumes and higher distribution costs per
ton.
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Selling and administrative costs increased $8 million in the second quarter of 2010 compared to the
second quarter of 2009, primarily due to a $16 million reversal in the second quarter of 2009 of
previously recorded Canadian capital tax liabilities as a result of legislation enacted which
eliminated this tax, partially offset by our continued cost reduction initiatives, as well as costs
incurred in the second quarter of 2009 related to our unsuccessful refinancing efforts.
In the second quarter of 2010 and 2009, we recorded $3 million and $240 million, respectively, in
closure costs, impairment and other related charges, which were not associated with our work
towards a comprehensive restructuring plan. In the second quarter of 2010 and 2009, we realized $4
million and $1 million, respectively, in net gains on disposition of assets, which were not
associated with our work towards a comprehensive restructuring plan. For additional information,
see Segment Results of Operations Corporate and Other below.
Net loss attributable to AbitibiBowater Inc.
Net loss attributable to AbitibiBowater Inc. in the second quarter of 2010 was $297 million, or
$5.15 per common share, an improvement of $213 million, or $3.69 per common share, compared to $510
million, or $8.84 per common share, in the same period of 2009. The improvement was primarily due
to the improvement in operating loss, as discussed above, as well as an increase in other income,
net, partially offset by an increase in reorganization items, net, both as discussed below.
Six months ended June 30, 2010 versus June 30, 2009
Sales
Sales increased $133 million, or 6.2%, from $2,149 million in the first six months of 2009 to
$2,282 million in the same period of 2010. The increase was primarily due to higher shipments for
all of our product lines as markets began improving in recent quarters, as well as significantly
higher transaction prices for market pulp and wood products, partially offset by significantly
lower transaction prices in our paper grades (newsprint, coated papers and specialty papers) as
pricing in these grades experienced a precipitous decline in 2009, which continued into the first
quarter of 2010. The impact of each of these items is discussed further below under Segment
Results of Operations.
Operating loss
Operating loss improved $116 million from $299 million in the first six months of 2009 to $183
million in the same period of 2010. The above table analyzes the major items that improved
operating loss. A brief explanation of these major items follows.
Manufacturing costs increased $237 million in the first six months of 2010 compared to the same
period of 2009, primarily due to a significantly unfavorable currency exchange ($189 million,
primarily due to the Canadian dollar), benefits from the alternative fuel mixture tax credits of
$118 million in the first six months of 2009 (the fuel tax credit program expired at the end of
2009), higher volumes ($118 million) and higher costs for maintenance ($28 million). These higher
costs were partially offset by lower costs for wood and fiber ($20 million), energy ($32 million),
fuel ($7 million), chemicals ($20 million), labor and benefits ($25 million), depreciation ($57
million) and other favorable cost variances. For additional information regarding the alternative
fuel mixture tax credits, reference is made to Note 17, Alternative Fuel Mixture Tax Credits, to
our Unaudited Interim Consolidated Financial Statements.
Distribution costs increased $44 million in the first six months of 2010 compared to the same
period of 2009, due to significantly higher shipment volumes and higher distribution costs per ton.
Selling and administrative costs decreased $42 million in the first six months of 2010 compared to
the same period of 2009, primarily due to our continued cost reduction initiatives and the reversal
of a $17 million bonus accrual in the first quarter of 2010, as well as costs incurred in the first
six months of 2009 related to our unsuccessful financing efforts. These decreases were partially
offset by a $16 million reversal in the second quarter of 2009 of previously recorded Canadian
capital tax liabilities as a result of legislation enacted which eliminated this tax.
In the first six months of 2010 and 2009, we recorded $8 million and $270 million, respectively, in
closure costs, impairment and other related charges, which were not associated with our work
towards a comprehensive restructuring plan. In the first six months of 2010 and 2009, we realized
$13 million and $53 million, respectively, in net gains on disposition of assets, which were not
associated with our work towards a comprehensive restructuring plan. For additional information,
see Segment Results of Operations Corporate and Other below.
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Net loss attributable to AbitibiBowater Inc.
Net loss attributable to AbitibiBowater Inc. in the first six months of 2010 was $797 million, or
$13.83 per common share, an increase of $69 million, or $1.21 per common share, compared to $728
million, or $12.62 per common share, in the same period of 2009. The increase was primarily due to
the increase in reorganization items, net, as discussed below, partially offset by the improvement
in operating loss, as discussed above, as well as an increase in other income, net, as discussed
below.
Non-operating items three and six months ended June 30, 2010 versus June 30, 2009
Interest expense
Interest expense decreased $14 million from $143 million in the second quarter of 2009 to $129
million in the second quarter of 2010. Interest expense decreased $17 million from $335 million in
the first six months of 2009 to $318 million in the same period of 2010. Pursuant to the Creditor
Protection Proceedings, we ceased recording interest expense on certain pre-petition debt
obligations. In accordance with FASB ASC 852, we have continued to record interest expense on our
pre-petition debt obligations only to the extent that: (i) interest will be paid during the
Creditor Protection Proceedings or (ii) it is probable that interest will be an allowed priority,
secured or unsecured claim. As such, we have continued to accrue interest only on the Debtors
pre-petition secured debt obligations and the CCAA filers pre-petition unsecured debt obligations
(based on the expectation that accrued interest on the CCAA filers pre-petition debt obligations
will be a permitted claim under the CCAA Proceedings). Interest expense in the first six months of
2010 included a first quarter cumulative adjustment of $43 million to adjust the accrued interest
on the unsecured U.S. dollar denominated debt obligations of the CCAA filers, as further discussed
in Note 12, Liquidity and Debt Overview, to our Unaudited Interim Consolidated Financial
Statements.
Other income (expense), net
Other income, net in the second quarter and first six months of 2010 was $41 million and $38
million, respectively, and was primarily comprised of foreign currency exchange gains, primarily
due to a stronger U.S. dollar versus the Canadian dollar. Other expense, net in the second quarter
of 2009 was $30 million, primarily comprised of fees of $12 million for a waiver and amendment to
the Abitibi and Donohue accounts receivable securitization program, as well as foreign currency
exchange losses of $10 million, primarily due to a stronger Canadian dollar versus the U.S. dollar.
Other expense, net in the first six months of 2009 was $31 million, primarily comprised of fees of
$23 million for waivers and amendments to the Abitibi and Donohue accounts receivable
securitization program, as well as a loss on the sale of ownership interests in accounts receivable
of $7 million.
Reorganization items, net
We have incurred significant costs associated with our Creditor Protection Proceedings and will
continue to incur significant costs, which could adversely affect our results of operations and
financial condition. In the second quarter and first six months of 2010, pursuant to FASB ASC 852,
we recorded reorganization items, net of $148 million and $353 million, respectively, for certain
expenses, provisions for losses, gains on disposition of assets and other charges directly
associated with or resulting from the reorganization and restructuring of the business that have
been realized or incurred in the Creditor Protection Proceedings. Reorganization items, net for the
second quarter and first six months of 2009 were $89 million and $99 million, respectively. For
additional information, see Note 3, Creditor Protection Proceedings Related Disclosures -
Reorganization items, net, to our Unaudited Interim Consolidated Financial Statements.
Income taxes
Our effective tax rate in the second quarter of 2010 and 2009 was 3% and 6%, respectively, and in
the first six months of 2010 and 2009 was 1% and 5%, respectively, resulting from the recording of
a tax benefit on a pre-tax loss in all periods presented.
During the second quarter of 2010 and 2009, income tax benefits of approximately $139 million and
$75 million, respectively, and during the first six months of 2010 and 2009, income tax benefits of
approximately $211 million and $146 million, respectively, generated on the majority of our losses
in all periods presented were entirely offset by tax charges to increase our valuation allowance
related to these tax benefits. Additionally, any income tax benefit recorded on any future losses
will probably be offset by additional increases to the valuation allowance (tax charge). During the
three and six months ended June 30, 2009, we recorded a tax recovery of approximately $41 million
and $49 million, respectively,
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ABITIBIBOWATER INC.
related to the asset impairment charges recorded associated with our assets held for sale for our
investment in Manicouagan Power Company (MPCo). For additional information, see Note 4, Closure
Costs, Impairment and Other Related Charges, to our Unaudited Interim Consolidated Financial
Statements.
Our effective tax rate varies frequently and substantially from the weighted-average effect of both
domestic and foreign statutory tax rates, primarily as a result of the tax treatment on foreign
currency gains and losses. We have a number of foreign subsidiaries whose unconsolidated foreign
currency gains and losses are taxed in the local country. Upon consolidation, such gains and losses
are eliminated, but we are still liable for the local country taxes. Due to the variability and
volatility of foreign exchange rates, we are unable to estimate the impact of future changes in
exchange rates on our effective tax rate. Additionally, we will probably not be recording income
tax benefits on the majority of any 2010 losses, which will have an adverse impact on our overall
effective income tax rate in future periods. To the extent that our operations on which a full
valuation allowance has been recorded become profitable, the impact of this valuation allowance
would lessen or reverse and positively impact our effective tax rate in those periods.
Segment Results of Operations
We manage our business based on the products that we manufacture and sell to external customers.
Our reportable segments, which correspond to our primary product lines, are newsprint, coated
papers, specialty papers, market pulp and wood products. None of the income or loss items following
Operating loss in our Consolidated Statements of Operations are allocated to our segments, since
those items are reviewed separately by management. For the same reason, closure costs, impairment
and other related charges, employee termination costs, net gain on disposition of assets and other
discretionary charges or credits are not allocated to our segments. Also excluded from our segment
results are corporate and other items, which include timber sales and general and administrative
expenses, including costs associated with our unsuccessful refinancing efforts. These items are
analyzed separately from our segment results. Share-based compensation expense and depreciation
expense are, however, allocated to our segments. For additional information regarding our segments,
see Note 16, Segment Information, to our Unaudited Interim Consolidated Financial Statements.
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Newsprint
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
Average price (per metric ton) |
$ | 597 | $ | 581 | $ | 16 | $ | 570 | $ | 630 | $ | (60 | ) | |||||||||||
Average cost (per metric ton) |
$ | 661 | $ | 688 | $ | (27 | ) | $ | 668 | $ | 672 | $ | (4 | ) | ||||||||||
Shipments (thousands of metric tons) |
763 | 759 | 4 | 1,558 | 1,484 | 74 | ||||||||||||||||||
Downtime (thousands of metric tons) |
306 | 367 | (61 | ) | 520 | 742 | (222 | ) | ||||||||||||||||
Inventory at end of period
(thousands of metric tons) |
90 | 187 | (97 | ) | 90 | 187 | (97 | ) | ||||||||||||||||
(Unaudited, in millions) |
||||||||||||||||||||||||
Segment sales |
$ | 456 | $ | 441 | $ | 15 | $ | 889 | $ | 935 | $ | (46 | ) | |||||||||||
Segment operating loss |
(49 | ) | (81 | ) | 32 | (151 | ) | (62 | ) | (89 | ) | |||||||||||||
Significant items that favorably (unfavorably) impacted segment operating loss: |
||||||||||||||||||||||||
Product pricing |
$ | 11 | $ | (88 | ) | |||||||||||||||||||
Shipments |
4 | 42 | ||||||||||||||||||||||
Change in sales |
15 | (46 | ) | |||||||||||||||||||||
Change in cost of sales and depreciation, amortization and cost of timber harvested |
35 | (21 | ) | |||||||||||||||||||||
Change in distribution costs |
(11 | ) | (22 | ) | ||||||||||||||||||||
Change in selling and administrative expenses |
(7 | ) | | |||||||||||||||||||||
$ | 32 | $ | (89 | ) | ||||||||||||||||||||
Three months ended June 30, 2010 versus June 30, 2009
Segment sales increased $15 million, or 3.4%, from $441 million in the second quarter of 2009 to
$456 million in the second quarter of 2010 due to slightly higher transaction prices and shipment
volumes. Shipments in the second quarter of 2010 increased 4,000 metric tons, or 0.5%, compared to
the second quarter of 2009.
In the second quarter of 2010, downtime at our facilities was primarily market related. Inventory
levels as of June 30, 2010 were 90,000 metric tons compared to 187,000 metric tons as of June 30,
2009.
Segment operating loss decreased $32 million to $49 million in the second quarter of 2010 compared
to $81 million in the second quarter of 2009, primarily due to lower manufacturing costs, as well
as increased sales as discussed above, partially offset by higher distribution costs. The above
table analyzes the major items that decreased operating loss. A brief explanation of these major
items follows.
Segment manufacturing costs decreased $35 million in the second quarter of 2010 compared to the
second quarter of 2009, primarily due to lower volumes ($10 million), lower costs for wood and
fiber ($7 million), energy ($12 million), labor and benefits ($16 million), depreciation ($12
million) and other favorable cost variances, partially offset by an unfavorable currency exchange
($28 million, primarily due to the Canadian dollar), as well as benefits from the alternative fuel
mixture tax credits of $4 million in the second quarter of 2009.
Segment distribution costs increased in the second quarter of 2010 compared to the second quarter
of 2009 due to higher distribution costs per ton and higher shipment volumes.
Six months ended June 30, 2010 versus June 30, 2009
Segment sales decreased $46 million, or 4.9%, from $935 million in the first six months of 2009 to
$889 million in the same period of 2010, primarily due to lower transaction prices, partially
offset by higher shipment volumes. Shipments in the first six months of 2010 increased 74,000
metric tons, or 5.0%, compared to the same period of 2009. Our average
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transaction price in the first six months of 2010 was lower than the same period of 2009 as a
result of the precipitous decline in newsprint prices that began in 2009 due to market conditions,
which continued into the first quarter of 2010.
In the first six months of 2010, downtime at our facilities was primarily market related.
Segment operating loss increased $89 million to $151 million in the first six months of 2010
compared to $62 million in the first six months of 2009, due to decreased sales as discussed above,
as well as higher manufacturing and distribution costs. The above table analyzes the major items
that increased operating loss. A brief explanation of these major items follows.
Segment manufacturing costs increased $21 million in the first six months of 2010 compared to the
same period of 2009, primarily due to an unfavorable currency exchange ($73 million, primarily due
to the Canadian dollar) and higher volumes ($30 million), as well as benefits from the alternative
fuel mixture tax credits of $6 million in the first six months of 2009, partially offset by lower
costs for wood and fiber ($11 million), energy ($25 million), fuel ($4 million), labor and benefits
($26 million), depreciation ($12 million) and other favorable cost variances.
Segment distribution costs increased in the first six months of 2010 compared to the same period of
2009 due to higher distribution costs per ton and higher shipment volumes.
Newsprint Third-Party Data: In the first six months of 2010, North American newsprint demand
declined 1.6% compared to the same period of 2009 and for the month of June 2010, declined 2.4%
compared to the month of June 2009. In the first six months of 2010, North American net exports of
newsprint were 61.5% higher than the same period of 2009. Inventories for North American mills as
of June 30, 2010 were 229,000 metric tons, which is 50.6% lower than as of June 30, 2009. The days
of supply at the U.S. daily newspapers was 48 days as of June 30, 2010 compared to 53 days as of
June 30, 2009. The North American operating rate for newsprint was 91% in the first six months of
2010 compared to 67% in the same period of 2009.
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Coated Papers
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
Average price (per short ton) |
$ | 685 | $ | 729 | $ | (44 | ) | $ | 677 | $ | 759 | $ | (82 | ) | ||||||||||
Average cost (per short ton) |
$ | 655 | $ | 524 | $ | 131 | $ | 672 | $ | 579 | $ | 93 | ||||||||||||
Shipments (thousands of short tons) |
166 | 129 | 37 | 325 | 274 | 51 | ||||||||||||||||||
Downtime (thousands of short tons) |
7 | 49 | (42 | ) | 10 | 85 | (75 | ) | ||||||||||||||||
Inventory at end of period
(thousands of short tons) |
20 | 30 | (10 | ) | 20 | 30 | (10 | ) | ||||||||||||||||
(Unaudited, in millions) |
||||||||||||||||||||||||
Segment sales |
$ | 114 | $ | 94 | $ | 20 | $ | 220 | $ | 208 | $ | 12 | ||||||||||||
Segment operating income |
5 | 27 | (22 | ) | 1 | 50 | (49 | ) | ||||||||||||||||
Significant items that (unfavorably)
favorably impacted
segment operating income: |
||||||||||||||||||||||||
Product pricing |
$ | (6 | ) | $ | (23 | ) | ||||||||||||||||||
Shipments |
26 | 35 | ||||||||||||||||||||||
Change in sales |
20 | 12 | ||||||||||||||||||||||
Change in cost of sales
and depreciation,
amortization and cost of timber harvested |
(40 | ) | (57 | ) | ||||||||||||||||||||
Change in distribution costs |
(2 | ) | (4 | ) | ||||||||||||||||||||
$ | (22 | ) | $ | (49 | ) | |||||||||||||||||||
Three months ended June 30, 2010 versus June 30, 2009
Segment sales increased $20 million, or 21.3%, from $94 million in the second quarter of 2009 to
$114 million in the second quarter of 2010 due to significantly higher shipments, partially offset
by lower transaction prices.
Segment operating income decreased $22 million to $5 million in the second quarter of 2010 compared
to $27 million in the second quarter of 2009, primarily due to higher manufacturing costs,
partially offset by increased sales as discussed above. The above table analyzes the major items
that decreased operating income. A brief explanation of these major items follows.
Segment manufacturing costs increased $40 million in the second quarter of 2010 compared to the
second quarter of 2009, primarily due to benefits from the alternative fuel mixture tax credits of
$17 million in the second quarter of 2009, higher volumes ($8 million) and higher costs for wood
and fiber ($3 million), chemicals ($3 million), labor and benefits ($4 million), maintenance ($3
million) and other unfavorable cost variances. The average cost per ton increased $131 in the
second quarter of 2010 compared to the second quarter of 2009, primarily due to benefits from the
alternative fuel mixture tax credits in 2009.
Six months ended June 30, 2010 versus June 30, 2009
Segment sales increased $12 million, or 5.8%, from $208 million in the first six months of 2009 to
$220 million in the same period of 2010 due to higher shipments, partially offset by lower
transaction prices.
Segment operating income decreased $49 million to $1 million in the first six months of 2010
compared to $50 million in the same period of 2009, primarily due to higher manufacturing costs,
partially offset by increased sales as discussed above. The above table analyzes the major items
that decreased operating income. A brief explanation of these major items follows.
Segment manufacturing costs increased $57 million in the first six months of 2010 compared to the
same period of 2009, primarily due to benefits from the alternative fuel mixture tax credits of $27
million in the first six months of 2009, higher
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volumes ($13 million) and higher costs for wood and
fiber ($7 million), chemicals ($4 million), labor and benefits ($3 million) and maintenance ($5
million), partially offset by other cost variances that were favorable. The average cost per ton
increased $93 in the first six months of 2010 compared to the same period of 2009, primarily due to
benefits from the alternative fuel mixture tax credits in 2009.
Coated Papers Third-Party Data: North American demand for coated mechanical papers increased 7.7%
in the first six months of 2010 compared to the same period of 2009. The North American operating
rate for coated mechanical papers was 86% in the first six months of 2010 compared to 69% in the
same period of 2009. North American coated mechanical mill inventories were at 14 days of supply as
of June 30, 2010 compared to 33 days of supply as of June 30, 2009.
Specialty Papers
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
Average price (per short ton) |
$ | 675 | $ | 746 | $ | (71 | ) | $ | 680 | $ | 786 | $ | (106 | ) | ||||||||||
Average cost (per short ton) |
$ | 727 | $ | 697 | $ | 30 | $ | 716 | $ | 715 | $ | 1 | ||||||||||||
Shipments (thousands of short tons) |
488 | 440 | 48 | 924 | 856 | 68 | ||||||||||||||||||
Downtime (thousands of short tons) |
76 | 141 | (65 | ) | 80 | 250 | (170 | ) | ||||||||||||||||
Inventory at end of period
(thousands of short tons) |
79 | 126 | (47 | ) | 79 | 126 | (47 | ) | ||||||||||||||||
(Unaudited, in millions) |
||||||||||||||||||||||||
Segment sales |
$ | 329 | $ | 328 | $ | 1 | $ | 628 | $ | 673 | $ | (45 | ) | |||||||||||
Segment operating (loss) income |
(25 | ) | 21 | (46 | ) | (33 | ) | 61 | (94 | ) | ||||||||||||||
Significant items that (unfavorably)
favorably impacted segment operating (loss)
income: |
||||||||||||||||||||||||
Product pricing |
$ | (31 | ) | $ | (91 | ) | ||||||||||||||||||
Shipments |
32 | 46 | ||||||||||||||||||||||
Change in sales |
1 | (45 | ) | |||||||||||||||||||||
Change in cost of sales and
depreciation, amortization and cost of timber
harvested |
(43 | ) | (50 | ) | ||||||||||||||||||||
Change in distribution costs |
(3 | ) | (2 | ) | ||||||||||||||||||||
Change in selling and
administrative expenses |
(1 | ) | 3 | |||||||||||||||||||||
$ | (46 | ) | $ | (94 | ) | |||||||||||||||||||
Three months ended June 30, 2010 versus June 30, 2009
Segment sales increased $1 million, or 0.3%, from $328 million in the second quarter of 2009 to
$329 million in the second quarter of 2010, primarily due to higher shipment volumes, offset by
lower average transaction prices.
Inventory levels as of June 30, 2010 were 79,000 short tons compared to 126,000 short tons as of
June 30, 2009.
Segment operating income decreased $46 million to an operating loss of $25 million in the second
quarter of 2010 compared to $21 million of operating income in the second quarter of 2009,
primarily due to higher manufacturing costs. The above table analyzes the major items that
decreased operating income. A brief explanation of these major items follows.
Segment manufacturing costs increased $43 million in the second quarter of 2010 compared to the
second quarter of 2009, primarily due to an unfavorable Canadian dollar currency exchange ($25
million), benefits from the alternative fuel mixture tax credits of $8 million in the second
quarter of 2009, higher volumes ($11 million) and higher costs for wood and fiber ($4 million) and
energy ($4 million). These higher costs were partially offset by lower costs for depreciation ($5
million) and chemicals ($4 million).
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Six months ended June 30, 2010 versus June 30, 2009
Segment sales decreased $45 million, or 6.7%, from $673 million in the first six months of 2009 to
$628 million in the same period of 2010, primarily due to lower average transaction prices,
partially offset by higher shipment volumes.
Segment operating income decreased $94 million to an operating loss of $33 million in the first six
months of 2010 compared to $61 million of operating income in the same period of 2009, primarily
due to decreased sales as discussed above, as well as higher manufacturing costs. The above table
analyzes the major items that decreased operating income. A brief explanation of these major items
follows.
Segment manufacturing costs increased $50 million in the first six months of 2010 compared to the
same period of 2009, primarily due to an unfavorable Canadian dollar currency exchange ($59
million), as well as benefits from the alternative fuel mixture tax credits of $13 million in the
first six months of 2009, higher volumes ($7 million) and higher costs for wood and fiber ($2
million) and maintenance ($3 million). These higher costs were partially offset by lower costs for
depreciation ($7 million), labor and benefits ($7 million), chemicals ($11 million), fuel ($2
million) and other favorable cost variances.
Specialty Papers Third-Party Data: In the first six months of 2010 compared to the same period in
2009, North American demand for supercalendered high gloss papers was up 10.0%, for lightweight or
directory grades was down 4.8%, for standard uncoated mechanical papers was up 3.2% and in total
for all specialty papers was up 4.9%. The North American operating rate for all specialty papers
was 86% in the first six months of 2010 compared to 72% in the same period of 2009. North American
uncoated mechanical mill inventories were at 15 days of supply as of June 30, 2010 compared to 22
days of supply as of June 30, 2009.
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Market Pulp
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
Average price (per metric ton) |
$ | 767 | $ | 498 | $ | 269 | $ | 720 | $ | 515 | $ | 205 | ||||||||||||
Average cost (per metric ton) |
$ | 659 | $ | 335 | $ | 324 | $ | 639 | $ | 450 | $ | 189 | ||||||||||||
Shipments (thousands of metric tons) |
225 | 234 | (9 | ) | 466 | 425 | 41 | |||||||||||||||||
Downtime (thousands of metric tons) |
31 | 25 | 6 | 45 | 104 | (59 | ) | |||||||||||||||||
Inventory at end of period
(thousands of metric tons) |
47 | 90 | (43 | ) | 47 | 90 | (43 | ) | ||||||||||||||||
(Unaudited, in millions) |
||||||||||||||||||||||||
Segment sales |
$ | 172 | $ | 117 | $ | 55 | $ | 335 | $ | 219 | $ | 116 | ||||||||||||
Segment operating income |
24 | 38 | (14 | ) | 37 | 27 | 10 | |||||||||||||||||
Significant items that favorably
(unfavorably) impacted segment operating income: |
||||||||||||||||||||||||
Product pricing |
$ | 60 | $ | 87 | ||||||||||||||||||||
Shipments |
(5 | ) | 29 | |||||||||||||||||||||
Change in sales |
55 | 116 | ||||||||||||||||||||||
Change in cost of sales and
depreciation, amortization and cost of timber
harvested |
(68 | ) | (99 | ) | ||||||||||||||||||||
Change in distribution costs |
(1 | ) | (6 | ) | ||||||||||||||||||||
Change in selling and
administrative expenses |
| (1 | ) | |||||||||||||||||||||
$ | (14 | ) | $ | 10 | ||||||||||||||||||||
Three months ended June 30, 2010 versus June 30, 2009
Segment sales increased $55 million, or 47.0%, from $117 million in the second quarter of 2009 to
$172 million in the second quarter of 2010, primarily due to significantly higher transaction
prices, partially offset by slightly lower shipment volumes.
Inventory levels as of June 30, 2010 were 47,000 metric tons compared to 90,000 metric tons as of
June 30, 2009.
Segment operating income decreased $14 million to $24 million in the second quarter of 2010
compared to $38 million in the second quarter of 2009, primarily due to higher manufacturing costs,
partially offset by increased sales as discussed above. The above table analyzes the major items
that decreased operating income. A brief explanation of these major items follows.
Segment manufacturing costs increased $68 million in the second quarter of 2010 compared to the
second quarter of 2009, primarily due to benefits from the alternative fuel mixture tax credits of
$56 million in the second quarter of 2009, an unfavorable Canadian dollar currency exchange ($8
million) and higher costs for maintenance ($15 million). These higher costs were partially offset
by lower volumes ($6 million) and lower costs for chemicals ($5 million). The average cost per ton
increased $324 in the second quarter of 2010 compared to the second quarter of 2009, primarily due
to benefits from the alternative fuel mixture tax credits in 2009.
Six months ended June 30, 2010 versus June 30, 2009
Segment sales increased $116 million, or 53.0%, from $219 million in the first six months of 2009
to $335 million in the same period of 2010, primarily due to significantly higher transaction
prices and higher shipment volumes.
Segment operating income increased $10 million to $37 million in the first six months of 2010
compared to $27 million in the same period of 2009, primarily due to increased sales as discussed
above, partially offset by higher manufacturing costs.
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The above table analyzes the major items
that increased operating income. A brief explanation of these major items follows.
Segment manufacturing costs increased $99 million in the first six months of 2010 compared to the
same period of 2009, primarily due to benefits from the alternative fuel mixture tax credits of $72
million in the first six months of 2009, an unfavorable Canadian dollar currency exchange ($20
million), higher volumes ($10 million) and higher costs for maintenance ($18 million). These higher
costs were partially offset by lower costs for wood and fiber ($2 million), energy ($4 million),
chemicals ($11 million) and other favorable cost variances. The average cost per ton increased $189
in the first six months of 2010 compared to the same period of 2009, primarily due to benefits from
the alternative fuel mixture tax credits in 2009.
Market Pulp Third-Party Data: World shipments for market pulp increased 1.0% in the first six
months of 2010 compared to the same period of 2009. Shipments were up 11.4% in Western Europe (the
worlds largest pulp market), up 12.1% in North America, down 28.9% in China, up 18.4% in Latin
America and down 2.7% in Africa and Asia (excluding China and Japan). World market pulp producers
shipped at 93% of capacity in the first six months of 2010 compared to 89% in the same period of
2009. World market pulp producer inventories were at 25 days of supply as of June 30, 2010 compared
to 29 days of supply as of June 30, 2009.
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Wood Products
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||||
Average price (per thousand board feet) |
$ | 329 | $ | 205 | $ | 124 | $ | 315 | $ | 207 | $ | 108 | |||||||||||||
Average cost (per thousand board feet) |
$ | 319 | $ | 278 | $ | 41 | $ | 307 | $ | 297 | $ | 10 | |||||||||||||
Shipments (millions of board feet) |
334 | 270 | 64 | 665 | 524 | 141 | |||||||||||||||||||
Downtime (millions of board feet) |
331 | 502 | (171 | ) | 645 | 973 | (328 | ) | |||||||||||||||||
Inventory at end of period (millions
of board feet) |
115 | 79 | 36 | 115 | 79 | 36 | |||||||||||||||||||
(Unaudited, in millions) |
|||||||||||||||||||||||||
Segment sales |
$ | 111 | $ | 56 | $ | 55 | $ | 210 | $ | 109 | $ | 101 | |||||||||||||
Segment operating income (loss) |
3 | (20 | ) | 23 | 5 | (47 | ) | 52 | |||||||||||||||||
Significant items that favorably
(unfavorably) impacted segment
operating income (loss): |
|||||||||||||||||||||||||
Product pricing |
$ | 33 | $ | 56 | |||||||||||||||||||||
Shipments |
22 | 45 | |||||||||||||||||||||||
Change in sales |
55 | 101 | |||||||||||||||||||||||
Change in cost of sales and
depreciation, amortization and cost
of timber
harvested |
(28 | ) | (41 | ) | |||||||||||||||||||||
Change in distribution costs |
(4 | ) | (9 | ) | |||||||||||||||||||||
Change in selling and administrative expenses |
| 1 | |||||||||||||||||||||||
$ | 23 | $ | 52 | ||||||||||||||||||||||
Three months ended June 30, 2010 versus June 30, 2009
Segment sales increased $55 million, or 98.2%, from $56 million in the second quarter of 2009 to
$111 million in the second quarter of 2010, due to significantly higher transaction prices and
shipment volumes.
In the second quarter of 2010, downtime at our facilities was market related.
Segment operating loss improved $23 million to operating income of $3 million in the second quarter
of 2010 compared to a $20 million operating loss in the second quarter of 2009. The above table
analyzes the major items that improved operating loss. A brief explanation of these major items
follows.
The significant increase in sales in the second quarter of 2010 was partially offset by higher
manufacturing and distribution costs in the second quarter of 2010 compared to the same period of
2009. The increase in manufacturing costs was primarily due to an unfavorable Canadian dollar
currency exchange ($8 million) and higher volumes ($55 million), partially offset by lower costs
for labor and benefits ($3 million), wood ($7 million), energy ($1 million), depreciation ($2
million) and other favorable cost variances.
Six months ended June 30, 2010 versus June 30, 2009
Segment sales increased $101 million, or 92.7%, from $109 million in the first six months of 2009
to $210 million in the same period of 2010, primarily due to significantly higher transaction
prices and shipment volumes.
In the first six months of 2010, downtime at our facilities was market related.
Segment operating loss improved $52 million to operating income of $5 million in the first six
months of 2010 compared to a $47 million operating loss in the same period of 2009. The above table
analyzes the major items that improved operating loss. A brief explanation of these major items
follows.
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The significant increase in sales in the first six months of 2010 was partially offset by higher
manufacturing and distribution costs in the first six months of 2010 compared to the same period of
2009. The increase in manufacturing costs was primarily due to an unfavorable Canadian dollar
currency exchange ($38 million) and higher volumes ($57 million), partially offset by lower costs
for labor and benefits ($6 million), wood ($16 million), energy ($3 million) and other favorable
cost variances.
Wood Products Third-Party Data: Privately-owned housing starts in the U.S. decreased 5.8% to a
seasonally-adjusted annual rate of 549,000 units in June 2010, compared to 583,000 units in June
2009.
Corporate and Other
The following table is included in order to facilitate the reconciliation of our segment sales and
segment operating income (loss) to our total sales and operating loss in our Consolidated
Statements of Operations.
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
(Unaudited, in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Sales |
$ | | $ | | $ | | $ | | $ | 5 | $ | (5 | ) | |||||||||||
Operating loss |
(31 | ) | (270 | ) | 239 | (42 | ) | (328 | ) | 286 | ||||||||||||||
Sales |
$ | | $ | | $ | | $ | | $ | 5 | $ | (5 | ) | |||||||||||
Cost of sales and depreciation,
amortization and cost of timber
harvested |
(24 | ) | (24 | ) | | (20 | ) | (51 | ) | 31 | ||||||||||||||
Distribution costs |
(1 | ) | | (1 | ) | (1 | ) | | (1 | ) | ||||||||||||||
Selling and administrative expenses |
(7 | ) | (7 | ) | | (26 | ) | (65 | ) | 39 | ||||||||||||||
Closure costs, impairment and
other related charges |
(3 | ) | (240 | ) | 237 | (8 | ) | (270 | ) | 262 | ||||||||||||||
Net gain on disposition of assets |
4 | 1 | 3 | 13 | 53 | (40 | ) | |||||||||||||||||
Operating loss |
$ | (31 | ) | $ | (270 | ) | $ | 239 | $ | (42 | ) | $ | (328 | ) | $ | 286 | ||||||||
Cost of sales and depreciation, amortization and cost of timber harvested
Manufacturing costs included in corporate and other primarily included the cost of timberlands and
for the second quarter and first six months of 2009 also included $12 million in both periods for
the writedown of inventory associated with our Alabama River, Alabama and Dalhousie, New Brunswick
mills.
Selling and administrative expenses
The decrease in selling and administrative expenses in the first six months of 2010 compared to the
same period of 2009 was primarily due to our continued cost reduction initiatives and the reversal
of a $17 million bonus accrual in the first quarter of 2010, as well as costs of $10 million
incurred in the first six months of 2009 related to our unsuccessful refinancing efforts. These
decreases were partially offset by a $16 million reversal in the second quarter of 2009 of
previously recorded Canadian capital tax liabilities as a result of legislation enacted which
eliminated this tax.
Closure costs, impairment and other related charges
In the second quarter and first six months of 2010, we recorded $3 million and $8 million,
respectively, of closure costs, impairment and other related charges, which were not associated
with our work towards a comprehensive restructuring plan, primarily for impairment of long-lived
assets related to our previously permanently closed Covington, Tennessee facility, as well as costs
for a lawsuit related to a closed mill and other miscellaneous adjustments to severance liabilities
and asset retirement obligations. In the second quarter and first six months of 2009, we recorded
$240 million and $270
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million, respectively, of closure costs, impairment and other related
charges, which were not associated with our work towards a comprehensive restructuring plan,
primarily for long-lived asset impairment charges related to: (i) assets held for sale for our
interest in MPCo and (ii) certain of our newsprint mill assets.
For additional information, see Note 4, Closure Costs, Impairment and Other Related Charges, to
our Unaudited Interim Consolidated Financial Statements.
Net gain on disposition of assets
During the second quarter and first six months of 2010, we recorded a net gain on disposition of
assets of $4 million and $13 million, respectively, primarily related to the sale, with Court or
Monitor approval, as applicable, of various assets, which were not associated with our work towards
a comprehensive restructuring plan. During the second quarter and first six months of 2009, we
recorded a net gain on disposition of assets of $1 million and $53 million, respectively, primarily
related to the sale of timberlands and other assets.
For additional information, see Note 5, Assets Held for Sale, Liabilities Associated with Assets
Held for Sale and Net Gain on Disposition of Assets, to our Unaudited Interim Consolidated
Financial Statements.
Liquidity and Capital Resources
Overview
In addition to cash-on-hand and cash provided by operations, our external sources of liquidity are
comprised of the following (which are defined and discussed below): (i) the Bowater DIP Agreement,
(ii) the ULC DIP Facility and (iii) the Abitibi and Donohue accounts receivable securitization
program.
The commencement of the Creditor Protection Proceedings constituted an event of default under
substantially all of our pre-petition debt obligations, and those debt obligations became
automatically and immediately due and payable by their terms, although any action to enforce such
payment obligations is stayed as a result of the commencement of the Creditor Protection
Proceedings.
Non-core asset sales have been and may continue to be a source of additional liquidity. We expect
to continue to review non-core assets and seek to divest those that no longer fit within our
long-term strategic business plan. It is unclear how current global credit conditions may impact
our ability to sell any of these assets. In addition, for the duration of the Creditor Protection
Proceedings, any divestiture not subject to certain de minimis asset sale thresholds under the
Creditor Protection Proceedings must be approved by the applicable Court or the Monitor, as
applicable. No assurances can be provided that such approvals will be obtained or as to the timing
of any such approvals. Proceeds generated as a result of any divestiture: (i) may be deposited in
trust with the Monitor and require Court approval to release the proceeds or (ii) may have to be used to repay amounts outstanding pursuant to the terms of our debtor in
possession financing arrangements or pre-petition secured indebtedness. During the six months ended
June 30, 2010, we sold, with Court or Monitor approval, as applicable, various mills and other
assets for proceeds of $62 million, including our Mackenzie paper mill and sawmills and four
previously permanently closed paper mills that were bundled and sold together.
During the first six months of 2010, we incurred significant costs associated with our Creditor
Protection Proceedings and will continue to incur similar significant costs, which have and will
continue to adversely affect our liquidity, results of operations and financial condition. In the
three and six months ended June 30, 2010, we paid $28
million and $47 million, respectively, relating to reorganization items. For additional
information, see Note 3, Creditor Protection Proceedings Related Disclosures -
Reorganization items, net, to our Unaudited Interim Consolidated Financial Statements. Partially
offsetting these increased payments were lower cash payments for interest. We are currently making
cash payments for interest on the Bowater DIP Agreement (as defined below), the Abitibi and Donohue
accounts receivable securitization program, the Bowater pre-petition secured bank credit
facilities, Abitibis pre-petition senior secured term loan and Bowaters floating rate industrial
revenue bonds due 2029. As a result, cash payments for interest were $40 million and $64 million in
the three and six months ended June 30, 2010, respectively, compared to $49 million and $164
million, respectively, in the same periods of 2009. Additionally, in
the third quarter of 2009, we announced
that we would continue to work on SG&A austerity measures with a target reduction of approximately
$100 million on an annualized basis, as compared to 2008. The SG&A reduction efforts included,
among other items, a 25% corporate headcount reduction and the suspension of 2009 incentive
compensation plans, including equity awards.
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Abitibi and Donohue liquidity
Abitibis and Donohues primary sources of liquidity and capital resources are cash-on-hand, cash
provided by operations, the ULC DIP Facility (defined below) and an accounts receivable
securitization program. As of June 30, 2010, Abitibi and Donohue had cash and cash equivalents of
approximately $205 million and $19 million, respectively. As of June 30, 2010, Abitibi had $94
million of availability under its ULC DIP Facility, of which $47 million was included in Cash and
cash equivalents and $47 million was included as restricted cash in Other assets in our
Consolidated Balance Sheets. Abitibi and Donohue also had the ability to receive additional
proceeds of up to $33 million under their accounts receivable securitization program.
ULC DIP Facility
On December 9, 2009, Abitibi entered into a Cdn$230 million ($218 million) Super Priority
Debtor-In-Possession Credit Facility (the ULC DIP Facility) with 3239432 Nova Scotia Company, a
wholly-owned subsidiary of ACCC (the (ULC), which is an intercompany facility that was created
upon the sale of MPCo and was funded by a portion of the sale proceeds. On the same date, Cdn$130
million ($123 million) of the ULC DIP Facility was drawn pursuant to the Canadian Courts approval.
Subsequent draws of up to Cdn$50 million ($47 million, based on the exchange rate in effect on June
30, 2010) in the aggregate will be advanced upon not less than five business days notice, subject
to meeting certain draw down requirements and certain conditions determined by the Canadian Court,
and the remaining Cdn$50 million ($47 million, based on the exchange rate in effect on June 30,
2010) will become available only upon further order of the Canadian Court.
The obligations of Abitibi under its ULC DIP Facility are guaranteed by certain of Abitibis
subsidiaries and secured by superpriority liens on all present and after-acquired property of
Abitibi and the subsidiary guarantors, but subordinate to:
(i) an administrative charge in the aggregate amount not exceeding Cdn$6 million ($6 million) of
professional fees and disbursements in connection with the CCAA Proceedings; (ii) a directors
charge not exceeding Cdn$22.5 million ($21 million) and (iii) the Cdn$140 million ($130 million)
charge granted by the Canadian Court in connection with Abitibis former debtor in possession
financing arrangement (but only to the extent of the subrogation rights of certain secured
creditors of Abitibi, estimated to be in an aggregate amount of approximately Cdn$40 million ($38
million)). These U.S. dollar amounts reflect the exchange rate to U.S. dollars in effect on
December 9, 2009.
Loans made under the ULC DIP Facility bear no interest, except in the case of an overdue payment.
All loans advanced under the ULC DIP Facility are to be repaid in full and the ULC DIP Facility
will terminate on the earliest of: (i) December 31, 2010, (ii) the effective date of a plan or plans of reorganization or a plan of
compromise or arrangement confirmed by order of the Courts or (iii) the acceleration of the ULC DIP
Facility or the occurrence of an event of default. Loans must be prepaid to the extent the ULC does
not have sufficient funds to make a payment under the guarantee agreement with Alcoa Canada Ltd.
(Alcoa), which was our partner in MPCo and continues to own a 40% interest in MPCo. As of June
30, 2010, the ULC maintained an approximate Cdn$52 million ($49 million) reserve for this purpose,
which was included as restricted cash in Other assets in our Consolidated Balance Sheets.
The ULC DIP Facility contains usual and customary events of default and covenants for debtor in
possession financings of this type, including, among other things, the obligation for Abitibi to
provide to Alcoa and the trustee for the 13.75% senior secured notes due 2011 a weekly cash flow
forecast and certain monthly financial information.
In accordance with its stated purpose, the proceeds of the loans under the ULC DIP Facility can be
used by Abitibi and certain of its subsidiaries for working capital and other general corporate
purposes, costs of the Creditor Protection Proceedings and fees and expenses associated with the
ULC DIP Facility.
Abitibi and Donohue accounts receivable securitization program
Abitibi and ACSC, a subsidiary of Donohue, (the Participants) participate in an accounts
receivable securitization program (the Program) whereby the Participants share among themselves
the proceeds received under the Program. On June 16, 2009, with the approval of the Courts, the
former accounts receivable securitization program was amended and restated in its entirety and, as
further amended on June 11, 2010, with the approval of the Courts, now provides for a maximum
outstanding limit of $180 million (the Purchase Limit) for the purchase of ownership interests in
the Participants eligible trade accounts receivable by the third-party financial institutions
party to the agreement (the Banks).
The Participants sell most of their receivables to Abitibi-Consolidated U.S. Funding Corp.
(Funding), which is a bankruptcy-remote, special-purpose, indirect consolidated subsidiary of
Donohue. On a revolving basis, Funding transfers
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to the agent for the Banks (the Agent) undivided percentage ownership interests (Receivable
Interests) in the pool of receivables that Funding acquired from the Participants. The outstanding
balance of Receivable Interests increases as new Receivable Interests are transferred to the Agent
and decreases as collections reduce previously transferred Receivable Interests. The amount of
Receivable Interests that can be transferred to the Agent depends on the amount and nature of the
receivables available to be transferred and cannot result in the outstanding balance of Receivable
Interests exceeding the Purchase Limit. The pool of receivables is collateral for the Receivable
Interests transferred to the Agent. The Banks can pledge or sell their Receivable Interests, but
cannot pledge or sell any receivable within the pool of receivables.
As discussed in Note 1, Organization and Basis of Presentation Recently adopted accounting
guidance, to our Unaudited Interim Consolidated Financial Statements, effective January 1, 2010,
we prospectively applied new accounting guidance relating to the transfers of financial assets. As
a result, transfers of the Receivable Interests to the Agent no longer qualify as sales. Such
transfers and the proceeds received from the Banks are now accounted for as secured borrowings in
accordance with FASB ASC 860, Transfers and Servicing. As of June 30, 2010, the
interest rate charged by the Banks to Funding on the secured borrowings was 6.25% per annum and the
commitment fee for the unused portion of the Purchase Limit was 0.75% per annum. These amounts,
which totaled approximately $3 million and $7 million for the three and six months ended June 30,
2010, respectively, are included in Interest expense in our Consolidated Statements of
Operations. For the three and six months ended June 30, 2009, the transfer of Receivable Interests
were recorded as a sale to the Banks, and the proceeds received from the Banks were net of an
amount based on the Banks funding cost plus a margin, which resulted in a loss on the sale of
ownership interests in accounts receivable of $4 million and $7 million, respectively, which was
included in Other expense, net in our Consolidated Statements of Operations.
As of June 30, 2010, the balance of the pool of receivables, net of an allowance for doubtful
accounts was included in Accounts receivable, net in our Consolidated Balance Sheets. The
outstanding balance of the proceeds received from the Banks was approximately $120 million and was
recorded as Secured borrowings in our Consolidated Balance Sheets. In addition, based on the
level and eligibility of the pool of receivables as of June 30, 2010, we could have borrowed an
additional $33 million.
Abitibi and ACSC act as servicing agents and administer the collection of the receivables under the
Program. The fees received from the Banks for servicing their Receivable Interests approximate the
value of services rendered.
In connection with the Program, Abitibi and ACSC maintain lockboxes into which certain collection
receipts are deposited. These lockbox accounts are in Abitibis or Fundings name, but are
controlled by the Banks. The cash balances in these lockbox accounts, which totaled approximately
$17 million and $18 million as of June 30, 2010 and December 31, 2009, respectively, were included
as restricted cash in Other current assets in our Consolidated Balance Sheets.
The Program contains usual and customary events of termination and covenants for accounts
receivable securitization programs of this type, including, among other things, the requirement for
Funding to provide to the Agent financial statements and other reports and to provide to the Agent
copies of any reports the Participants or their subsidiaries file with the SEC or any other U.S.,
Canadian or other national or provincial securities exchange.
Unless terminated earlier due to the occurrence of certain events of termination, or the
substantial consummation of a plan or plans of reorganization or a plan of compromise or
arrangement confirmed by order of the Courts, the Program, as further amended on June 11, 2010,
will terminate on June 10, 2011.
As consideration for entering into the amendment to the Program on June 11, 2010, we incurred fees
of approximately $4 million during the second quarter of 2010. These fees were recorded in
Reorganization items, net in our Consolidated Statements of Operations for the three and six
months ended June 30, 2010 (see Note 3, Creditor Protection Proceedings Related Disclosures
- Reorganization items, net, to our Unaudited Interim Consolidated Financial Statements).
Bowater liquidity
Bowaters primary sources of liquidity and capital resources are cash-on-hand, cash provided by
operations and the Bowater DIP Agreement (defined below). As of June 30, 2010, Bowater had cash and
cash equivalents of approximately $484 million.
Bowater DIP Agreement
In the Creditor Protection Proceedings, we sought and obtained final approval by the Courts to
enter into a debtor in
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possession financing facility for the benefit of AbitibiBowater Inc., Bowater and certain of
Bowaters subsidiaries. On April 21, 2009, we entered into a Senior Secured Superpriority Debtor In
Possession Credit Agreement (the Bowater DIP Agreement) among AbitibiBowater Inc., Bowater and
BCFPI, as borrowers, Fairfax Financial Holdings Limited (Fairfax), as administrative agent,
collateral agent and an initial lender, and Avenue Investments, L.P., as an initial lender. On May
8, 2009, Law Debenture Trust Company of New York replaced Fairfax as the administrative agent and
collateral agent under the Bowater DIP Agreement.
The Bowater DIP Agreement provides for term loans in an aggregate principal amount of $206 million
(the Initial Advance), consisting of a $166 million term loan facility to AbitibiBowater Inc. and
Bowater (the U.S. Borrowers) and a $40 million term loan facility to BCFPI. Following the payment
of fees payable to the lenders in connection with the Bowater DIP Agreement, the U.S. Borrowers and
BCFPI received aggregate loan proceeds of $196 million. The Bowater DIP Agreement also permits the
U.S. Borrowers to request, subject to the approval of the requisite lenders under the Bowater DIP
Agreement, an incremental term loan facility (the Incremental Facility) and an asset
based-revolving credit facility (the ABL Facility), provided that the aggregate principal amount
of the Initial Advance and the Incremental Facility may not exceed $360 million and the aggregate
principal amount of the Initial Advance, Incremental Facility and the ABL Facility may not exceed
$600 million. In connection with an amendment we entered into on July 15, 2010, which was approved
by the U.S. Court on July 14, 2010 and the Canadian Court on July 21, 2010, we prepaid $166 million
of the outstanding principal amount of the Initial Advance on July 21, 2010, which reduced the
outstanding principal balance to $40 million.
As amended, the outstanding principal amount of loans under the Bowater DIP Agreement,
plus accrued and unpaid interest, will be due and payable on the earliest of: (i) December 31,
2010, (ii) the effective date of a plan or plans of reorganization or (iii) the acceleration of
loans and termination of the commitments (the Maturity Date).
Borrowings under the Bowater DIP Agreement bear interest, at our election, at either a rate tied to
the U.S. Federal Funds Rate (the base rate) or the London interbank offered rate for deposits in
U.S. dollars (LIBOR), in each case plus a specified margin. The interest margin for base rate
loans was 6.50% through April 20, 2010 and effective April 21, 2010 was 7.00%, with a base rate
floor of 4.50%. The interest margin for base rate loans was reduced to 5.00% effective July 15,
2010 in connection with the July 15, 2010 amendment. The interest margin for LIBOR loans was 7.50%
through April 20, 2010 and effective April 21, 2010 was 8.00%, with a LIBOR floor of 3.50%. The
interest margin for LIBOR loans was reduced to 6.00% with a LIBOR floor of 2.00% effective July 15,
2010 in connection with the July 15, 2010 amendment. We incurred an extension fee and an amendment
fee in connection with the May 5, 2010 extension and the July 15, 2010 amendment, respectively, in
each case in an amount of 0.5% of the outstanding principal balance of $206 million, or
approximately $1 million for each. We will be required to pay a duration fee of 0.5% of the
outstanding principal balance (estimated to be $40 million), or approximately $200,000, if the
aggregate principal amount of the advances under the Bowater DIP Agreement have not been repaid in
full on or prior to October 15, 2010. In addition, on the earlier of the final Maturity Date or the
date that the Bowater DIP Agreement is repaid in full, an exit fee of 2.00% of the aggregate amount
of the advances will be payable to the lenders.
The obligations of the U.S. Borrowers under the Bowater DIP Agreement are guaranteed by
AbitibiBowater Inc., Bowater, Bowater Newsprint South LLC
(Newsprint South), a direct,
wholly-owned subsidiary of AbitibiBowater Inc., and each of the U.S. subsidiaries of Bowater and
Newsprint South that are debtors in the Chapter 11 Cases (collectively, the U.S. Guarantors) and
secured by all or substantially all of the assets of each of the U.S. Borrowers and the U.S.
Guarantors. The obligations of BCFPI under the Bowater DIP Agreement are guaranteed by the U.S.
Borrowers and the U.S. Guarantors and each of the Bowater Canadian subsidiaries (other than BCFPI)
that are debtors in the CCAA Proceedings (collectively, the Canadian Guarantors) and secured by
all or substantially all of the assets of the U.S. Borrowers, the U.S. Guarantors, BCFPI and the
Canadian Guarantors. On June 24, 2009, Bowater Canadian Finance Corporation was released from its
obligations under the Bowater DIP Agreement.
The Bowater DIP Agreement contains customary covenants for debtor in possession financings of this
type, including, among other things: (i) requirements to deliver financial statements, other
reports and notices; (ii) restrictions on the incurrence and repayment of indebtedness; (iii)
restrictions on the incurrence of liens; (iv) restrictions on making certain payments; (v)
restrictions on investments; (vi) restrictions on asset dispositions and (vii) restrictions on
modifications to material indebtedness. Additionally, the Bowater DIP Agreement contains certain
financial covenants, including, among other things: (i) maintenance of a minimum consolidated
EBITDA; (ii) compliance with a minimum fixed charge coverage ratio and (iii) a maximum amount of
capital expenditures.
In accordance with its stated purpose, the proceeds of the Bowater DIP Agreement can be used by us
for, among other things, working capital, general corporate purposes, to pay adequate protection to
holders of secured debt under Bowaters and BCFPIs pre-petition secured bank credit facilities, to
pay the costs associated with administration of the Creditor
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Protection Proceedings and to pay transaction costs, fees and expenses in connection with the
Bowater DIP Agreement.
As
consideration for the May 5, 2010 extension of the Bowater DIP Agreement to July 21, 2010, during the second
quarter of 2010, we incurred fees of approximately $1 million. These fees were recorded in
Reorganization items, net in our Consolidated Statements of Operations for the three and six
months ended June 30, 2010 (see Note 3, Creditor Protection Proceedings Related Disclosures
- Reorganization items, net, to our Unaudited Interim Consolidated Financial Statements).
Flow of funds
Summary of cash flows
A summary of cash flows for the six months ended June 30, 2010 and 2009 was as follows:
(Unaudited, in millions) | 2010 | 2009 | ||||||
Net cash (used in) provided by operating activities |
$ | (3 | ) | $ | 63 | |||
Net cash (used in) provided by investing activities |
(19 | ) | 60 | |||||
Net cash (used in) provided by financing activities |
(26 | ) | 164 | |||||
Net (decrease) increase in cash and cash equivalents |
$ | (48 | ) | $ | 287 | |||
Cash (used in) provided by operating activities
The $66 million decrease in cash provided by operating activities in the first six months of 2010
compared to the same period of 2009 was primarily related to an increase in accounts receivable, as
well as the alternative fuel mixture tax credits in 2009, partially offset by an increase in
accounts payable and accrued liabilities and a reduction in our pension contributions in 2010.
Cash (used in) provided by investing activities
The $79 million decrease in cash provided by investing activities in the first six months of 2010
compared to the same period of 2009 was primarily due to an increase in restricted cash in 2010 and
a decrease in deposit requirements for letters of credit in 2009, partially offset by reductions in
cash invested in fixed assets.
Capital expenditures for both periods include compliance, maintenance and projects to increase
returns on production assets. We continue to take a restricted approach to capital spending until
market conditions improve and translate into positive cash flow. In light of the Creditor
Protection Proceedings, any significant capital spending is subject to the approval of the
applicable Court, and there can be no assurance that such approval would be granted.
Cash (used in) provided by financing activities
The $190 million decrease in cash provided by financing activities in the first six months of 2010
compared to the same period of 2009 was primarily due to the debtor in possession financing
arrangements in the first six months of 2009.
Employees
As of June 30, 2010, we employed approximately 11,200 people, of whom approximately 8,100 were
represented by bargaining units. Our unionized employees are represented predominantly by the
Communications, Energy and Paperworkers Union (the CEP) in Canada and predominantly by the United
Steelworkers International in the U.S.
A significant number of our collective bargaining agreements with respect to our paper operations
in Eastern Canada expired at the end of April 2009. At the beginning of March 2010, we reached an
agreement in principle with the CEP and the Confederation des syndicats nationaux (the CSN),
subject to the resolution of ongoing discussions with the governments of Quebec and Ontario
regarding funding relief in respect of the material solvency deficits in pension plans sponsored by
Abitibi and Bowater. Ratification of these agreements has been completed in all locations.
On April 29, 2010, a coalition of U.S. labor unions led by the United Steelworkers International
ratified a new master bargaining agreement covering mills in Calhoun, Catawba, Coosa Pines, Alabama
and Augusta. The individual mill collective bargaining agreements adopted in connection therewith
will extend through April 27, 2014 in the case of
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Calhoun and Catawba and April 27, 2015 in the case of Coosa Pines and Augusta. The master
bargaining agreement will become effective upon consummation of the Plans of Reorganization.
In May and June 2010, we reached agreements with sawmills and woodland workers in the Mauricie
region of the province of Quebec represented by the CSN and most of the unions representing trades
and office employees in our four Ontario paper mills. We are still negotiating the renewal of
collective bargaining agreements with other unions also representing trades and office employees in
those four Ontario mills.
In June 2010, we reached an agreement for the renewal of the collective bargaining agreements of
four sawmills affiliated with the CEP. The CEP union agreement has since been serving as a model
agreement for three other sawmills located in Saint-Felicien, Normandin and Comtois, Quebec.
Except for the agreement related to the sawmill in Comtois, these agreements have been ratified.
We started discussions at the end of June 2010 with the CEP for the reopening and/or renewal of
eight woodland unions representing 800 employees working in the Lac
Saint-Jean, Quebec region.
The employees at the Mokpo facility have complied with all conditions necessary to strike, but the
possibility of a strike or lockout of those employees is not clear; we served the six-month notice
necessary to terminate the collective bargaining agreement related to the Mokpo facility on June
19, 2009.
We may not be able to reach satisfactory agreements with all of our employees, which could result
in strikes or work stoppages by affected employees. Renewals could also result in higher wage or
benefit costs. We could therefore experience a disruption of our operations or higher ongoing labor
costs, which could materially and adversely affect our business, financial condition or results of
operations and our emergence from the Creditor Protection Proceedings.
We also announced in the third quarter of 2009 that we would continue to work on SG&A austerity
measures with a target reduction of approximately $100 million on an annualized basis, as compared
to 2008. The SG&A reduction efforts included, among other items, a 25% corporate headcount
reduction. We expect to have some further declines in employment and compensation as we implement
the Plans of Reorganization and respond to the need to further reduce capacity in some product
lines.
Recent Accounting Guidance
There is
no new accounting guidance issued which we have not yet adopted that
is expected to materially impact
our results of operations or financial condition.
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ITEM 4. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures: |
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a15(e) and 15d15(e) of the Securities Exchange Act of 1934,
as of June 30, 2010. Based on that evaluation, the President and Chief Executive Officer and the
Executive Vice President and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of such date in recording, processing, summarizing, and timely
reporting information required to be disclosed in our reports to the Securities and Exchange
Commission.
(b) | Changes in Internal Control over Financial Reporting: |
In connection with the evaluation of internal control over financial reporting, there were no
changes during the period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Creditor Protection Proceedings
As previously discussed, on April 16, 2009 and December 21, 2009, AbitibiBowater Inc. and certain
of its U.S. and Canadian subsidiaries filed voluntary petitions for relief under Chapter 11. In
addition, on April 17, 2009, certain of AbitibiBowater Inc.s Canadian subsidiaries sought creditor
protection under the CCAA. On April 17, 2009, Abitibi and ACCC each filed Chapter 15 Cases to
obtain recognition and enforcement in the United States of certain relief granted in the CCAA
Proceedings and also on that date, AbitibiBowater Inc. and certain of its subsidiaries in the
Chapter 11 Cases obtained orders under the 18.6 Proceedings. Our wholly-owned subsidiary that
operates our Mokpo operations and almost all of our less than wholly-owned subsidiaries continue to
operate outside of the Creditor Protection Proceedings.
On July 9, 2010, the Canadian Court approved the mailing of solicitation materials related to the
CCAA Plan and on August 2, 2010, the U.S. Court approved the solicitation materials related to our
Chapter 11 Plan. These approvals enable us to begin soliciting votes from creditors to accept or
reject our Plans of Reorganization in accordance with the applicable Court orders.
For additional information, see Part I, Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations Creditor Protection Proceedings, of this Quarterly Report
on Form 10-Q, which is incorporated herein by reference.
Legal Items
We are involved in various legal proceedings relating to contracts, commercial disputes, taxes,
environmental issues, employment and workers compensation claims and other matters. We
periodically review the status of these proceedings with both inside and outside counsel. Although
the final outcome of any of these matters is subject to many variables and cannot be predicted with
any degree of certainty, we establish reserves for a matter (including legal costs expected to be
incurred) when we believe an adverse outcome is probable and the amount can be reasonably
estimated. We believe that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material adverse effect on our
results of operations in any given quarter or year.
Subject to certain exceptions, all litigation against the Debtors that arose or may arise out of
pre-petition conduct or acts is subject to the automatic stay provisions of Chapter 11 and the CCAA
and the orders of the Courts rendered thereunder. In addition, any recovery by the plaintiffs in
those matters will be treated consistent with all other general unsecured claims in the Creditor
Protection Proceedings.
Information on our legal proceedings is presented under Part I, Item 3, Legal Proceedings, in our
Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 31,
2010, as subsequently amended, and updated under Part II, Item 1, Legal Proceedings, in our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed with the SEC on May 20,
2010 and as further updated above. Except as so amended and updated, there have been no
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ABITIBIBOWATER INC.
material developments to the legal proceedings described in our Annual Report on Form 10-K for the
year ended December 31, 2009, filed with the SEC on March 31, 2010, as amended.
ITEM 6. EXHIBITS
Exhibit No. | Description | |
10.1*
|
Amendment No. 6, dated as of April 12, 2010, to the Senior Secured SuperPriority Debtor In Possession Credit Agreement, dated as of April 21, 2009, by and among AbitibiBowater Inc., Bowater Incorporated, Bowater Canadian Forest Products Inc., as debtors, debtors in possession and borrowers and Law Debenture Trust Company of New York, as administrative agent and collateral agent, and the lenders (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed April 16, 2010, SEC File No. 001-33776). | |
10.2*
|
Backstop Commitment Agreement, dated May 24, 2010, between AbitibiBowater Inc. and Fairfax Financial Holdings Limited, Avenue Capital Management II, L.P., Paulson Credit Opportunities Master Ltd., Barclays Bank plc, Steelhead Navigator Master, L.P., J.P. Morgan Securities Inc. and Whitebox Advisors, LLC (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed May 28, 2010, SEC File No. 001-33776). | |
10.3*
|
Amendment No. 1 to Second Amended and Restated Receivables Purchase Agreement, Amendment No. 1 to the Second Amended and Restated Purchase and Contribution Agreement and Amendment No. 3 to Guaranty and Undertaking Agreement, among Abitibi-Consolidated U.S. Funding Corp., Abitibi-Consolidated Inc., Abitibi Consolidated Sales Corporation and certain other subsidiaries of the Company and Citibank, N.A., as agent for the banks party thereto, dated as of June 11, 2010 (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed June 17, 2010, SEC File No. 001-33776). | |
31.1**
|
Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2**
|
Certification of Executive Vice President and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1**
|
Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2**
|
Certification of Executive Vice President and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Previously filed and incorporated herein by reference. | |
** | Filed with this Quarterly Report on Form 10-Q. |
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ABITIBIBOWATER INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned thereunto duly authorized.
ABITIBIBOWATER INC. | ||||||
By | /s/ William G. Harvey | |||||
William G. Harvey | ||||||
Executive Vice President and Chief | ||||||
Financial Officer | ||||||
By | /s/ Joseph B. Johnson | |||||
Joseph B. Johnson | ||||||
Senior Vice President, Finance and Chief Accounting Officer | ||||||
Dated: August 16, 2010
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ABITIBIBOWATER INC.
INDEX TO EXHIBITS
Exhibit No. | Description | |
10.1*
|
Amendment No. 6, dated as of April 12, 2010, to the Senior Secured SuperPriority Debtor In Possession Credit Agreement, dated as of April 21, 2009, by and among AbitibiBowater Inc., Bowater Incorporated, Bowater Canadian Forest Products Inc., as debtors, debtors in possession and borrowers and Law Debenture Trust Company of New York, as administrative agent and collateral agent, and the lenders (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed April 16, 2010, SEC File No. 001-33776). | |
10.2*
|
Backstop Commitment Agreement, dated May 24, 2010, between AbitibiBowater Inc. and Fairfax Financial Holdings Limited, Avenue Capital Management II, L.P., Paulson Credit Opportunities Master Ltd., Barclays Bank plc, Steelhead Navigator Master, L.P., J.P. Morgan Securities Inc. and Whitebox Advisors, LLC (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed May 28, 2010, SEC File No. 001-33776). | |
10.3*
|
Amendment No. 1 to Second Amended and Restated Receivables Purchase Agreement, Amendment No. 1 to the Second Amended and Restated Purchase and Contribution Agreement and Amendment No. 3 to Guaranty and Undertaking Agreement, among Abitibi-Consolidated U.S. Funding Corp., Abitibi-Consolidated Inc., Abitibi Consolidated Sales Corporation and certain other subsidiaries of the Company and Citibank, N.A., as agent for the banks party thereto, dated as of June 11, 2010 (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed June 17, 2010, SEC File No. 001-33776). | |
31.1**
|
Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2**
|
Certification of Executive Vice President and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1**
|
Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2**
|
Certification of Executive Vice President and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Previously filed and incorporated herein by reference. | |
** | Filed with this Quarterly Report on Form 10-Q. |