Attached files

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EX-10.16 - 2011 ABITIBIBOWATER INC. SHORT-TERM INCENTIVE PLAN - Resolute Forest Products Inc.d264660dex1016.htm
EX-10.14 - 2010 EQUITY INCENTIVE PLAN FORM OF EMPLOYEE NONQUALIFIED STOCK OPTION AGREEMENT - Resolute Forest Products Inc.d264660dex1014.htm
EX-32.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Resolute Forest Products Inc.d264660dex321.htm
EX-31.2 - ERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SECTION 302 - Resolute Forest Products Inc.d264660dex312.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - Resolute Forest Products Inc.d264660dex211.htm
EX-24.1 - POWERS OF ATTORNEY FOR CERTAIN DIRECTORS OF THE REGISTRANT - Resolute Forest Products Inc.d264660dex241.htm
EX-32.2 - CERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SECTION 906 - Resolute Forest Products Inc.d264660dex322.htm
EX-31.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Resolute Forest Products Inc.d264660dex311.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Resolute Forest Products Inc.d264660dex121.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Resolute Forest Products Inc.d264660dex231.htm
EX-10.38 - ABIBOW CANADA INC. AND ABITIBIBOWATER INC. SECURITY PROTOCOL - Resolute Forest Products Inc.d264660dex1038.htm
EX-10.17 - SUMMARY OF 2012 ABITIBIBOWATER INC. SHORT-TERM INCENTIVE PLAN - Resolute Forest Products Inc.d264660dex1017.htm
EX-10.39 - RETIREMENT COMPENSATION TRUST AGREEMENT - Resolute Forest Products Inc.d264660dex1039.htm
EX-10.35 - OFFER LETTER BETWEEN PIERRE LABERGE AND ABITIBIBOWATER INC. - Resolute Forest Products Inc.d264660dex1035.htm
EX-10.36 - DIRECTOR COMPENSATION PROGRAM CHART - Resolute Forest Products Inc.d264660dex1036.htm
EX-10.13 - 2010 EQUITY INCENTIVE PLAN FORM OF EMPLOYEE RESTRICTED STOCK UNIT AGREEMENT - Resolute Forest Products Inc.d264660dex1013.htm
Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934
       FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

 

  ¨ 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)

111 Duke Street, Suite 5000; Montreal, Quebec; Canada H3C 2MI

 

 

(Address of principal executive offices) (Zip Code)

(514) 875-2515

 

 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $.001 per share       

New York Stock Exchange

Toronto Stock Exchange

        (Title of class)        

     (Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.  Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨    No þ

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 ¨

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 (§232.405 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  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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    þ

   Accelerated filer    ¨    Non-accelerated filer    ¨    Smaller reporting company    ¨
   (Do not check if a smaller reporting company)            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2011) was approximately $1.2 billion. For purposes of the foregoing calculation only, all directors, executive officers and 5% beneficial owners have been deemed affiliates.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed pursuant to Section 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 þ    No ¨

As of January 31, 2012, there were 97,092,382 shares of AbitibiBowater Inc. common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed within 120 days of December 31, 2011 are incorporated by reference in this Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

Part I

    

Item 1.

 

Business

     1   

Item 1A.

 

Risk Factors

     10   

Item 1B.

 

Unresolved Staff Comments

     19   

Item 2.

 

Properties

     19   

Item 3.

 

Legal Proceedings

     19   

Item 4.

 

Mine Safety Disclosures

     20   

Part II

    

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     21   

Item 6.

 

Selected Financial Data

     23   

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     56   

Item 8.

 

Financial Statements and Supplementary Data

     57   

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     120   

Item 9A.

 

Controls and Procedures

     120   

Item 9B.

 

Other Information

     120   

Part III

    

Item 10.

 

Directors, Executive Officers and Corporate Governance

     121   

Item 11.

 

Executive Compensation

     121   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     121   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     121   

Item 14.

 

Principal Accounting Fees and Services

     121   

Part IV

    

Item 15.

 

Exhibits, Financial Statement Schedules

     122   

Signatures

       128   

 

 

 

 


Table of Contents

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION AND USE OF

THIRD-PARTY DATA

Statements in this Annual Report on Form 10-K (“Form 10-K”) that are not reported financial results or other historical information 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”) are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. They include, for example, statements relating to our: efforts to continue to reduce costs and increase revenues and profitability, including our cost reduction initiatives regarding selling, general and administrative (“SG&A”) expenses; business outlook; assessment of market conditions; liquidity outlook, prospects, growth strategies and the industry in which we operate; and strategies for achieving our goals generally, including the strategies described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Strategy and Outlook,” of this Form 10-K. 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,” “project” and other terms with similar meaning indicating possible future events or potential impact on our business or AbitibiBowater’s 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 management’s 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 future financial condition, results of operations and performance to differ materially from those expressed or implied in this Form 10-K include those set forth in Part I, Item 1A, “Risk Factors.”

All forward-looking statements in this Form 10-K are expressly qualified by the cautionary statements contained or referred to in this section and in our other filings with the United States Securities and Exchange Commission (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, except as required by law.

Market and Industry Data

Information about industry or general economic conditions contained in this Form 10-K 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.

PART I

ITEM 1. BUSINESS

We are a global leader in the forest products industry, with a diverse range of products, including newsprint, commercial printing papers, market pulp and wood products, which are marketed in close to 90 countries. We own or operate 18 pulp and paper mills and 23 wood products facilities in the United States, Canada and South Korea.

AbitibiBowater Inc. is a Delaware corporation incorporated on January 25, 2007. On October 29, 2007, Abitibi-Consolidated Inc. (“Abitibi”) and Bowater Incorporated (“Bowater”) combined in a merger of equals (the “Combination”) with each becoming a subsidiary of AbitibiBowater Inc. On November 7, 2011, AbitibiBowater Inc. began doing business as Resolute Forest Products. We expect at the 2012 annual meeting of shareholders to seek shareholder approval to amend our certificate of incorporation to change our legal name to Resolute Forest Products Inc. Our common stock began trading under the symbol “ABH” on both the New York Stock Exchange (the “NYSE”) and the Toronto Stock Exchange (the “TSX”) on December 10, 2010.

 

1


Table of Contents

Executive Officers

The following is information about our executive officers as of February 29, 2012:

 

                     Name    Age      Position    Officer Since

Richard Garneau

     64       President and Chief Executive Officer    2011

Alain Boivin

     61       Senior Vice President, Pulp and Paper Operations    2011

Pierre Laberge

     55       Senior Vice President, Human Resources and Public Affairs    2011

John Lafave

     47       Senior Vice President, Pulp and Paper Sales and Marketing    2011

Yves Laflamme

     55       Senior Vice President, Wood Products, Global
Supply Chain, Procurement and Information Technology
   2007

Jo-Ann Longworth

     51       Senior Vice President and Chief Financial Officer    2011

Jacques P. Vachon

     52       Senior Vice President and Chief Legal Officer    2007

Mr. Garneau joined the Board of Directors in June 2010. Previously, Mr. Garneau served as President and Chief Executive Officer of Catalyst Paper Corporation from March 2007 to May 2010. Prior to his tenure at Catalyst, Mr. Garneau served as Executive Vice President, Operations at Domtar Corporation. He also held a variety of roles at Norampac Inc. (a division of Cascades Inc.), Copernic Inc., Future Electronics Inc., St. Laurent Paperboard Inc., Finlay Forest Industries Inc. and Donohue Inc. Mr. Garneau is a member of the Canadian Institute of Chartered Accountants.

Mr. Boivin previously served as Vice President of Mill Operations at Smurfit-Stone Container Corporation and as a Vice President at Smurfit-Stone since 2000. He was Senior Vice President, Containerboard Operations for St. Laurent Paperboard Inc. from 1999 to 2000 and was Mill Manager at a number of operations for Donohue Inc. and Avenor Inc.

Mr. Laberge previously served as Vice President, Human Resources for our Canadian operations. He joined a predecessor of the Company in 1988. As of March 1, 2012, Mr. Laberge will serve as Senior Vice President, Human Resources.

Mr. Lafave previously served as Vice President Sales, National Accounts – Paper Sales and as Vice President Sales, National Accounts – Newsprint and Vice President Sales, Commercial Printers of Abitibi from 2004 to 2009. He held progressive positions in sales with UPM-Kymmene and Repap Enterprises.

Mr. Laflamme previously served as Senior Vice President, Wood Products from October 2007 to January 2011, as Senior Vice President, Woodlands and Sawmills of Abitibi from 2006 to October 2007 and as Vice President, Sales, Marketing and Value-Added Wood Products Operations of Abitibi from 2004 to 2005.

Ms. Longworth previously served as Special Advisor to the President and Chief Executive Officer, focusing on special mandates, from July 4, 2011 to August 31, 2011. She served as Senior Vice President and Chief Accounting Officer with World Color Inc. (formerly Quebecor World Inc.) from 2008 to 2010, as Chief Financial Officer with Skyservice Inc. from 2007 to 2008, as Vice President and Controller with Novelis, Inc. from 2005 to 2006 and held a number of financial and operational roles over a 16-year career with Alcan Inc.

Mr. Vachon previously served as Senior Vice President, Corporate Affairs and Chief Legal Officer from October 2007 to January 2011 and as Senior Vice President, Corporate Affairs and Secretary of Abitibi from 1997 to October 2007. As of March 1, 2012, Mr. Vachon will serve as Senior Vice President, Corporate Affairs and Chief Legal Officer.

 

2


Table of Contents

Our Products

We manage our business based on the products we manufacture. Accordingly, our reportable segments correspond to our primary product lines: newsprint, coated papers, specialty papers, market pulp and wood products. Certain segment and geographical financial information, including sales by segment and by geographic area, operating income (loss) by segment, total assets by segment and long-lived assets by geographic area, can be found in Note 25, “Segment Information,” to our consolidated financial statements and related notes (“Consolidated Financial Statements”) appearing in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.

In accordance with our values, our environmental vision statement and forestry policies and in the interests of our customers and other stakeholders, we are committed to implementing and maintaining environmental management systems at our pulp, paper, woodlands and wood procurement operations to promote the conservation and sustainable use of forests and other natural resources. We and other member companies of the Forest Products Association of Canada, as well as a number of environmental organizations, are partners in the Canadian Boreal Forest Agreement. The group works to identify solutions to conservation issues that meet the goal of balancing equally the three pillars of sustainability linked to human activities: economic, social and environmental. We are also a member of the World Wildlife Fund’s Climate Savers program, in which businesses establish ambitious targets to voluntarily reduce greenhouse gas emissions and work aggressively toward achieving them.

Newsprint

We produce newsprint at 11 facilities in North America and one facility in South Korea. We are the largest producer of newsprint in the world by capacity, with total capacity of approximately 3.1 million metric tons, or approximately 9% of total worldwide capacity. We are also the largest North American producer of newsprint, with total North American capacity of approximately 2.9 million metric tons, or approximately 36% of total North American capacity.

We distribute newsprint by rail, truck and ship; it is sold to North American customers directly by our regional sales offices. Export markets are serviced primarily through our international offices located in or near the markets we supply or through international agents. In 2011, approximately 45% of our total newsprint shipments were to markets outside of North America.

We sell newsprint to various joint venture partners (partners with us in the ownership of certain mills we operate). During 2011, these joint venture partners purchased approximately 400,000 metric tons from our consolidated entities, which represented approximately 15% of the total newsprint metric tons we sold in 2011.

Coated papers

We produce coated mechanical papers at our Catawba, South Carolina facility. We are one of the largest producers of coated mechanical papers in North America, with total capacity of approximately 616,000 metric tons, or approximately 16% of total North American capacity. Our coated papers are used in magazines, catalogs, books, retail advertising, direct mail and coupons.

We sell coated papers to major commercial printers, publishers, catalogers and retailers. We distribute coated papers by truck, rail and ship. Most of our coated paper production is sold within North America and serviced directly by our regional sales offices. Export markets are serviced primarily through international agents.

Specialty papers

We produce specialty papers at eight facilities in North America. We are the largest producer of specialty papers in North America by capacity, including supercalendered, superbright, high bright, bulky book and directory papers, with total capacity of approximately 1.4 million metric tons, or approximately 31% of total North American capacity. Our specialty papers are used in books, retail advertising, direct mail, coupons and other commercial printing applications.

We sell specialty papers to major commercial printers, direct mailers, publishers, catalogers and retailers. We distribute specialty papers by truck, rail and ship. Most of our specialty paper production is sold within North America and serviced directly by our regional sales offices. Export markets are serviced primarily through international agents.

We sell specialty papers to various joint venture partners (partners with us in the ownership of certain mills we operate). During 2011, these joint venture partners purchased approximately 25,000 short tons from our consolidated entities, which represented approximately 1% of the total specialty papers short tons we sold in 2011.

Market pulp

Wood pulp is the most commonly used material to make paper. Pulp shipped and sold as pulp, as opposed to being processed into paper in one of our facilities, is referred to as market pulp. We produce market pulp at five facilities in North America, with total capacity of approximately 1.1 million metric tons, or approximately 6% of total North American capacity. Market pulp is used to make a range of consumer products including tissue, packaging, specialty paper products, diapers and other absorbent products.

 

3


Table of Contents

North American market pulp sales are made through our regional sales offices, while export sales are made through international sales agents local to their markets. We distribute market pulp by truck, rail and ship.

On December 15, 2011, we announced an offer to purchase all of the issued and outstanding shares of Fibrek Inc. (“Fibrek”), a producer and marketer of virgin and recycled kraft pulp with a combined annual production capacity of approximately 760,000 metric tons. For additional information, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K (“Item 7”) under “Business Strategy and Outlook – Strategic opportunities.”

Wood products

We operate 18 sawmills in Canada that produce construction-grade lumber sold in North America. In addition, our sawmills are a major source of wood chips for our pulp and paper mills. We also operate two engineered wood products facilities in Canada that produce I-joists and three remanufacturing wood products facilities in Canada that produce bed frame components, finger joints and furring strips.

Pulp and paper manufacturing facilities

The following table provides a listing of the pulp and paper manufacturing facilities and the number of paper machines we owned or operated as of December 31, 2011 (excluding facilities and paper machines which have been permanently closed as of December 31, 2011) and production information by product line (which represents all of our reportable segments except wood products). The table below represents these facilities’ actual 2011 production, which reflects the impact of any downtime taken in 2011, and 2012 capacity.

 

      Number     

2012

    

2011

     2011 Production by Product Line  
(In 000s of metric tons)    of Paper
Machines
     Total
Capacity
     Total
Production
     Newsprint      Coated
Papers
     Specialty
Papers
     Market Pulp  

Canada

                    

Alma, Quebec

     3             370             351             –             –             351             –       

Amos, Quebec

     1             193             194             194             –             –             –       

Baie-Comeau, Quebec

     3             443             432             432             –             –             –       

Clermont, Quebec (1)

     2             345             298             298             –             –             –       

Fort Frances, Ontario

     2             254             229             –             –             171             58       

Iroquois Falls, Ontario

     2             251             244             214             –             30             –       

Kenogami, Quebec

     1             143             137             –             –             137             –       

Laurentide, Quebec

     2             329             323             –             –             323             –       

Liverpool, Nova Scotia (2)

     2             230             224             216             –             8             –       

Thorold, Ontario

     1             199             196             196             –             –             –       

Thunder Bay, Ontario

     1             574             514             216             –             –             298       

United States

                    

Augusta, Georgia (3)

     2             401             390             390             –             –             –       

Calhoun, Tennessee (4)

     3             655             640             118             –             394             128       

Catawba, South Carolina

     3             865             845             –             610             22             213       

Coosa Pines, Alabama

     –             272             250             –             –             –             250       

Grenada, Mississippi

     1             247             240             240             –             –             –       

Usk, Washington (5)

     1             244             240             240             –             –             –       

South Korea

                    

Mokpo, South Korea

     1             200             219             219             –             –             –       
       31             6,215             5,966             2,973             610             1,436             947       

 

(1)

Donohue Malbaie Inc. (“DMI”), which owns one of Clermont’s paper machines, is owned 51% by us and 49% by NYT Capital Inc. We manage the facility and wholly own all of the other assets at the site. Manufacturing costs are transferred between us and DMI at agreed-upon transfer costs. DMI’s paper machine produced 205,000 metric tons of newsprint in 2011. The amounts in the above table represent the mill’s total capacity and production including DMI’s paper machine.

(2) 

Bowater Mersey Paper Company Limited (“Mersey”) is located in Liverpool, Nova Scotia and is owned 51% by us and 49% by The Daily Herald Company, a wholly-owned subsidiary of The Washington Post. We manage the facility. The amounts in the above table represent the mill’s total capacity and production.

(3) 

As of December 31, 2010, Augusta Newsprint Company (“ANC”), which operates our newsprint mill in Augusta, was owned 52.5% by us and 47.5% by an indirect subsidiary of The Woodbridge Company Limited. ANC became a wholly-owned subsidiary of ours on January 14, 2011. The amounts in the above table represent the mill’s total capacity and production.

 

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(4) 

Calhoun Newsprint Company (“CNC”), which owns one of Calhoun’s paper machines, Calhoun’s recycled fiber plant and a portion of the thermomechanical pulp (“TMP”) mill, is owned 51% by us and 49% by Herald Company, Inc. We manage the facility and wholly own all of the other assets at the site, including the remaining portion of the TMP mill, a kraft pulp mill, a market pulp dryer, four other paper machines (two of which are still operating) and other support equipment. Pulp, other raw materials, labor and other manufacturing services are transferred between us and CNC at agreed-upon transfer costs. CNC’s paper machine produced 118,000 metric tons of newsprint and 94,000 metric tons of specialty papers in 2011. The amounts in the above table represent the mill’s total capacity and production including CNC’s paper machine.

(5)

Ponderay Newsprint Company is located in Usk, Washington and is an unconsolidated partnership in which we have a 40% interest and, through a wholly-owned subsidiary, we are the managing partner. The balance of the partnership is held by subsidiaries of three newspaper publishers. The amounts in the above table represent the mill’s total capacity and production.

Wood products facilities

The following table provides a listing of the sawmills we owned or operated as of December 31, 2011 and their respective 2012 capacity and 2011 production. Our harvesting rights in Quebec are not sufficient to operate our sawmills at their total capacity. This table excludes facilities which have been permanently closed as of December 31, 2011.

 

(In million board feet)   

2012

Total Capacity

    

2011

Total Production

 

Comtois, Quebec

     145                   50             

Girardville-Normandin, Quebec

     208                   189             

La Dore, Quebec

     183                   183             

La Tuque, Quebec (1)

     200                   108             

Maniwaki, Quebec

     160                   125             

Mistassini, Quebec

     175                   167             

Oakhill, Nova Scotia (2)

     152                   97             

Obedjiwan, Quebec (3)

     30                   20             

Petit Saguenay, Quebec (4)

     27                   –             

Pointe-aux-Outardes, Quebec

     175                   26             

Roberval, Quebec

     143                   21             

Saint-Felicien, Quebec

     160                   135             

Saint-Fulgence, Quebec (4)

     167                   26             

Saint-Hilarion, Quebec

     85                   22             

Saint-Ludger-de-Milot, Quebec (5)

     135                   95             

Saint-Thomas, Quebec

     110                   78             

Senneterre, Quebec

     155                   104             

Thunder Bay, Ontario

     300                   237             
       2,710                   1,683             

 

(1)

Forest Products Mauricie L.P. is located in La Tuque, Quebec and is a consolidated subsidiary in which we have a 93.2% interest. The amounts in the above table represent the mill’s total capacity and production.

(2) 

The Oakhill sawmill is wholly owned by Mersey, which is a consolidated subsidiary in which we have a 51% interest. The amounts in the above table represent the mill’s total capacity and production.

(3)

Societe en Commandite Scierie Opitciwan is located in Obedjiwan, Quebec and is an unconsolidated entity in which we have a 45% interest. The amounts in the above table represent the mill’s total capacity and production.

(4)

In the third quarter of 2010, we indefinitely idled our Petit Saguenay and Saint-Fulgence sawmills. In June 2011, we restarted our Saint-Fulgence sawmill.

(5)

Produits Forestiers Petit-Paris Inc. is located in Saint-Ludger-de-Milot, Quebec and is an unconsolidated entity in which we have a 50% interest. The amounts in the above table represent the mill’s total capacity and production.

 

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Table of Contents

The following table provides a listing of the remanufacturing and engineered wood facilities we owned or operated as of December 31, 2011 and their respective 2012 capacity and 2011 production.

 

(In million board feet, except where otherwise stated)   

2012

Total Capacity

    

2011

Total Production

 

Remanufacturing Wood Products Facilities

     

Chateau-Richer, Quebec

     63                   47             

La Dore, Quebec

     15                   20             

Manseau, Quebec

     20                   7             

Total Remanufacturing Wood Facilities

     98                   74             

Engineered Wood Products Facilities

     

Larouche and Saint-Prime, Quebec (million linear feet) (1)

     145                   67             

 

(1)

Abitibi-LP Engineered Wood Inc. and Abitibi-LP Engineered Wood II Inc. are located in Larouche, Quebec and Saint-Prime, Quebec, respectively, and are unconsolidated entities in which we have a 50% interest in each entity. We operate the facilities and our joint venture partners sell the products. The amounts in the above table represent the mills’ total capacity and production.

On October 12, 2006, an agreement regarding Canada’s softwood lumber exports to the U.S. became effective (the “2006 Softwood Lumber Agreement”). The 2006 Softwood Lumber Agreement provides for, among other things, softwood lumber to be subject to one of two ongoing border restrictions, depending upon the province of first manufacture with several provinces, including Nova Scotia, being exempt from these border restrictions. Volume quotas have been established for each company within the provinces of Ontario and Quebec based on historical production, and the volume quotas are not transferable between provinces. U.S. composite prices would have to rise above $355 composite per thousand board feet before the quota volume restrictions would be lifted, which had not occurred since the implementation of the 2006 Softwood Lumber Agreement. On January 23, 2012, Canada and the U.S. announced a two-year extension to the 2006 Softwood Lumber Agreement, through October 2015. For information regarding lumber duties, see Note 20, “Commitments and Contingencies – Lumber duties,” to our Consolidated Financial Statements.

Other products

We also sell pulpwood, saw timber and wood chips to customers located in Canada and the United States. Sales of these other products are considered a recovery of the cost of manufacturing our primary products.

Raw Materials

Our operations consume substantial amounts of raw materials such as wood, recovered paper, chemicals and energy in the manufacturing of our paper, pulp and wood products. We purchase raw materials and energy sources (except internal generation) primarily on the open market.

Wood

Our sources of wood include property we own or lease, property on which we possess harvesting rights and purchases from local producers, including sawmills that supply residual wood chips. As of December 31, 2011, we owned or leased approximately 0.7 million acres of timberlands, primarily in Canada, and have long-term harvesting rights for approximately 35.2 million acres of Crown-owned land in Canada. These sources provide approximately half of our wood fiber supplies to our paper, pulp and wood products operations. The harvesting rights contracts are approximately 20 – 25 years in length and automatically renew every five years, contingent upon our continual compliance with environmental performance and reforestation requirements.

All of our managed forest lands are third-party certified to one or more globally recognized sustainable forest management standards, including those of the Sustainable Forestry Initiative (the “SFI”), Canadian Standards Association (the “CSA”) and Forest Stewardship Council (the “FSC”). We have implemented fiber tracking systems at our mills to ensure that our wood fiber supply comes from acceptable sources such as certified forests and legal harvesting operations. At several of our mills, these systems are third-party certified to recognize chain of custody standards and others are in the process of being certified.

We strive to improve our forest management and wood fiber procurement practices and we encourage our wood and fiber suppliers to demonstrate continual improvement in forest resource management, wood and fiber procurement and third-party certification.

 

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Recovered paper

We are one of the largest recyclers of newspapers and magazines in North America and have a number of recycling plants that use advanced mechanical and chemical processes to manufacture high quality pulp from a mixture of old newspapers and magazines, or “recovered paper.” Using recovered paper, we produce, among other things, recycled fiber newsprint and uncoated specialty papers comparable in quality to paper produced with 100% virgin fiber pulp. The Thorold and Mokpo operations produce products containing 100% recycled fiber. In 2011, we used 0.9 million metric tons of recovered paper in our production processes and the recycled fiber content in the newsprint we produced averaged 20%.

In 2011, we collected or purchased 1.2 million metric tons of recovered paper. Our Paper Retriever® and ecorewards® programs collect recovered fiber through a combination of community drop-off containers and recycling programs with businesses and commercial offices. The recovered paper that we physically purchase is from suppliers generally within the region of our recycling plants, primarily under long-term agreements.

Energy

Steam and electrical power constitute the primary forms of energy used in pulp and paper production. Process steam is produced in boilers using a variety of fuel sources, as well as heat recovery units in mechanical pulp facilities. All but two of our mills produced 100% of their own steam requirements. In 2011, our Alma, Calhoun, Catawba, Coosa Pines, Fort Frances, Kenogami and Thunder Bay operations collectively consumed approximately 33% of their electrical requirements from internal sources, notably on-site cogeneration and hydroelectric stations. The balance of our energy needs was purchased from third parties. We have six sites that operate cogeneration facilities and all of these sites generate “green energy” from carbon-neutral biomass. In addition, we utilize alternative fuels such as methane from landfills, used oil, tire-derived fuel and black liquor to reduce consumption of virgin fossil fuels.

As of December 31, 2011, we had one hydroelectric facility (Hydro Saguenay, Quebec), which consisted of seven installations with capacity of 162 MW and generation of 1,122 GWh. The water rights agreements required to operate these installations typically range from 10 to 50 years and are generally renewable, under certain conditions, for additional terms. In certain circumstances, water rights are granted without expiration dates. In some cases, the agreements are contingent on the continued operation of the related paper mill and a minimum level of capital spending in the region. The province of Quebec informed us on December 30, 2011 that it intended to terminate one of these agreements and to require us to transfer property of the associated installation to the province for no consideration. The termination and transfer would be effective as of March 2, 2012. The province’s actions are not consistent with our understanding of the agreement in question. We continue to evaluate our legal options. For additional information, see the discussion under “Critical Accounting Estimates – Long-lived assets” in Item 7.

Competition

In general, our products are globally-traded commodities and are marketed in close to 90 countries. The markets in which we compete are highly competitive and, aside from quality specifications to meet customer needs, the production of our products does not depend upon a proprietary process or formula. Pricing and the level of shipments of our products are influenced by the balance between supply and demand as affected by global economic conditions, changes in consumption and capacity, the level of customer and producer inventories and fluctuations in currency exchange rates. Any material decline in prices for our products or other adverse developments in the markets for our products could have a material adverse effect on our results of operations or financial condition. Prices for our products have been and are likely to continue to be highly volatile.

Newsprint, one of our principal products, is produced by numerous manufacturers worldwide. In 2011, the five largest North American producers represented approximately 85% of North American newsprint capacity and the five largest global producers represented approximately 36% of global newsprint capacity. Our total newsprint capacity is approximately 9% of worldwide newsprint capacity. We face competition from both large global producers and numerous smaller regional producers. In recent years, a number of global producers of newsprint based in Asia, particularly China, have grown their production capacity. Price, quality and customer relationships are important competitive determinants.

We compete with seven other coated mechanical paper producers with operations in North America. In 2011, the five largest North American producers represented approximately 84% of North American capacity for coated mechanical paper. In addition, several major offshore suppliers of coated mechanical paper compete for North American business. In 2011, offshore imports represented approximately 11% of North American demand. As a major supplier to printers, end users (such as magazine publishers, catalogers and retailers) and brokers/merchants in North America, we compete with numerous worldwide suppliers of other grades of paper such as coated freesheet and supercalendered paper. We compete on the basis of price, quality and service.

 

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In 2011, we produced approximately 30% of North American uncoated mechanical paper demand, comprised mainly of supercalendered, superbright, high bright, bulky book and directory papers. We compete with numerous uncoated mechanical paper producers with operations in North America. In addition, imports from overseas represented approximately 10% of North American demand in 2011 and were primarily concentrated in the supercalendered paper market where they represented approximately 19% of North American demand. We compete on the basis of price, quality, service and breadth of product line.

We compete with eight other major market pulp suppliers with operations in North America along with other smaller competitors. Market pulp is a globally-traded commodity for which competition exists in all major markets. We produce five major grades of market pulp (northern and southern hardwood, northern and southern softwood and fluff) and compete with other producers from South America (eucalyptus hardwood and radiata pine softwood), Europe (northern hardwood and softwood) and Asia (mixed tropical hardwood). Price, quality, service and fiber sources are considered the main competitive determinants.

By the end of 2008, we had completed the certification of all of our managed forest lands to globally-recognized sustainable forest management standards, namely the SFI and the Z809 Standard of the CSA. In 2009, to better respond to market demands, we introduced the FSC standard in our certification portfolio by re-certifying two forest units in Quebec from CSA to FSC and by dual-certifying one forest in Ontario to FSC (already certified to SFI). In 2010, we further balanced our forest certification portfolio by re-certifying two additional forest units in Quebec from CSA to FSC and by dual-certifying one forest in Nova Scotia to FSC (already certified to SFI).

As with other global commodities, the competitive position of our products is significantly affected by the volatility of foreign currency exchange rates. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Exchange Risk,” of this Form 10-K. We have operations in Canada, the United States and South Korea. In addition to the U.S., several of our primary competitors are located in Canada, Sweden, Finland and certain Asian countries. Accordingly, the relative rates of exchange between those countries’ currencies and the United States dollar can have a substantial effect on our ability to compete. In addition, the degree to which we compete with foreign producers depends in part on the level of demand abroad. Shipping costs and relative pricing generally cause producers to prefer to sell in local markets when the demand is sufficient in those markets.

Trends in advertising, electronic data transmission and storage and the Internet could have further adverse effects on the demand for traditional print media, including our products and those of our customers, but neither the timing nor the extent of those trends can be predicted with certainty. Our newspaper, magazine, book and catalog publishing customers may increasingly use, and compete with businesses that use, other forms of media and advertising and electronic data transmission and storage, including television, electronic readers and the Internet, instead of newsprint, coated papers, uncoated specialty papers or other products made by us. The demand for newsprint declined significantly over the last several years as a result of continued declines in newspaper circulation and advertising volume and publishers’ conservation measures, which include increased usage of lighter basis-weight newsprint and web-width and page count reductions. Our newsprint, magazine and catalog publishing customers are also subject to the effects of competing media, including the Internet.

Emergence From Creditor Protection Proceedings

AbitibiBowater Inc. and all but one of its debtor affiliates (as discussed below) successfully emerged from creditor protection proceedings under Chapter 11 of the United States Bankruptcy Code, as amended (“Chapter 11”) and the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”), as applicable (collectively, the “Creditor Protection Proceedings”) on December 9, 2010 (the “Emergence Date”). In the third quarter of 2010, the creditors under the Creditor Protection Proceedings, with one exception, voted in the requisite numbers to approve the respective Plan of Reorganization (as defined below). Creditors of Bowater Canada Finance Corporation (“BCFC”), an indirect, wholly-owned subsidiary of ours, did not vote in the requisite numbers to approve the Plans of Reorganization (as defined below). Accordingly, we did not seek sanction of the CCAA Plan of Reorganization and Compromise (the “CCAA Reorganization Plan”) or confirmation of the Debtors’ Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Chapter 11 Reorganization Plan” and, together with the CCAA Reorganization Plan, the “Plans of Reorganization” and each, a “Plan of Reorganization”) with respect to BCFC. See Item 3, “Legal Proceedings – BCFC Bankruptcy and Insolvency Act Filing,” for information regarding BCFC’s Bankruptcy and Insolvency Act filing on December 31, 2010. The Plans of Reorganization became effective on the Emergence Date.

 

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From the 97,134,954 shares of Successor Company common stock issued for claims in the Creditor Protection Proceedings, we established a reserve of 23,382,073 shares for claims that remained in dispute as of the Emergence Date, from which we have made and will make supplemental interim distributions to unsecured creditors as disputed claims are resolved. As of December 31, 2011, there were 19,719,565 shares remaining in this reserve. The remaining claims are claims that we believe should be disallowed because they are duplicative, without merit, overstated or should be disallowed for other reasons. We have made significant progress in addressing the claims that remained in dispute at the time of our emergence from the substantial number and amount of claims filed during the Creditor Protection Proceedings. The majority of the remaining disputed claims will be disposed through ongoing litigation before the United States Bankruptcy Court for the District of Delaware (the “U.S. Court”) or a claims officer appointed by the Superior Court of Quebec in Canada (the “Canadian Court” and, together with the U.S. Court, the “Courts”). The ultimate completion of the claims resolution process could therefore take some time to complete. We may be required to settle certain disputed claims in cash under certain specific circumstances. As such, included in “Accounts payable and accrued liabilities” in our Consolidated Balance Sheets (as defined below) as of December 31, 2011 and 2010 is a liability of $11 million and $35 million, respectively, for the estimated cash settlement of such claims. To the extent there are shares remaining after all disputed claims have been resolved, these shares will be reallocated ratably among unsecured creditors with allowed claims in the Creditor Protection Proceedings pursuant to the Plans of Reorganization.

For additional information regarding the Creditor Protection Proceedings, see Note 3, “Creditor Protection Proceedings,” to our Consolidated Financial Statements.

Basis of Presentation

Effective upon the commencement of the Creditor Protection Proceedings on April 16 and 17, 2009 and through the Convenience Date (as defined below), 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. 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, during the Creditor Protection Proceedings, we: (i) recorded certain expenses, charges and credits incurred or realized that were directly associated with or resulting from the reorganization and restructuring of the business in “Reorganization items, net” in our Consolidated Statements of Operations included in our Consolidated Financial Statements (“Consolidated Statements of Operations”) and (ii) ceased recording interest expense on certain of our pre-petition debt obligations. For additional information, see Note 3, “Creditor Protection Proceedings,” and Note 16, “Liquidity and Debt,” to our Consolidated Financial Statements.

In accordance with FASB ASC 852, fresh start accounting (“fresh start accounting”) was required upon our emergence from the Creditor Protection Proceedings, which we applied effective December 31, 2010 (the “Convenience Date”). As such, the application of fresh start accounting was reflected in our Consolidated Balance Sheets included in our Consolidated Financial Statements (“Consolidated Balance Sheets”) as of December 31, 2010 and fresh start accounting adjustments related thereto were included in our Consolidated Statements of Operations for the year ended December 31, 2010.

The implementation of the Plans of Reorganization and the application of fresh start accounting materially changed the carrying amounts and classifications reported in our consolidated financial statements and resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, our consolidated financial statements as of December 31, 2010 and for periods subsequent to December 31, 2010 are not comparable to our consolidated financial statements for periods prior to December 31, 2010. References to “Successor” or “Successor Company” refer to the Company on or after December 31, 2010, after giving effect to the implementation of the Plans of Reorganization and the application of fresh start accounting. References to “Predecessor” or “Predecessor Company” refer to the Company prior to December 31, 2010. Additionally, references to periods on or after December 31, 2010 refer to the Successor and references to periods prior to December 31, 2010 refer to the Predecessor.

Employees

As of December 31, 2011, we employed approximately 10,400 people, of whom approximately 7,900 were represented by bargaining units. Our unionized employees are represented predominantly by the Communications, Energy and Paperworkers Union (the “CEP”) and the Confederation des syndicats nationaux (the “CSN”) in Canada and predominantly by the United Steelworkers International in the U.S.

 

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We have collective bargaining agreements in place covering the majority of our unionized employees, many of which have been recently renewed and revised. However, there can be no assurance that we will maintain continuously satisfactory agreements with all of our unionized employees or that we will finalize satisfactory agreements with the remaining unionized employees (which include approximately 200 wood workers in Quebec). Should we be unable to do so, it could result in strikes or other work stoppages by affected employees, which could cause us to experience a disruption of operations and affect our business, financial condition or results of operations.

Trademarks

We registered the marks “AbitibiBowater,” “Resolute,” “Resolute Forest Products,” “Resolu” and “Produits Forestiers Resolu” and the AbitibiBowater and Resolute logos in the countries of our principal markets. We consider our interest in the logos and marks to be important and necessary to the conduct of our business.

Environmental Matters

We are subject to a variety of federal, state, provincial and local environmental laws and regulations in the jurisdictions in which we operate. We believe our operations are in material compliance with current applicable environmental laws and regulations. While it is impossible to predict future environmental regulations that may be established, we believe that we will not be at a competitive disadvantage with regard to meeting future Canadian, United States or South Korean standards. For additional information, see

Note 20, “Commitments and Contingencies – Environmental matters,” to our Consolidated Financial Statements.

Internet Availability of Information

We make our Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and any amendments to these reports, available free of charge on our website (www.resolutefp.com) as soon as reasonably practicable after we file or furnish such materials to the SEC. The SEC also maintains a website (www.sec.gov) that contains our reports and other information filed with the SEC. In addition, any materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C., 20549. Information on the operations of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. Our reports are also available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) website (www.sedar.com).

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Form 10-K, you should carefully consider the following factors, which could materially affect our business, financial condition or future results. In particular, the risks described below could cause actual events to differ materially from those contemplated in the forward-looking statements in this Form 10-K. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially affect our business, financial condition or future results.

Developments in alternative media could continue to adversely affect the demand for our products, especially in North America, and our responses to these developments may not be successful.

Trends in advertising, electronic data transmission and storage and the Internet could have further adverse effects on the demand for traditional print media, including our products and those of our customers. Neither the timing nor the extent of those trends can be predicted with certainty. Our newspaper, magazine, book and catalog publishing customers may increasingly use, and compete with businesses that use, other forms of media and advertising and electronic data transmission and storage, including television, electronic readers and the Internet, instead of newsprint, coated papers, uncoated specialty papers or other products made by us. The demand for certain of our products weakened significantly over the last several years. For example, industry statistics indicate that North American newsprint demand has been in decline for several years and has experienced annual declines of 10.3% in 2007, 11.2% in 2008, 25.3% in 2009, 6.0% in 2010 and 7.4% in 2011. Third-party forecasters indicate that these declines may continue in the future due to reduced North American newspaper circulation, less advertising, substitution to other uncoated mechanical grades and conservation measures taken by publishers.

One of our responses to the declining demand for our products has been to curtail our production capacity. If demand continues to decline for our products, it may become necessary to curtail production even further or permanently shut down even more machines or facilities. Curtailments or shutdowns could result in asset impairments and additional cash costs at the affected facilities, including restructuring charges and exit or disposal costs, and could negatively impact our cash flows and materially affect our results of operations or financial condition.

 

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Currency fluctuations may adversely affect our results of operations or financial condition, and changes in foreign currency exchange rates can affect our competitive position, selling prices and manufacturing costs.

We compete with North American, European and Asian producers in most of our product lines. Our products are sold and denominated in U.S. dollars, Canadian dollars and selected foreign currencies. A substantial portion of our manufacturing costs are denominated in Canadian dollars. In addition to the impact of product supply and demand, changes in the relative strength or weakness of such currencies, particularly the U.S. dollar, may also affect international trade flows of these products. A stronger U.S. dollar may attract imports into North America from foreign producers, increase supply and have a downward effect on prices, while a weaker U.S. dollar may encourage U.S. exports and increase manufacturing costs that are in Canadian dollars or other foreign currencies. Variations in the exchange rates between the U.S. dollar and other currencies, particularly the Euro and the currencies of Canada, Sweden and certain Asian countries, will significantly affect our competitive position compared to many of our competitors.

We are particularly sensitive to changes in the value of the Canadian dollar versus the U.S. dollar. The impact of these changes depends primarily on our production and sales volume, the proportion of our production and sales that occur in Canada, the proportion of our financial assets and liabilities denominated in Canadian dollars, our hedging levels and the magnitude, direction and duration of changes in the exchange rate. We expect exchange rate fluctuations to continue to impact costs and revenues; however, we cannot predict the magnitude or direction of this effect for any quarter, and there can be no assurance of any future effects. During the last two years, the relative value of the Canadian dollar ranged from a high of US$1.06 in July 2011 to a low of US$0.93 in May 2010 and was US$0.98 as of December 31, 2011. Based on operating projections for 2012, a one-cent increase in the Canadian-U.S. dollar exchange rate would decrease our annual operating income by approximately $16 million.

If the Canadian dollar continues to remain strong or appreciates as against the U.S. dollar, it could influence the foreign exchange rate assumptions that are used in our evaluation of long-lived assets for impairment and consequently, result in asset impairment charges.

We face intense competition in the forest products industry and the failure to compete effectively would have a material adverse effect on our business, financial condition or results of operations.

We compete with numerous forest products companies, many of which have greater financial resources than we do. There has been a continued trend toward consolidation in the forest products industry, leading to new global producers. These global producers are typically large, well-capitalized companies that may have greater flexibility in pricing and financial resources for marketing, investment and expansion than we do. The markets for our products are all highly competitive. Actions by competitors can affect our ability to sell our products and can affect the volatility of the prices at which our products are sold. While the principal basis for competition is price, we also compete on the basis of customer service, quality and product type. There has also been an increasing trend toward consolidation among our customers. With fewer customers in the market for our products, our negotiating position with these customers could be weakened.

In addition, our industry is capital intensive, which leads to high fixed costs. Some of our competitors may be lower-cost producers in some of the businesses in which we operate. Global newsprint capacity, particularly Chinese and European newsprint capacity, has been increasing, which may result in lower prices, volumes or both for our exported products. We believe that hardwood pulp capacity at South American pulp mills has unit costs that are significantly below those of our hardwood kraft pulp mills. Other actions by competitors, such as reducing costs or adding low-cost capacity, may adversely affect our competitive position in the products we manufacture and consequently, our sales, operating income and cash flows. We may not be able to compete effectively and achieve adequate levels of sales and product margins. Failure to compete effectively would have a material adverse effect on our business, financial condition or results of operations.

The forest products industry is highly cyclical. Fluctuations in the prices of, and the demand for, our products could result in small or negative profit margins, lower sales volumes and curtailment or closure of operations.

The forest products industry is highly cyclical. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume and margins for our products. Most of our paper and wood products are commodities that are widely available from other producers and even our coated and specialty papers are susceptible to these fluctuations. Because our commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. The overall levels of demand for the products we manufacture and distribute and consequently, our sales and profitability, reflect fluctuations in levels of end-user demand, which depend in part on general economic conditions in North America and worldwide.

 

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The effect of not meeting certain conditions under the Canadian pension funding relief regulations could have a material impact on our financial condition.

As of the third quarter of 2011, both the provinces of Quebec and Ontario had adopted specific regulations to implement funding relief measures with respect to aggregate solvency deficits in our material Canadian registered pension plans, as contemplated by an agreement between each province and our principal Canadian operating subsidiary, effective as of our emergence from the Creditor Protection Proceedings for a period of 10 years. Those agreements include a number of undertakings by our principal Canadian operating subsidiary, which will apply for a minimum period of five years following the Emergence Date. Those undertakings and the basic funding parameters are described in Note 18, “Pension and Other Postretirement Benefit Plans – Canadian pension funding relief,” to our Consolidated Financial Statements. We could lose the benefit of the funding relief regulations if we fail to comply with them or fail to meet our undertakings in the related agreements, which, in either case, could have a material impact on our financial condition.

The regulations also provide that corrective measures would be required if the aggregate solvency ratio in the registered pension plans falls below a prescribed level under the target provided by the regulations as of December 31 in any year through 2014. Such measures may include additional funding over five years to attain the target solvency ratio prescribed in the regulations. Thereafter, supplemental contributions, as described in Note 18, “Pension and Other Postretirement Benefit Plans – Canadian pension funding relief,” to our Consolidated Financial Statements, would be required if the aggregate solvency ratio in the registered pension plans falls below a prescribed level under the target provided by the regulations as of December 31 in any year on or after 2015 for the remainder of the period covered by the regulations. The aggregate solvency ratio in the Canadian registered pension plans covered by the Quebec and Ontario funding relief is determined annually as of December 31. The calculation is based on a number of factors and assumptions, including the accrued benefits to be provided by the plans, interest rate levels, membership data and demographic experience. In light of low yields on government securities in Canada, which are used to determine the applicable discount rate, when we file the actuarial report in respect of these plans later this year, we expect that the aggregate solvency ratio in these Canadian registered plans will have fallen below the minimum level prescribed by the regulations and that we will therefore be required to adopt corrective measures by March 2013. At this time, we cannot estimate the additional contributions, if any, that may be required in future years, but they could be material.

It is also possible that provinces other than Quebec and Ontario could attempt to assert jurisdiction and to compel additional funding of certain of our Canadian registered pension plans in respect of plan members associated with sites we formerly operated in their respective provinces. At this time, we cannot estimate the additional contributions, if any, that may be required, but they could be material.

We may be required to record additional valuation allowances against our recorded deferred income tax assets.

We recorded significant tax attributes (deferred income tax assets) in our Consolidated Balance Sheet as of December 31, 2011, which attributes would be available to offset any future taxable income. If, in the future, we determine that we are unable to use the full extent of these tax attributes as a result of sustained cumulative taxable losses, we could be required to record additional valuation allowances for the portion of the deferred income tax assets that are not recoverable. Such valuation allowances, if taken, would be recorded as a charge to income tax expense and would negatively impact our reported net income (loss).

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to service our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay capital expenditures or to sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement that governs our ABL Credit Facility (as defined and further discussed in Item 7 under “Liquidity and Capital Resources”) restricts our ability to dispose of assets and use the proceeds from any such dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or obtain proceeds in an amount sufficient to meet any debt service obligations when due.

 

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If we are unable to generate sufficient cash flows to service our obligations under the 2018 Notes (as defined in Item 7 under “Liquidity and Capital Resources”) and the ABL Credit Facility, we would be in default. If the default is not cured, holders of the 2018 Notes could declare all outstanding principal and interest to be due and payable, the lenders under the ABL Credit Facility could terminate their commitments to loan money, our secured lenders could foreclose against the assets securing such borrowings and we could be forced into bankruptcy or liquidation.

The credit agreement that governs the ABL Credit Facility and the 2018 Notes indenture may restrict our ability to respond to changes or to take certain actions.

The 2018 Notes indenture and the credit agreement that governs our ABL Credit Facility contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including, among other things, restrictions on our ability (subject to a number of exceptions and qualifications) to: incur, assume or guarantee additional indebtedness; issue redeemable stock and preferred stock; pay dividends or make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase certain indebtedness; make loans and investments; incur liens; restrict dividends, loans or asset transfers from our subsidiaries; sell or otherwise dispose of assets, including capital stock of subsidiaries; consolidate or merge with or into, or sell substantially all of our assets to another person; enter into transactions with affiliates; and enter into new lines of business.

In addition, the restrictive covenants in the credit agreement that governs our ABL Credit Facility could require us to maintain a specified financial ratio if the availability falls below a certain threshold, as well as satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and there can be no assurance that we will meet them.

A breach of the covenants under the 2018 Notes indenture or under the credit agreement that governs the ABL Credit Facility could result in an event of default under the indenture or credit agreement governing the applicable indebtedness. Such default may allow the holders to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, the occurrence of an event of default under the credit agreement that governs our ABL Credit Facility would permit the lenders thereunder to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our ABL Credit Facility or the 2018 Notes following an acceleration, those lenders could proceed against the collateral securing that indebtedness. In the event our lenders under the ABL Credit Facility or holders of the 2018 Notes accelerate the repayment of our borrowings, there can be no assurance that we and our subsidiaries would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be limited in how we conduct our business, unable to raise additional debt or equity financing to operate during general economic or business downturns or unable to compete effectively or to take advantage of new business opportunities. These restrictions may affect our ability to respond to changes or to pursue other business opportunities.

Our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for all of our capital requirements.

Our businesses are capital intensive and require regular capital expenditures in order to maintain our equipment, increase our operating efficiency and comply with environmental laws. In addition, significant amounts of capital may be required to modify our equipment to produce alternative grades with better demand characteristics or to make significant improvements in the characteristics of our current products. If our available cash resources and cash generated from operations are not sufficient to fund our operating needs and capital expenditures, we would have to obtain additional funds from borrowings or other available sources or reduce or delay our capital expenditures. Recent global credit conditions and the downturn in the global economy have resulted in a significant decline in the credit markets and the overall availability of credit. Our indebtedness could adversely affect our financial health, limit our operations and impair our ability to raise additional capital. If this occurs, we may not be able to obtain additional funds on favorable terms or at all. If we cannot maintain or upgrade our equipment as we require, we may become unable to manufacture products that compete effectively. An inability to make required capital expenditures in a timely fashion could have a material adverse effect on our growth, business, financial condition or results of operations.

We may not be successful in implementing our strategies to increase our return on capital.

We are targeting a higher return on capital, which may require significant capital investments with uncertain return outcomes. Our strategies include improving our business mix, reducing our costs and increasing operational flexibility, targeting export markets with better newsprint demand and exploring strategic alternatives. There are risks associated with the implementation of these strategies, which are complicated and involve a substantial number of mills, machines, capital and personnel. To the extent we are unsuccessful in achieving these strategies, our results of operations may be adversely affected.

 

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Our manufacturing businesses may have difficulty obtaining wood fiber at favorable prices, or at all.

Wood fiber is the principal raw material we use in our business. We use both virgin fiber (wood chips and logs) and recycled fiber (old newspapers and magazines) as fiber sources for our paper mills. The primary source for wood fiber is timber. Environmental litigation and regulatory developments have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest in Canada and the United States. For example, new legislation in the province of Quebec provides that a portion of the harvesting rights allocated to harvesters, including us, will be subject to an auction system that will be fully implemented in April 2013. The new system could have the effect of increasing the cost of harvesting timber and reducing supply. In addition, future domestic or foreign legislation or regulation, litigation advanced by Aboriginal groups and litigation concerning the use of timberlands, forest management practices, the protection of endangered species, the promotion of forest biodiversity and the response to and prevention of catastrophic wildfires could also affect timber supplies. Availability of harvested timber may further be limited by factors such as fire and fire prevention, insect infestation, disease, ice storms, wind storms, drought, flooding and other natural and man-made causes, thereby reducing supply and increasing prices. As is typical in the industry, we do not maintain insurance for any loss to our standing timber from natural disasters or other causes.

In all Canadian provinces, the volume allocated on Crown land is constrained by the Annual Allowable Cut. This overall level of harvest is revised on a regular basis, typically every five years. In December 2006, the Chief Forester of the province of Quebec confirmed a reduction of 23.8% below 2004 levels for the period 2008 to 2013. In August 2011, the Quebec Chief Forester announced a drop of 10.3% in the annual allowable cut for 2013 – 2014, which is an interim estimate. A revised assessment will be available sometime in 2013, which will reduce the volume that could be allocated to our sawmills through Timber Supply Guarantees starting April 1, 2013.

Wood fiber is a commodity and prices historically have been cyclical, are subject to market influences and may increase in particular regions due to market shifts. Pricing of recycled fiber is also subject to market influences and has experienced significant fluctuations. During the last two years, the market prices of old newspapers have ranged from a low of $136 average per ton during the third quarter of 2010 to a high of $192 average per ton during the third quarter of 2011. There can be no assurance that prices of recycled fiber will remain at levels that are economical for us to use. Any sustained increase in fiber prices would increase our operating costs and we may be unable to increase prices for our products in response, which could have a material adverse effect on our results of operations or financial condition.

There can be no assurance that access to fiber will continue at the same levels as in the past. The cost of softwood fiber and the availability of wood chips may be affected. If our harvesting rights pursuant to applicable laws, forest licenses or forest management agreements are reduced or if any third-party supplier of wood fiber stops selling or is unable to sell wood fiber to us, our financial condition or operating results could suffer.

A sustained increase in the cost of purchased energy and other raw materials would lead to higher manufacturing costs, thereby reducing our margins.

Our operations consume substantial amounts of energy, such as electricity, natural gas, fuel oil, coal and wood waste. We buy energy and raw materials, including chemicals, wood, recovered paper and other raw materials, primarily on the open market.

The prices for raw materials and energy are volatile and may change rapidly, directly affecting our results of operations. The availability of raw materials and energy may also be disrupted by many factors outside our control, adversely affecting our operations. Energy prices, particularly for electricity, natural gas and fuel oil, have been volatile in recent years and prices every year since 2005 have exceeded long-term historical averages. As a result, fluctuations in energy prices will impact our manufacturing costs and contribute to earnings volatility.

We are a major user of renewable natural resources such as water and wood. Accordingly, significant changes in climate and forest diseases or infestation could affect our financial condition or results of operations. The volume and value of timber that we can harvest or purchase may be limited by factors such as fire and fire prevention, insect infestation, disease, ice storms, wind storms, drought, flooding and other natural and man-made causes, thereby reducing supply and increasing prices. As is typical in the industry, we do not maintain insurance for any loss to our standing timber from natural disasters or other causes. Also, there can be no assurance that we will be able to maintain our water rights or to renew them at conditions comparable to those currently in effect.

For our commodity products, the relationship between industry supply and demand for these products, rather than changes in the cost of raw materials, will determine our ability to increase prices. Consequently, we may be unable to pass along increases in our operating costs to our customers. Any sustained increase in energy, chemical or raw material prices without any corresponding increase in product pricing would reduce our operating margins and potentially require us to limit or cease operations of one or more of our machines.

The global financial crisis and economic downturn could continue to negatively impact our results of operations or financial condition and it may cause a number of the risks that we currently face to increase in likelihood, magnitude and duration.

The global financial crisis and economic downturn has adversely affected economic activity globally. Our operations and performance depend significantly on worldwide economic conditions. Customers across all of our businesses have been delaying and reducing their expenditures in response to deteriorating macroeconomic and industry conditions and uncertainty, which has had a significant negative impact on the demand for our products and therefore, the cash flows of our businesses, and could continue to have a negative impact on our capital resources.

 

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Our newsprint, coated papers and specialty papers demand has been and is expected to be negatively impacted by higher unemployment and lower gross domestic product growth rates. We believe that some consumers have reduced newspaper and magazine subscriptions as a direct result of their financial circumstances in the current economic downturn, contributing to lower demand for our products by our customers. Additionally, advertising demand in magazines and newspapers, including classified advertisements, and demand from automotive dealerships and real estate agencies have been impacted by higher unemployment, lower automobile sales and the distressed real estate environment. Lower demand for print advertisements leads to fewer pages in newspapers, magazines and other advertisement circulars and periodicals, decreasing the demand for our products. Furthermore, consumer and advertising-driven demand for our paper products may not recover, even with an economic recovery, as purchasing habits may be permanently changed with a prolonged economic downturn.

The economic downturn has had a profoundly negative impact on the U.S. housing industry, which sets the prices for many of our lumber and other wood-based products. According to the U.S. Census Bureau, U.S. housing starts declined from approximately 1.4 million in 2007 to approximately 0.7 million in 2011, reflecting a 52% decline. With this low level of primary demand for our lumber and other wood-based products, our wood products business may continue to operate at a low level until there is a meaningful recovery in new residential construction demand. With less demand for saw logs at sawmills throughout North America and lower saw log prices, our timberland values may decline, impacting some of our financial options. Additionally, with less lumber demand, sawmills have generated less sawdust and wood chips and shavings that we use for fiber for our mills. The price of sawdust and wood chips for our mills that need to purchase their furnish on the open market may also continue to be at elevated levels, until there is a meaningful recovery in new residential demand in the U.S.

Changes in laws and regulations could adversely affect our results of operations.

We are subject to a variety of foreign, federal, state, provincial and local laws and regulations dealing with trade, employees, transportation, taxes, timber and water rights, pension funding and the environment. Changes in these laws or regulations or their interpretations or enforcement have required in the past, and could require in the future, substantial expenditures by us and adversely affect our results of operations. For example, changes in environmental laws and regulations have in the past, and could in the future, require us to spend substantial amounts to comply with restrictions on air emissions, wastewater discharge, waste management, landfill sites, including remediation costs, the Environmental Protection Agency’s new greenhouse gas regulations and Boiler MACT. Environmental laws are becoming increasingly stringent. Consequently, our compliance and remediation costs could increase materially.

Changes in the political or economic conditions in Canada, the United States or other countries in which our products are manufactured or sold could adversely affect our results of operations.

We manufacture products in Canada, the United States and South Korea and sell products throughout the world. Paper prices are tied to the health of the economies of North and South America, Asia and Europe, as well as to paper inventory levels in these regions. The economic and political climate of each region has a significant impact on our costs and the prices of, and demand for, our products. Changes in regional economies or political instability, including acts of war or terrorist activities, can affect the cost of manufacturing and distributing our products, pricing and sales volume, directly affecting our results of operations. Such changes could also affect the availability or cost of insurance.

We may be required to record additional environmental liabilities.

We are subject to a wide range of general and industry-specific laws and regulations relating to the protection of the environment, including those governing air emissions, wastewater discharges, timber harvesting, the storage, management and disposal of hazardous substances and waste, the clean-up of contaminated sites, landfill and lagoon operation and closure, forestry operations, endangered species habitat and health and safety. As an owner and operator of real estate and manufacturing and processing facilities, we may be liable under environmental laws for cleanup and other costs and damages, including tort liability and damages to natural resources, resulting from past or present spills or releases of hazardous or toxic substances on or from our current or former properties. We may incur liability under these laws without regard to whether we knew of, were responsible for, or owned the property at the time of, any spill or release of hazardous or toxic substances on or from our property, or at properties where we arranged for the disposal of regulated materials. Claims may also arise out of currently unknown environmental conditions or aggressive enforcement efforts by governmental or private parties. As a result of the above, we may be required to record additional environmental liabilities. For information regarding environmental matters to which we are subject, see Note 20, “Commitments and Contingencies – Environmental matters,” to our Consolidated Financial Statements.

 

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We are subject to physical and financial risks associated with climate change.

Our operations are subject to climate variations, which impact the productivity of forests, the distribution and abundance of species and the spread of disease or insect epidemics, which may adversely or positively affect timber production. Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability and frequency of natural disasters such as hurricanes, earthquakes, hailstorms, wildfires, snow and ice storms, which could also affect our woodlands or cause variations in the cost for raw materials, such as fiber. Changes in precipitation resulting in droughts could adversely affect our hydroelectric facilities’ production, increasing our energy costs, while increased precipitation may generally have positive effects.

To the extent climate change impacts raw material availability or our electricity production, it may also impact our costs and revenues. Furthermore, should financial markets view climate change as a financial risk, our ability to access capital markets or to receive acceptable terms and conditions could be affected.

We may be required to record additional long-lived asset impairment or accelerated depreciation charges.

Losses related to the impairment of long-lived assets to be held and used are recognized when circumstances indicate the carrying value of an asset group may not be recoverable, such as continuing losses in certain businesses. When indicators that the carrying value of an asset group may not be recoverable are triggered, we evaluate the carrying value of the asset group in relation to its expected undiscounted future cash flows. If the carrying value of an asset group is greater than the expected undiscounted future cash flows to be generated by the asset group, an impairment charge is recognized based on the excess of the asset group’s carrying value over its fair value. If it is determined that the carrying value of an asset group is recoverable, we review and adjust, as necessary, the estimated useful lives of the assets in the group.

If there were to be a triggering event, it is possible that we could record non-cash long-lived asset impairment or accelerated depreciation charges in future periods, which would be recorded as operating expenses and would directly and negatively impact our reported operating income (loss) and net income (loss). One group of assets, for which the remaining useful life is being monitored closely, are the tangible and intangible assets associated with our Jim-Gray hydroelectric installation, which is part of the Hydro Saguenay facility that provides hydroelectric power to certain mills in the province of Quebec. The province of Quebec informed us on December 30, 2011 that it intended to terminate our water rights associated with this facility and to require us to transfer property of the associated installation to the province for no consideration. The termination and transfer would be effective as of March 2, 2012. The province’s actions are not consistent with our understanding of the agreement in question. We continue to evaluate our legal options. The net book value of this hydroelectric facility was tested for impairment with the other assets in its asset group and no impairment was indicated. At this time, we believe that the remaining useful life of the assets remains unchanged, as we continue pursuing the renewal of our water rights at the facility. The carrying value of the long-lived assets associated with the Jim-Gray installation as of December 31, 2011 was approximately $95 million. If we are unable to renew the water rights at this facility, we will reevaluate the remaining useful life of these assets, which may result in accelerated depreciation and amortization charges in the first quarter of 2012.

We could be compelled to make additional environmental remediation payments in respect of certain sites we formerly owned and/or operated in the province of Newfoundland and Labrador.

On March 31, 2010, the Canadian Court dismissed a motion for declaratory judgment brought by the province of Newfoundland and Labrador, awarding costs in our favor, and thus confirmed our position that the five orders the province issued under section 99 of its Environmental Protection Act on November 12, 2009 were subject to the stay of proceedings pursuant to the Creditor Protection Proceedings. The province of Newfoundland and Labrador’s orders could have required us to proceed immediately with the environmental remediation of various sites we formerly owned or operated, some of which the province expropriated in December 2008. The Quebec Court of Appeal denied the province’s request for leave to appeal on May 18, 2010. An appeal of that decision is now pending before the Supreme Court of Canada, which heard the matter on November 16, 2011. If leave to appeal is ultimately granted and the appeal is allowed, we could be required to make additional environmental remediation payments without regard to the Creditor Protection Proceedings. Any additional environmental remediation payments required to be made by us could have a material adverse effect on our results of operations or financial condition. For information regarding our environmental matters, see Note 20, “Commitments and Contingencies – Environmental matters,” to our Consolidated Financial Statements.

 

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We could experience disruptions in operations or increased labor costs due to labor disputes.

As of December 31, 2011, we employed approximately 10,400 people, of whom approximately 7,900 were represented by bargaining units. Our unionized employees are represented predominantly by the CEP and the CSN in Canada and predominantly by the United Steelworkers International in the U.S.

We have collective bargaining agreements in place covering the majority of our unionized employees, many of which have been recently renewed and revised. However, there can be no assurance that we will maintain continuously satisfactory agreements with all of our unionized employees or that we will finalize satisfactory agreements with the remaining unionized employees (which include approximately 200 wood workers in Quebec). Should we be unable to do so, it could result in strikes or other work stoppages by affected employees, which could cause us to experience a disruption of operations and affect our business, financial condition or results of operations.

The occurrence of natural or man-made disasters could disrupt our supply chain and the delivery of our products and adversely affect our financial condition or results of operations.

The success of our businesses is largely contingent on the availability of direct access to raw materials and our ability to ship products on a timely basis. As a result, any event that disrupts or limits transportation or delivery services would materially and adversely affect our business. In addition, our operating results are dependent on the continued operation of our various production facilities and the ability to complete construction and maintenance projects on schedule. Material operating interruptions at our facilities, including interruptions caused by the events described below, may materially reduce the productivity and profitability of a particular manufacturing facility, or our business as a whole, during and after the period of such operational difficulties.

Although we take precautions to enhance the safety of our operations and minimize the risk of disruptions, our operations are subject to hazards inherent in our business and the transportation of raw materials, products and wastes. These potential hazards include: explosions; fires; severe weather and natural disasters; mechanical failures; unscheduled downtimes; supplier disruptions; labor shortages or other labor difficulties; transportation interruptions; remediation complications; discharges or releases of toxic or hazardous substances or gases; other environmental risks; and terrorist acts.

Some of these hazards may cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage and may result in suspension of operations, the shutdown of affected facilities and the imposition of civil or criminal penalties. Furthermore, except for claims that were addressed by the Plans of Reorganization, we will also continue to be subject to present and future claims with respect to workplace exposure, exposure of contractors on our premises, as well as other persons located nearby, workers’ compensation and other matters.

We maintain property, business interruption, product, general liability, casualty and other types of insurance, including pollution and legal liability, that we believe are in accordance with customary industry practices, but we are not fully insured against all potential hazards incident to our business, including losses resulting from natural disasters, war risks or terrorist acts. Changes in insurance market conditions have caused, and may in the future cause, premiums and deductibles for certain insurance policies to increase substantially and in some instances, for certain insurance to become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, we might not be able to finance the amount of the uninsured liability on terms acceptable to us or at all, and might be obligated to divert a significant portion of our cash flow from normal business operations.

Shared control or lack of control of joint ventures may delay decisions or actions regarding the joint ventures.

A portion of our operations currently are, and may in the future be, conducted through joint ventures, where control may be exercised by or shared with unaffiliated third parties. We cannot control the actions of our joint venture partners, including any nonperformance, default or bankruptcy of joint venture partners. The joint ventures that we do not control may also lack adequate internal controls systems.

 

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In the event that any of our joint venture partners do not observe their joint venture obligations, it is possible that the affected joint venture would not be able to operate in accordance with our business plans or that we would be required to increase our level of commitment in order to give effect to such plans. As with any such joint venture arrangements, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major matters, potentially adversely affecting the business and operations of the joint ventures and in turn our business and operations.

Bankruptcy of a significant customer could have a material adverse effect on our liquidity, financial condition or results of operations.

Trends in alternative media continue to impact the operations of our newsprint customers. See “—Developments in alternative media could continue to adversely affect the demand for our products, especially in North America, and our responses to these developments may not be successful” above. If a customer is forced into bankruptcy as a result of these trends, any receivables related to that customer prior to the date of the bankruptcy filing of such customer may not be realized. In addition, such a customer may choose to reject its contracts with us, which could result in a larger claim arising prior to the date of the bankruptcy filing of such customer that also may not be realized.

Because our consolidated financial statements as of and for the year ended December 31, 2010 reflect adjustments related to the implementation of the Plans of Reorganization and the application of fresh start accounting as a result of our emergence from the Creditor Protection Proceedings, the consolidated financial statements of the Successor Company are not comparable to the consolidated financial statements of the Predecessor Company.

As of December 31, 2010, we applied fresh start accounting, pursuant to which the reorganization value, as derived from the enterprise value established in the Plans of Reorganization, was allocated to our assets and liabilities based on their fair values (except for deferred income taxes and pension and other postretirement (“OPEB”) benefit obligations) in accordance with FASB ASC 805, “Business Combinations,” with the excess of net asset values over the reorganization value recorded as an adjustment to equity. The amount of deferred income taxes recorded was determined in accordance with FASB ASC 740, “Income Taxes.” The amount of pension and OPEB benefit obligations recorded was determined in accordance with FASB ASC 715, “Compensation – Retirement Benefits.” Additionally, the implementation of the Plans of Reorganization, among other things, resulted in a new capital structure that replaced our historical pre-petition capital structure. The implementation of the Plans of Reorganization and the application of fresh start accounting materially changed the carrying amounts and classifications reported in our consolidated financial statements and resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, our consolidated financial statements as of December 31, 2010 and for periods subsequent to December 31, 2010 are not comparable to our consolidated financial statements for periods prior to December 31, 2010. For additional information, see Note 3, “Creditor Protection Proceedings,” to our Consolidated Financial Statements and “Plans of Reorganization” in Item 7.

Certain liabilities were not fully extinguished as a result of our emergence from the Creditor Protection Proceedings.

While a significant amount of our existing liabilities were discharged upon emergence from the Creditor Protection Proceedings, a number of obligations remain in effect following the effective date of the Plans of Reorganization. Various agreements and liabilities remain in place, such as certain employee benefit and pension obligations, potential environmental liabilities related to sites in operation or formerly owned or operated by us and other contracts that, even if they were modified during the Creditor Protection Proceedings, may still subject us to substantial obligations and liabilities. Other claims, such as those alleging toxic tort or product liability, or environmental liability related to formerly owned or operated sites, were not extinguished.

Other circumstances in which claims and other obligations that arose prior to Creditor Protection Proceedings were not discharged include instances where a claimant had inadequate notice of the Creditor Protection Proceedings or a valid argument as to when its claim arose or as a matter of law or otherwise.

There are significant holders of our common stock.

As publicly reported on SEDAR and with the SEC, there are several significant holders of our common stock who own a substantial percentage of the outstanding shares of our common stock. These holders may increase their percentage ownership of our common stock, including as a result of additional distributions pursuant to the Creditor Protection Proceedings. These holders may be in a position to influence the outcome of actions requiring shareholder approval, including, among other things, the election of board members. This concentration of ownership could also facilitate or hinder a negotiated change of control and consequently, impact the value of our common stock. Furthermore, the possibility that one or more of these holders may sell all or a large portion of our common stock in a short period of time may adversely affect the trading price of our common stock.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Information regarding our owned properties is included in Item 1, “Business.”

In addition to the properties that we own, we also lease under long-term leases certain timberlands, office premises and office and transportation equipment and have harvesting rights with respect to certain timberlands. Information regarding timberland and operating leases and harvesting rights is included in Note 23, “Timberland and Operating Leases and Purchase Obligations,” to our Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

BCFC Bankruptcy and Insolvency Act Filing

As part of a negotiated resolution to certain objections to the Plans of Reorganization, as reflected in the U.S. Court’s order confirming the Chapter 11 Reorganization Plan, BCFC was dismissed from the CCAA proceedings and is expected to be dismissed from the Chapter 11 cases. In addition, BCFC has made an assignment for the benefit of its creditors under the Bankruptcy and Insolvency Act (Canada) (the “BIA”). BCFC appointed a trustee as its representative in the BIA filing, whose responsibilities are to prosecute its claims (including a disputed claim in the Creditor Protection Proceedings), distribute its property, if any, and others as provided by the BIA.

Legal Items

We are involved in various legal proceedings relating to contracts, commercial disputes, taxes, environmental issues, employment and workers’ compensation claims, Aboriginal 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 entities subject to the Creditor Protection Proceedings (the “Debtors”) that arose out of pre-petition conduct or acts was subject to the automatic stay provisions of Chapter 11 and the CCAA and the orders of the Courts rendered thereunder and subject to certain exceptions, any recovery by the plaintiffs in those matters was treated consistently with all other general unsecured claims in the Creditor Protection Proceedings, i.e., to the extent a disputed general unsecured claim becomes an accepted claim, the claimholder would be entitled to receive a ratable amount of Successor Company common stock from the reserve established on the Emergence Date for this purpose, as discussed in Item 1, “Business – Emergence From Creditor Protection Proceedings.” As a result, we believe that these matters will not have a material adverse effect on our results of operations or financial position.

On March 31, 2010, the Canadian Court dismissed a motion for declaratory judgment brought by the province of Newfoundland and Labrador, awarding costs in our favor, and thus confirmed our position that the five orders the province issued under section 99 of its Environmental Protection Act on November 12, 2009 were subject to the stay of proceedings pursuant to the Creditor Protection Proceedings. The province of Newfoundland and Labrador’s orders could have required us to proceed immediately with the environmental remediation of various sites we formerly owned or operated, some of which the province expropriated in December 2008. The Quebec Court of Appeal denied the province’s request for leave to appeal on May 18, 2010. An appeal of that decision is now pending before the Supreme Court of Canada, which heard the matter on November 16, 2011. If leave to appeal is ultimately granted and the appeal is allowed, we could be required to make additional environmental remediation payments without regard to the Creditor Protection Proceedings, which payments could have a material impact on our results of operations or financial condition.

 

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Since late 2001, Bowater, several other paper companies, and numerous other companies have been named as defendants in asbestos personal injury actions. These actions generally allege occupational exposure to numerous products. We have denied the allegations and no specific product of ours has been identified by the plaintiffs in any of the actions as having caused or contributed to any individual plaintiff’s alleged asbestos-related injury. These suits have been filed by approximately 1,800 claimants who sought monetary damages in civil actions pending in state courts in Delaware, Georgia, Illinois, Mississippi, Missouri, New York and Texas. Approximately 1,000 of these claims have been dismissed, either voluntarily or by summary judgment, and approximately 645 claims remain. A motion to dismiss will be filed in each state for all matters related to products and premises where the plaintiffs did not file a claim in the Chapter 11 claims process. All Mississippi products and premises cases were dismissed, with other dismissals to follow. We expect that any resulting liability would be a general unsecured claim in the claims resolution process, which would be settled out of the share reserve and would not impact our results of operations and cash flows.

For a discussion of environmental matters to which we are subject, see Note 20, “Commitments and Contingencies – Environmental matters,” to our Consolidated Financial Statements.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Predecessor Company’s common stock began trading under the symbol “ABH” on both the NYSE and the TSX on October 29, 2007, following the consummation of the Combination. As a result of the Creditor Protection Proceedings, each of the NYSE and the TSX delisted this common stock at the opening of business on May 21, 2009 and the close of market on May 15, 2009, respectively. During the Creditor Protection Proceedings, this common stock traded in the over-the-counter market and was quoted on the Pink Sheets Quotation Service and on the OTC Bulletin Board under the symbol “ABWTQ.”

As of the Emergence Date and pursuant to the Plans of Reorganization, each share of the Predecessor Company’s common stock and each option, warrant, conversion privilege or other legal or contractual right to purchase shares of the Predecessor Company’s common stock, in each case to the extent outstanding immediately before the Emergence Date, was canceled and the holders thereof are not entitled to receive or retain any property on account thereof. On the Emergence Date, we issued 97,134,954 shares of new common stock. The Successor Company’s common stock began trading under the symbol “ABH” on both the NYSE and the TSX on December 10, 2010.

On December 31, 2010, AbitibiBowater Inc. issued 17,010,728 shares of unregistered common stock to Donohue Corp. (“Donohue,” a wholly-owned subsidiary of AbitibiBowater Inc.) as part of an internal tax restructuring contemplated by the Plans of Reorganization. The shares were issued to Donohue in exchange for all of the outstanding shares of common stock of two of Donohue’s wholly-owned subsidiaries, each of which also was an indirect wholly-owned subsidiary of ours. We accounted for these shares as treasury stock in our Consolidated Balance Sheets. The shares are voting stock but, in accordance with applicable Delaware corporate law, they will not be entitled to vote on matters brought before our shareholders nor be counted for quorum purposes. If ever entitled to vote, e.g., on account of a change in applicable law, Donohue has agreed with us that the shares will be voted in proportion to the votes of non-affiliated shareholders on all matters. The issuance of the shares to Donohue was made without registration under the Securities Act of 1933 (as amended, the “Securities Act”) in reliance on the exemption from registration provided under section 4(2) thereof.

The high and low prices of our common stock for 2010 and 2011, by quarter, are set forth below. The data through December 9, 2010 reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

      High      Low  

Predecessor common stock:

     

2010

     

First quarter

   $ 0.24       $ 0.09   

Second quarter

   $ 0.60       $ 0.09   

Third quarter

   $ 0.14       $ 0.01   

Fourth quarter – October 1 – December 9

   $ 0.08       $ 0.00   

Successor common stock:

     

2010

     

Fourth quarter – December 10 – December 31

   $  25.15       $  21.50   

2011

     

First quarter

   $ 30.54       $ 22.94   

Second quarter

   $ 28.34       $ 19.41   

Third quarter

   $ 21.18       $ 14.42   

Fourth quarter

   $ 18.20       $ 13.70   

As of January 31, 2012, there were approximately 2,700 holders of record of the Successor Company’s common stock.

During the Creditor Protection Proceedings, we could not pay dividends on the Predecessor Company’s common stock under the terms of our debtor in possession financing arrangements. It is unlikely that we will pay any dividends with respect to the Successor Company’s common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of the board of directors and will be dependent on then-existing conditions, including our financial condition,

 

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results of operations, capital requirements, contractual restrictions, business prospects and other factors that the board of directors considers relevant. The 2018 Notes indenture and the credit agreement that governs the ABL Credit Facility contain restrictions on our ability to pay dividends.

We did not repurchase any shares of common stock during 2010 and 2011 nor have we made any public announcement of plans or programs to date.

See Part III, Item 12 of this Form 10-K, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for information regarding our equity compensation plan.

The following graph compares the cumulative total return attained by shareholders on our common stock versus the cumulative total returns of the S&P 500 index and a peer group of five companies since December 10, 2010, the date the Successor Company’s common stock began trading following our emergence from the Creditor Protection Proceedings. The individual companies comprising the peer group are: Domtar Corporation, International Paper Company, UPM – Kymmene Corporation, Verso Paper Corp. and Weyerhaeuser Company. The graph tracks the performance of a $100 investment in our common stock on December 10, 2010, in the S&P 500 index on November 30, 2010 and in the peer group on November 30, 2010 (with the reinvestment of all dividends) to December 31, 2011. Data for periods prior to December 10, 2010 is not shown because of the Creditor Protection Proceedings and the fact that the financial results of the Successor Company are not comparable to the results of the Predecessor Company. The stock price performance included in the graph is not necessarily indicative of future stock price performance.

COMPARISON OF CUMULATIVE TOTAL RETURN

Among AbitibiBowater, the S&P 500 Index, and a Peer Group

 

LOGO

 

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents summary historical consolidated financial information for each of the last five years and should be read in conjunction with Items 7 and 8. The selected financial information for the years ended December 31, 2011, 2010 and 2009 and as of December 31, 2011 and 2010 under the captions “Statement of Operations Data,” “Segment Sales Information,” “Statement of Cash Flows Data” and “Financial Position” shown below has been derived from our audited Consolidated Financial Statements. As discussed in Part I, Item 1, “Business,” of this Form 10-K, on October 29, 2007, Abitibi and Bowater became subsidiaries of AbitibiBowater Inc. Bowater was deemed to be the “acquirer” of Abitibi for accounting purposes and AbitibiBowater Inc. was deemed to be the successor to Bowater for purposes of U.S. securities laws and financial reporting. Therefore, the data set forth below reflects the results of operations and financial position of Bowater for the period before October 29, 2007 and those of both Abitibi and Bowater for periods beginning on or after October 29, 2007.

As previously discussed, the implementation of the Plans of Reorganization and the application of fresh start accounting materially changed the carrying amounts and classifications reported in our Consolidated Financial Statements and resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, the consolidated financial statements of the Successor Company are not comparable to the consolidated financial statements of the Predecessor Company. For additional information, see Note 3, “Creditor Protection Proceedings,” to our Consolidated Financial Statements and “Plans of Reorganization” in Item 7.

 

            Successor        Predecessor  
(In millions, except per share amounts or otherwise indicated)          2011            2010      2009      2008      2007  

Statement of Operations Data

                      

Sales

      $ 4,756                 $ 4,746          $ 4,366           $ 6,771           $ 3,876        

Operating income (loss) (1)

        198                   (160)           (375)            (1,430)            (400)       

Reorganization items, net (2)

                           1,901            (639)            –              –         

Income (loss) before extraordinary item

        39                   2,775            (1,560)            (1,951)            (491)       

Net income (loss) attributable to AbitibiBowater Inc. (3)

        41                   2,614            (1,553)            (2,234)            (490)       

Basic net income (loss) per share attributable to AbitibiBowater Inc. common shareholders

        0.42                   45.30            (26.91)            (38.79)            (14.11)       

Diluted net income (loss) per share attributable to AbitibiBowater Inc. common shareholders

        0.42                   27.63            (26.91)            (38.79)            (14.11)       

Dividends declared per common share (4)

          –                   –            –             –              1.15        

Segment Sales Information

                      

Newsprint

      $ 1,816                 $ 1,804          $ 1,802           $ 3,238           $ 1,574        

Coated papers

        538                   482            416             659             570        

Specialty papers

        1,275                   1,321            1,331             1,829             800        

Market pulp

        659                   715            518             626             600        

Wood products

        468                   424            290             418             318        

Other

                             –            9             1             14        
          $ 4,756                 $ 4,746          $ 4,366           $ 6,771           $ 3,876        

Statement of Cash Flows Data

                      

Net cash provided by (used in) operating activities

      $ 198                 $ 39          $ 46           $ (420)          $ (247)       

Cash invested in fixed assets

          97                   81            101             186             128        
          Successor      Predecessor  
          2011            2010      2009      2008      2007  

Financial Position

                      

Fixed assets (5)

      $ 2,502               $ 2,641          $ 3,897           $ 4,507           $ 5,733        

Total assets

        6,298                 7,135            7,112             8,072             10,287        

Long-term debt, including current portion (6) (7)

        621                 905            613             5,293             5,059        

Total debt (6) (7)

          621                   905            1,499             5,970             5,648        

Additional Information

                      

Employees (number)

          10,400                   10,500            12,100             15,900             18,000        

 

(1) 

Operating income (loss) for 2011, 2010, 2009, 2008 and 2007 included a net gain on disposition of assets and other of $3 million, $30 million, $91 million, $49 million and $145 million, respectively, and included closure costs, impairment of assets other than goodwill and other related charges of $46 million, $11 million, $202 million, $481 million and $123 million, respectively. Operating loss for 2009 included $276 million of alternative fuel mixture tax credits (see Note 24,

 

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  “Alternative Fuel Mixture Tax Credits,” to our Consolidated Financial Statements for additional information). Operating loss for 2008 included impairment of goodwill charges of $810 million. Operating loss for 2007 included a charge for an arbitration award of $28 million.
(2) 

Certain expenses, provisions for losses and other charges and credits directly associated with or resulting from the reorganization and restructuring of the business that were realized or incurred in the Creditor Protection Proceedings, including the impact of the implementation of the Plans of Reorganization and the application of fresh start accounting, were recorded in “Reorganization items, net” in our Consolidated Statements of Operations. For additional information, see Note 3, “Creditor Protection Proceedings – Reorganization items, net,” to our Consolidated Financial Statements.

(3) 

Net loss attributable to AbitibiBowater Inc. in 2008 included a $256 million extraordinary loss for the non-cash write-off of the carrying value of our timber rights, water rights, leases and hydroelectric assets in the province of Newfoundland and Labrador, which were expropriated by the government of Newfoundland and Labrador in the fourth quarter of 2008. For additional information, see “Newfoundland and Labrador Expropriation” in Item 7.

(4) 

Dividends were declared quarterly. During the fourth quarter of 2007, the payment of a quarterly dividend to shareholders was suspended indefinitely. Additionally, during the Creditor Protection Proceedings, we could not pay dividends on the Predecessor Company’s common stock under the terms of our debtor in possession financing arrangements.

(5) 

As part of the application of fresh start accounting, fixed assets were adjusted to their fair values as of December 31, 2010.

(6) 

As of the Emergence Date and pursuant to the Plans of Reorganization, all amounts outstanding under our debtor in possession financing arrangements and the Debtors’ pre-petition secured debt obligations were paid in full in cash and certain holders of allowed claims arising from the Debtors’ pre-petition unsecured debt obligations received their pro rata share of the Successor Company’s common stock. Additionally, upon the consummation of the Plans of Reorganization, we assumed the obligations in respect of the $850 million principal amount of 2018 Notes issued by an escrow subsidiary of ours. In 2011, we redeemed $264 million of principal amount of the 2018 Notes. For additional information, see Note 16, “Liquidity and Debt,” to our Consolidated Financial Statements.

(7) 

Due to the commencement of the Creditor Protection Proceedings, our consolidated balance sheet as of December 31, 2009 included unsecured pre-petition debt obligations of $4,852 million included in liabilities subject to compromise, secured pre-petition debt obligations of $980 million included in current liabilities and pre-petition secured debt obligations of $34 million included in long-term debt, net of current portion.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) provides information that we believe is useful in understanding our results of operations, cash flows and financial condition for the years ended December 31, 2011, 2010 and 2009. This discussion should be read in conjunction with, and is qualified in its entirety by reference to, our Consolidated Financial Statements.

Business Strategy and Outlook

We emerged from the Creditor Protection Proceedings with a more flexible, lower-cost operating platform and a more conservative capital structure. Through aggressive capacity reductions, we streamlined our asset base and the substantial majority of our remaining assets have a competitive cost structure. We have reduced our debt levels from approximately $6.2 billion at the time of filing for creditor protection to $621 million as of December 31, 2011. We have substantially lowered our annual fixed costs, our debt service charges, as well as our SG&A expenses. We have also lowered overall manufacturing costs including significant reductions in salary and labor wages and costs.

During 2011, we experienced cost pressures as a result of inflation on our input costs, including higher energy and recycled fiber costs. We expect these cost pressures to continue in 2012; however, we also expect to mitigate some of the cost increases with actions to further lower manufacturing costs. Additionally, the Canadian dollar has a significant impact on the financial performance of our Canadian manufacturing sites. Based on our operating projections for 2012, a one-cent increase in the Canadian-U.S. dollar exchange rate is expected to decrease our annual operating income by approximately $16 million.

Our business strategy, which builds on the successful restructuring that began at the time of the Combination and continued through the Creditor Protection Proceedings, is based on three core areas of focus: operational excellence, corporate initiatives and strategic opportunities.

 

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Operational excellence

We plan to improve our performance and margins by: (i) leveraging our lower-cost position, (ii) continuing to prioritize further manufacturing cost reductions, (iii) capitalizing on our economical access to international ports through our network of mills located near deep sea ports to strengthen the export portion of our newsprint segment in growing markets such as Asia, Latin America and the Middle East and (iv) pursuing our strategy of not building inventory. We also regularly reevaluate our network of manufacturing assets and consider ways to further optimize our overall production and costs.

Corporate initiatives

Building on our focus to reduce manufacturing costs, we will continue our efforts to decrease overhead and spend our capital in a disciplined, strategic and focused manner, concentrated on the sites we believe are viable for the longer term.

Reducing debt and the associated interest charges is one of our primary financial goals. We believe this improves our financial flexibility and supports the implementation of our strategic objectives. In 2011, we redeemed $354 million of debt using the proceeds from the sale of our interest in Ontario power generation assets (ACH Limited Partnership, “ACH”) and cash on hand, as further discussed below under “Liquidity and Capital Resources.”

Strategic opportunities

We believe there will be continued consolidation in the paper and forest products industry as we and our competitors continue to explore ways to increase efficiencies and diversify customer offerings. We will take an opportunistic approach to strategic opportunities that reduce our cost position even further, improve our product diversification or expand into future growth markets.

For example, on December 15, 2011, we announced an offer to purchase all of the issued and outstanding shares of Fibrek. Fibrek is a producer and marketer of virgin and recycled kraft pulp, operating three mills with a combined annual production capacity of approximately 760,000 metric tons. The consideration for the proposed transaction (the “Fibrek Transaction”) consists of cash and shares of our common stock, up to approximately Cdn$71.5 million and 3.7 million shares, if consummated. The offer, which is more fully described in the bid circular and other ancillary documentation we filed with the SEC, will expire at 5:00 p.m. (Eastern Standard Time) on March 9, 2012, unless it is further extended or withdrawn. At this time, there can be no assurance that the offer will be consummated on the terms currently proposed or at all.

Plans of Reorganization

As a result of the implementation of the Plans of Reorganization and the application of fresh start accounting, as well as other actions taken during the Creditor Protection Proceedings, the consolidated financial statements of the Successor Company are not comparable to the consolidated financial statements of the Predecessor Company. Beginning in 2011, the consolidated statements of operations of the Successor Company are and will continue to be significantly different from the Predecessor Company due to, among other things, the following:

 

   

higher cost of sales, excluding depreciation, amortization and cost of timber harvested, as a result of the increase in the carrying value of finished goods inventory as of December 31, 2010 to reflect fair value, which increased cost of sales, excluding depreciation, amortization and cost of timber harvested, in the first quarter of 2011 as the inventory was sold;

 

   

lower depreciation, amortization and cost of timber harvested as a result of the rationalization of facilities, sale of assets, reductions in the carrying values of fixed assets and amortizable intangible assets to reflect fair values and updated useful lives of fixed assets and amortizable intangible assets;

 

   

lower labor and salary costs as a result of the implementation of our new labor agreements (costs of sales, excluding depreciation, amortization and cost of timber harvested) and salary reductions at the corporate level (SG&A expenses);

 

   

significantly lower interest expense as a result of the settlement or extinguishment of the Predecessor Company’s secured and unsecured debt obligations, partially offset by interest expense on our exit financing;

 

   

the Predecessor Company’s consolidated statements of operations included significant costs for reorganization items, which were directly associated with or resulted from the reorganization and restructuring of the business. In 2011, we incurred and will continue to incur costs associated with the finalization of outstanding restructuring and reorganization matters, primarily for the resolution and settlement of disputed creditor claims. These post-emergence costs are recorded in “Other expense, net” in the Successor Company’s consolidated statements of operations; and

 

   

income taxes are no longer impacted by the valuation allowances established on substantially all of the Predecessor Company’s deferred income tax assets. Such valuation allowances were reversed in connection with the implementation of the Plans of Reorganization. As of December 31, 2011, we recorded approximately $1,858 million of deferred income tax assets, which were reduced by $564 million of valuation allowances. As a result, we do not expect to pay significant cash taxes until these deferred income tax assets are fully utilized.

 

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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, newsprint, coated papers and specialty papers (particularly lightweight and directory grades) experienced a decrease in North American demand in 2011 compared to 2010. Global shipments of market pulp increased during 2011 compared to 2010, primarily due to increased Chinese demand. Our wood products segment continues to be impacted by low demand due to a weak U.S. housing market.

As discussed above, due to the implementation of the Plans of Reorganization and the application of fresh start accounting, as well as other actions taken during the Creditor Protection Proceedings, the operating results and financial condition of the Successor Company are not comparable to the operating results and financial condition of the Predecessor Company.

Consolidated Results of Operations

Year Ended December 31, 2011 versus December 31, 2010

 

            Years Ended December 31,  
          Successor      Predecessor        
(In millions, except per share amounts)          2011            2010          Change  

Sales

      $ 4,756            $ 4,746        $ 10   

Operating income (loss)

        198              (160       358   

Net income attributable to AbitibiBowater Inc.

        41              2,614          (2,573 ) 

Net income per share attributable to AbitibiBowater Inc. – basic

        0.42              45.30          (44.88 ) 

Net income per share attributable to AbitibiBowater Inc. – diluted

          0.42              27.63            (27.21 ) 

Significant items that favorably (unfavorably) impacted operating income (loss):

               

Product pricing

                $ 295   

Shipments

                                    (285 ) 

Change in sales

                  10   

Change in cost of sales, excluding depreciation, amortization and cost of timber harvested

                  134   

Change in depreciation, amortization and cost of timber harvested

                  273   

Change in distribution costs

                  6   

Change in selling, general and administrative expenses

                  (3 ) 

Change in closure costs, impairment and other related charges

                  (35 ) 

Change in net gain on disposition of assets and other

                                    (27 ) 
                                    $       358   

Sales

Sales increased $10 million, or 0.2%, from $4,746 million in 2010 to $4,756 million in 2011. The increase was due to higher transaction prices for newsprint, coated papers, specialty papers and higher shipments for wood products, partially offset by lower transaction prices for market pulp and wood products and lower shipments for newsprint, coated papers, specialty papers and market pulp. The impact of each of these items is discussed further below under “Segment Results of Operations.”

Operating income (loss)

Operating income (loss) improved $358 million to operating income of $198 million in 2011 compared to an operating loss of $160 million in 2010. The above table presents the items that impacted operating income (loss). A brief explanation of the major items follows.

 

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Cost of sales, excluding depreciation, amortization and cost of timber harvested, decreased $134 million in 2011 compared to 2010, primarily due to lower volumes ($201 million) and lower costs for energy ($9 million), fuel ($12 million) and labor and benefits ($82 million). These lower costs were partially offset by a significantly unfavorable currency exchange ($89 million, primarily due to the Canadian dollar) and higher costs for wood and fiber ($38 million), chemicals ($28 million), maintenance ($3 million) and other unfavorable cost variances. As discussed above, cost of sales, excluding depreciation, amortization and cost of timber harvested, in 2011 was unfavorably impacted by the increase in the carrying value of finished goods inventory as of December 31, 2010 to reflect fair value pursuant to fresh start accounting. In addition, as discussed above, such costs in 2011 were favorably impacted by lower costs for labor and benefits as a result of actions taken during the Creditor Protection Proceedings. Additionally, in the second quarter of 2011, we were approved for entry in the Northern Industrial Electricity Rate Program (“NIER Program”) in which we will earn rebates on electricity purchased and consumed by our paper mills in the province of Ontario from April 1, 2010 through March 31, 2013, provided we comply with the conditions of the program. During the second quarter of 2011, we recorded a rebate of approximately $19 million, of which approximately $14 million represented a retroactive rebate from April 1, 2010 through the first quarter of 2011.

Depreciation, amortization and cost of timber harvested decreased $273 million in 2011 compared to 2010, primarily as a result of actions taken during the Creditor Protection Proceedings and the application of fresh start accounting, as discussed above.

Distribution costs decreased $6 million in 2011 compared to 2010 due to lower shipment volumes, partially offset by higher distribution costs per ton.

Selling, general and administrative expenses increased $3 million in 2011 compared to 2010, primarily due to the reversal of a $17 million bonus accrual in 2010, as well as approximately $12 million of corporate employee termination costs and approximately $5 million of transaction costs in connection with our proposed acquisition of Fibrek recorded in 2011, partially offset by our continued cost reduction initiatives, including salary reductions at the corporate level, as discussed above, the reversal of a capital tax reserve of approximately $4 million in 2011 and a lease termination fee of approximately $2 million in 2010 related to our head office in Montreal, Quebec.

We recorded closure costs, impairment and other related charges of $46 million in 2011 compared to $11 million in 2010. We recorded a net gain on disposition of assets and other of $3 million in 2011 compared to $30 million in 2010. For additional information, see “Segment Results of Operations – Corporate and Other” below.

Net income attributable to AbitibiBowater Inc.

Net income attributable to AbitibiBowater Inc. in 2011 was $41 million, or $0.42 per diluted common share, a decrease of $2,573 million, or $27.21 per diluted common share, compared to $2,614 million, or $27.63 per diluted common share, in 2010. The decrease was primarily due to reorganization items, net recorded in 2010 (which included a net gain of $3,553 million resulting from the implementation of the Plans of Reorganization and a net expense of $362 million resulting from the application of fresh start accounting), which is discussed further below under “Non-operating Items,” partially offset by the improvement in operating income (loss), as discussed above, and a decrease in other expense, net (primarily foreign exchange) and a decrease in interest expense, both of which are discussed further below under “Non-operating Items.” Additionally, in 2011, we recorded an income tax provision of $16 million compared to an income tax benefit of $1,606 million in 2010, which was primarily due to the reversal of our valuation allowances in connection with the implementation of the Plans of Reorganization (see Note 19, “Income Taxes,” to our Consolidated Financial Statements for additional information). The 2011 income tax provision included an unfavorable $38 million of reorganization-related tax adjustments, which resulted from our identification of certain adjustments associated with our previously-reported 2010 deferred income tax balance sheet accounts. We did not adjust any prior period amounts, as we do not believe that these adjustments are material to 2011 or any of our previously-issued financial statements.

 

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Fourth Quarter of 2011 versus Fourth Quarter of 2010

Sales decreased $125 million, or 9.8%, from $1,272 million in the fourth quarter of 2010 to $1,147 million in the fourth quarter of 2011. The decrease was due to lower transaction prices for market pulp and wood products and lower shipments for newsprint, coated papers, specialty papers and market pulp, partially offset by higher transaction prices for newsprint, coated papers and specialty papers and higher shipments for wood products.

Operating income increased $36 million from $11 million in the fourth quarter of 2010 to $47 million in the fourth quarter of 2011. The increase was due to the following:

 

   

a decrease in cost of sales, excluding depreciation, amortization and cost of timber harvested, of $102 million, primarily due to a favorable currency exchange ($6 million, primarily due to the Canadian dollar), lower volumes ($75 million) and lower costs for energy ($5 million), fuel ($4 million), labor and benefits ($34 million) and other favorable cost variances, partially offset by higher costs for wood and fiber ($11 million), chemicals ($7 million) and maintenance ($10 million). As discussed above, cost of sales, excluding depreciation, amortization and cost of timber harvested, in 2011 was favorably impacted by lower costs for labor and benefits as a result of actions taken during the Creditor Protection Proceedings;

 

   

a decrease in depreciation, amortization and cost of timber harvested of $61 million, primarily as a result of actions taken during the Creditor Protection Proceedings and the application of fresh start accounting, as discussed above;

 

   

a decrease in distribution costs of $10 million due to lower shipment volumes, partially offset by higher distribution costs per ton; and

 

   

a decrease in selling, general and administrative expenses of $10 million, primarily due to our continued cost reduction initiatives, including salary reductions at the corporate level, as discussed above, the reversal of a capital tax reserve of approximately $4 million in the fourth quarter of 2011 and a lease termination fee of approximately $2 million in the fourth quarter of 2010 related to our head office in Montreal, Quebec, partially offset by approximately $5 million of transaction costs in connection with our proposed acquisition of Fibrek recorded in the fourth quarter of 2011.

The decreases in expenses discussed above were offset by the following:

 

   

the decrease in sales, as discussed above;

 

   

an increase in closure costs, impairment and other related charges of $6 million; and

 

   

a decrease in net gain on disposition of assets and other of $16 million, primarily due to a net gain related to a customer bankruptcy settlement in the fourth quarter of 2010.

Interest expense decreased $48 million from $66 million in the fourth quarter of 2010 to $18 million in the fourth quarter of 2011, primarily due to significantly lower debt levels in connection with our emergence from the Creditor Protection Proceedings, as well as debt redemptions of the 2018 Notes in 2011, as further discussed below under “Liquidity and Capital Resources.”

Other income, net was $3 million in the fourth quarter of 2011 compared to other expense, net of $121 million in the fourth quarter of 2010, primarily due to foreign currency exchange gains of $9 million in the fourth quarter of 2011 compared to foreign currency exchange losses of $124 million in the fourth quarter of 2010, as well as a net gain on extinguishment of debt of $2 million in the fourth quarter of 2011, partially offset by costs for the resolution and settlement of disputed creditor claims and other post-emergence activities associated with the Creditor Protection Proceedings of $12 million in the fourth quarter of 2011.

Net loss attributable to AbitibiBowater Inc. in the fourth quarter of 2011 was $6 million, or $0.06 per diluted common share, compared to $4,240 million of net income, or $44.82 per diluted common share, in the fourth quarter of 2010. The decrease was primarily due to reorganization items, net recorded in the fourth quarter of 2010 (which included a net gain of $3,553 million resulting from the implementation of the Plans of Reorganization and a net expense of $362 million resulting from the application of fresh start accounting), which is discussed further below under “Non-operating Items,” partially offset by the increase in operating income, the decrease in interest expense and the decrease in other expense, all of which are discussed above. Additionally, in the fourth quarter of 2011, we recorded an income tax provision of $42 million compared to an income tax benefit of $1,601 million in the fourth quarter of 2010, which was primarily due to the reversal of our valuation allowances in connection with the implementation of the Plans of Reorganization (see Note 19, “Income Taxes,” to our Consolidated Financial Statements for additional information). The income tax provision in the fourth quarter of 2011 included an unfavorable $48 million of reorganization-related tax adjustments, which resulted from our identification of certain adjustments associated with our previously-reported 2010 deferred income tax balance sheet accounts. We did not adjust any prior period amounts, as we do not believe that these adjustments are material to 2011 or any of our previously-issued financial statements.

 

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Year Ended December 31, 2010 versus December 31, 2009

 

0000000 0000000 0000000
      Predecessor  
     Years Ended December 31,  
(In millions, except per share amounts)    2010     2009     Change  

Sales

   $   4,746      $ 4,366      $ 380   

Operating loss

     (160     (375     215   

Net income (loss) attributable to AbitibiBowater Inc.

     2,614        (1,553     4,167   

Net income (loss) per share attributable to AbitibiBowater Inc. – basic

     45.30        (26.91     72.21   

Net income (loss) per share attributable to AbitibiBowater Inc. – diluted

     27.63        (26.91     54.54   

Significant items that favorably (unfavorably) impacted operating loss:

      

Product pricing

       $ 233   

Shipments

                     147   

Change in sales

         380   

Change in cost of sales and depreciation, amortization and cost of timber harvested

         (272

Change in distribution costs

         (66

Change in selling, general and administrative expenses

         43   

Change in closure costs, impairment and other related charges

         191   

Change in net gain on disposition of assets and other

                     (61
                     $       215   

Sales

Sales increased $380 million, or 8.7%, from $4,366 million in 2009 to $4,746 million in 2010. The increase was primarily due to significantly higher transaction prices for market pulp and wood products, higher transaction prices for newsprint and higher shipments for coated papers, specialty papers and wood products, partially offset by lower transaction prices for specialty papers and lower shipments for newsprint. The impact of each of these items is discussed further below under “Segment Results of Operations.”

Operating loss

Operating loss decreased $215 million from $375 million in 2009 to $160 million in 2010. The above table presents the items that impacted operating loss. A brief explanation of the major items follows.

Cost of sales and depreciation, amortization and cost of timber harvested increased $272 million in 2010 compared to 2009, primarily due to a significantly unfavorable currency exchange ($248 million, primarily due to the Canadian dollar), benefits from the alternative fuel mixture tax credits of $276 million that were recorded in 2009 (the fuel tax credit program expired at the end of 2009) and higher costs for maintenance ($26 million) and energy ($12 million). These higher costs were partially offset by lower volumes ($40 million) and lower costs for wood and fiber ($15 million), fuel ($8 million), chemicals ($21 million), labor and benefits ($55 million), depreciation ($109 million) and other favorable cost variances. For additional information regarding the alternative fuel mixture tax credits, see Note 24, “Alternative Fuel Mixture Tax Credits,” to our Consolidated Financial Statements.

Distribution costs increased $66 million in 2010 compared to 2009 due to higher distribution costs per ton and higher shipment volumes.

Selling, general and administrative expenses decreased $43 million in 2010 compared to 2009 due to our continued cost reduction initiatives and the reversal of a $17 million bonus accrual in 2010, as well as $10 million of costs incurred in 2009 related to our unsuccessful refinancing efforts. These decreases were partially offset by a $16 million reversal that was recorded in 2009 for previously recorded Canadian capital tax liabilities as a result of legislation which eliminated this tax, an accrual of approximately $7 million in 2010 for the 2010 short-term incentive plan and a lease termination fee of approximately $2 million in 2010 related to our head office in Montreal, Quebec.

 

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We recorded closure costs, impairment and other related charges of $11 million in 2010 compared to $202 million in 2009. We recorded a net gain on disposition of assets and other of $30 million in 2010 compared to $91 million in 2009. For additional information, see “Segment Results of Operations – Corporate and Other” below.

Net income (loss) attributable to AbitibiBowater Inc.

Net income (loss) attributable to AbitibiBowater Inc. in 2010 was $2,614 million of net income, or $27.63 per diluted common share, an improvement of $4,167 million, or $54.54 per diluted common share, compared to $1,533 million of net loss, or $26.91 per diluted common share, in 2009. The improvement was primarily due to the decrease in operating loss, as discussed above, decreases in interest expense and reorganization items, net and an increase in income tax benefit, partially offset by the increase in other expense, net, all of which are discussed further below under “Non-operating Items.” As further discussed in Note 3, “Creditor Protection Proceedings – Reorganization items, net,” to our Consolidated Financial Statements, reorganization items, net in 2010 included a net gain of $3,553 million resulting from the implementation of the Plans of Reorganization and a net expense of $362 million resulting from the application of fresh start accounting. Additionally, in 2010, we recorded an income tax benefit of $1,606 million, primarily due to the reversal of our valuation allowances in connection with the implementation of the Plans of Reorganization (see Note 19, “Income Taxes,” to our Consolidated Financial Statements for additional information).

Non-operating Items - Years Ended December 31, 2011, 2010 and 2009

Interest expense

Interest expense decreased to $95 million in 2011 from $483 million in 2010 and $597 million in 2009. The decrease in interest expense in 2011 compared to 2010 was primarily due to significantly lower debt levels in connection with our emergence from the Creditor Protection Proceedings. Additionally, interest expense in 2010 included a cumulative adjustment of $43 million to increase the accrued interest on the unsecured U.S. dollar denominated debt obligations of the CCAA filers to a fixed exchange rate, as further discussed in Note 3, “Creditor Protection Proceedings – Reorganization items, net,” to our Consolidated Financial Statements. The decrease in interest expense in 2010 compared to 2009 was a result of ceasing to accrue interest on certain of our pre-petition debt obligations. In accordance with FASB ASC 852, during the Creditor Protection Proceedings, we recorded interest expense on our pre-petition debt obligations only to the extent that: (i) interest would be paid during the Creditor Protection Proceedings or (ii) it was probable that interest would be an allowed priority, secured or unsecured claim. As such, during the Creditor Protection Proceedings, we continued to accrue interest on the Debtors’ pre-petition secured debt obligations and, until the third quarter of 2010, the CCAA filers’ pre-petition unsecured debt obligations. See Note 3, “Creditor Protection Proceedings – Reorganization items, net,” to our Consolidated Financial Statements for a discussion of the reversal of post-petition accrued interest on the CCAA filers’ pre-petition unsecured debt obligations. Interest expense in 2010 also included accrued interest on the 2018 Notes, which were issued on October 4, 2010, as further discussed below under “Liquidity and Capital Resources.”

Other expense, net

Other expense, net in 2011 was $48 million, primarily comprised of foreign currency exchange losses of $21 million and costs for the resolution and settlement of disputed creditor claims and other post-emergence activities associated with the Creditor Protection Proceedings of $47 million, partially offset by net gains on extinguishment of debt of $6 million. Other expense, net in 2010 was $89 million, primarily comprised of foreign currency exchange losses. Other expense, net in 2009 was $71 million, primarily comprised of foreign currency exchange losses of $59 million, fees for waivers and amendments to our former accounts receivable securitization program of $23 million, as well as a loss on the sale of ownership interests in accounts receivable of $17 million, partially offset by $24 million of income, net from a subsidiary’s proceeds sharing arrangement related to a third party’s sale of timberlands.

Reorganization items, net

Pursuant to FASB ASC 852, we recorded reorganization items, net in 2010 of a credit of $1,901 million and expense of $639 million in 2009 for certain expenses, provisions for losses and other charges and credits directly associated with or resulting from the reorganization and restructuring of the business that were realized or incurred in the Creditor Protection Proceedings, including the impact of the implementation of the Plans of Reorganization (net gain of $3,553 million in 2010) and the application of fresh start accounting (net expense of $362 million in 2010). For additional information, see Note 3, “Creditor Protection Proceedings – Reorganization items, net,” to our Consolidated Financial Statements.

 

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Income taxes

In 2011, an income tax provision of $16 million was recorded on income before income taxes of $55 million, resulting in an effective tax rate of 29%. The income tax provision included a favorable $63 million adjustment related to our reserves for unrecognized tax benefits, primarily due to the completion of certain tax authority examinations during the year, partially offset by an unfavorable $38 million of reorganization-related tax adjustments, which resulted from our identification of certain adjustments associated with our previously-reported 2010 deferred income tax balance sheet accounts. We did not adjust any prior period amounts, as we do not believe that these adjustments are material to 2011 or any of our previously-issued financial statements. Also impacting our effective tax rate in 2011 are unfavorable effects related to foreign exchange and the recording of valuation allowances on certain deferred income tax benefits not expected to be realized. For additional information, see Note 19, “Income Taxes,” to our Consolidated Financial Statements.

In 2010, an income tax benefit of $1,606 million was recorded on income before income taxes of $1,169 million, resulting in an effective tax rate of (137)%. The income tax benefit was primarily due to the reversal of our valuation allowances as part of the implementation of the Plans of Reorganization and the non-taxability of the gains on the Plans of Reorganization. See Note 19, “Income Taxes,” to our Consolidated Financial Statements.

In 2009, income tax benefits of $122 million were recorded on a loss before income taxes of $1,682 million, resulting in an effective tax rate of 7%. In 2009, income tax benefits of approximately $615 million generated on the majority of our losses were entirely offset by tax charges to increase our valuation allowance related to these tax benefits. Our effective tax rate in 2009 was primarily impacted by the valuation allowance, as described above, and the tax treatment on foreign currency gains and losses. Additionally, subsequent to the commencement of Abitibi’s CCAA proceedings, in 2009, we concluded that our investment in the common stock of Abitibi no longer had any value and therefore, we recorded a $308 million tax benefit for a worthless stock deduction, which represents the estimated tax basis in our investment in Abitibi of approximately $800 million. In addition, in 2009, we recorded a tax recovery of approximately $141 million related to the asset impairment charges associated with our investment in Manicouagan Power Company (“MPCo”) while it was an asset held for sale. For additional information, see Note 5, “Closure Costs, Impairment and Other Related Charges,” to our 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 foreign subsidiaries whose unconsolidated local currency foreign exchange 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. We also have foreign exchange gains and losses on the conversion of foreign currency denominated items, for which no tax expense or benefit is recorded. 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.

Financial Condition

Total assets were $6.3 billion as of December 31, 2011, a decrease of $0.8 billion compared to December 31, 2010, which was primarily due to the sale of our investment in ACH in 2011. Cash and cash equivalents were $369 million as of December 31, 2011, an increase of $50 million compared to December 31, 2010. For additional information regarding our liquidity, see “Liquidity and Capital Resources” below.

Segment Results of Operations

We manage our business based on the products we manufacture. Accordingly, our reportable segments correspond to our primary product lines: newsprint, coated papers, specialty papers, market pulp and wood products. None of the income or loss items following “Operating income (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, as well as other discretionary charges or credits are not allocated to our segments. Also excluded from our segment results are corporate and other items, which include costs associated with our unsuccessful refinancing efforts in 2009. These items are also analyzed separately from our segment results. Additionally, beginning in 2011, all SG&A expenses, excluding employee termination costs and certain discretionary charges, are allocated to our segments. Share-based compensation expense and depreciation expense are also allocated to our segments. For additional information regarding our segments, see Note 25, “Segment Information,” to our Consolidated Financial Statements.

As discussed above, due to the implementation of the Plans of Reorganization and the application of fresh start accounting, the operating results of the Successor Company are not comparable to the operating results of the Predecessor Company. To the extent that the items discussed above under “Plans of Reorganization” are allocated to our segments, the results of operations in 2011 for all of our segments were impacted by the actions taken during the Creditor Protection Proceedings, the implementation of the Plans of Reorganization and the application of fresh start accounting. Additionally, the results of operations in 2011 for all of our segments were impacted by the allocation of SG&A expenses, excluding employee termination costs and certain discretionary charges, to our segments, as discussed above.

 

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Year Ended December 31, 2011 versus December 31, 2010

Newsprint

 

            Years Ended December 31,  
          Successor              Predecessor         
            2011              2010      Change  

Average price (per metric ton)

      $ 659                 $ 600             $ 59   

Average cost (per metric ton)

      $ 627                 $ 657             $ (30

Shipments (thousands of metric tons)

        2,753                   3,005               (252

Downtime (thousands of metric tons)

        102                   738               (636

Inventory at end of year (thousands of metric tons)

        78                   75               3   
 

(In millions)

                                    

Segment sales

      $     1,816                 $ 1,804             $ 12   

Segment operating income (loss)

          89                     (171)             260   

Significant items that favorably (unfavorably) impacted segment operating income (loss):

  

Product pricing

   $ 178   

Shipments

     (166

Change in sales

     12   

Change in cost of sales, excluding depreciation, amortization and cost of timber harvested

     104   

Change in depreciation, amortization and cost of timber harvested

     152   

Change in distribution costs

     14   

Change in selling, general and administrative expenses

     (22
     $       260   

Segment sales increased $12 million, or 0.7%, from $1,804 million in 2010 to $1,816 million in 2011 due to higher transaction prices, partially offset by lower shipment volumes. Shipments in 2011 decreased 252,000 metric tons, or 8.4%, compared to 2010.

Downtime at our facilities was significantly lower in 2011 compared to 2010 due to permanent capacity reductions.

Segment operating income (loss) improved $260 million to operating income of $89 million in 2011 compared to an operating loss of $171 million in 2010. The above table presents the items that impacted operating income (loss). A brief explanation of the major items follows.

Segment cost of sales, excluding depreciation, amortization and cost of timber harvested, decreased $104 million in 2011 compared to 2010, primarily due to lower volumes ($113 million) and lower costs for energy ($19 million), labor and benefits ($22 million) and other favorable cost variances, partially offset by an unfavorable currency exchange ($36 million, primarily due to the Canadian dollar) and higher costs for wood and fiber ($18 million). In addition, as discussed above, such costs in 2011 were favorably impacted by approximately $9 million for the NIER Program retroactive rebate recorded in the second quarter of 2011.

Segment depreciation, amortization and cost of timber harvested decreased $152 million in 2011 compared to 2010, primarily as a result of actions taken during the Creditor Protection Proceedings and the application of fresh start accounting, as discussed above.

Segment distribution costs decreased $14 million in 2011 compared to 2010 due to lower shipment volumes, partially offset by higher distribution costs per ton.

 

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Newsprint Third-Party Data: North American newsprint demand declined 7.4% and global newsprint demand declined 5.2% in 2011 compared to 2010. In 2011, North American net exports of newsprint were 4.2% lower than 2010. Inventories for North American mills as of December 31, 2011 were 192,000 metric tons, which is 1.1% higher than as of December 31, 2010. The North American operating rate for newsprint was 92% in both 2011 and 2010.

Coated Papers

 

00000 00000 00000 00000
           Years Ended December 31,  
         Successor            Predecessor         
           2011            2010      Change  

Average price (per short ton)

     $ 819                  $ 718             $ 101   

Average cost (per short ton)

     $ 732                  $ 672             $ 60   

Shipments (thousands of short tons)

       657                    671               (14

Downtime (thousands of short tons)

       6                    10               (4

Inventory at end of year (thousands of short tons)

       26                    20               6   
 

(In millions)

                              

Segment sales

     $ 538                  $ 482             $ 56   

Segment operating income

         57                    31               26   
000000

Significant items that favorably (unfavorably) impacted segment operating income:

  

Product pricing

   $ 66   

Shipments

     (10

Change in sales

     56   

Change in cost of sales, excluding depreciation, amortization and cost of timber harvested

     (15

Change in depreciation, amortization and cost of timber harvested

     (5

Change in selling, general and administrative expenses

     (10
     $ 26   

Segment sales increased $56 million, or 11.6%, from $482 million in 2010 to $538 million in 2011 due to higher transaction prices, partially offset by lower shipment volumes.

Segment operating income increased $26 million to $57 million in 2011 compared to $31 million in 2010. The above table presents the items that impacted operating income. A brief explanation of the major items follows.

Segment cost of sales, excluding depreciation, amortization and cost of timber harvested, increased $15 million in 2011 compared to 2010, primarily due to higher costs for wood and fiber ($8 million), energy ($6 million), chemicals ($26 million) and other unfavorable cost variances, partially offset by lower volumes ($30 million).

Coated Papers Third-Party Data: North American demand for coated mechanical papers decreased 8.6% in 2011 compared to 2010. The North American operating rate for coated mechanical papers was 90% in 2011 compared to 88% in 2010. North American coated mechanical mill inventories were at 17 days of supply as of December 31, 2011 compared to 14 days of supply as of December 31, 2010.

 

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Specialty Papers

 

          Years Ended December 31,  
        Successor        Predecessor        
          2011        2010     Change  

Average price (per short ton)

    $ 727                $ 687              $ 40   

Average cost (per short ton)

    $ 692                $ 709              $ (17

Shipments (thousands of short tons)

      1,753                  1,924                (171

Downtime (thousands of short tons)

      90                  115                (25

Inventory at end of year (thousands of short tons)

      68                  88                (20
 

(In millions)

                                   

Segment sales

    $     1,275                $         1,321              $ (46

Segment operating income (loss)

        62                    (44)               106   

Significant items that favorably (unfavorably) impacted segment operating income (loss):

 

Product pricing

  $ 71   

Shipments

    (117

Change in sales

    (46

Change in cost of sales, excluding depreciation, amortization and cost of timber harvested

    89   

Change in depreciation, amortization and cost of timber harvested

    79   

Change in distribution costs

    4   

Change in selling, general and administrative expenses

    (20
    $      106   

Segment sales decreased $46 million, or 3.5%, from $1,321 million in 2010 to $1,275 million in 2011 due to lower shipment volumes, partially offset by higher transaction prices.

Segment operating income (loss) improved $106 million to operating income of $62 million in 2011 compared to an operating loss of $44 million in 2010. The above table presents the items that impacted operating income (loss). A brief explanation of the major items follows.

Segment cost of sales, excluding depreciation, amortization and cost of timber harvested, decreased $89 million in 2011 compared to 2010, primarily due to lower volumes ($78 million) and lower costs for fuel ($14 million), labor and benefits ($23 million) and other favorable cost variances, partially offset by an unfavorable Canadian dollar currency exchange ($29 million). In addition, as discussed above, such costs in 2011 were favorably impacted by approximately $3 million for the NIER Program retroactive rebate recorded in the second quarter of 2011.

Segment depreciation, amortization and cost of timber harvested decreased $79 million in 2011 compared to 2010, primarily as a result of actions taken during the Creditor Protection Proceedings and the application of fresh start accounting, as discussed above.

Segment distribution costs decreased $4 million in 2011 compared to 2010 due to lower shipment volumes, partially offset by higher distribution costs per ton.

Specialty Papers Third-Party Data: In 2011 compared to 2010, North American demand for supercalendered high gloss papers was down 4.2%, for lightweight and directory grades was down 20.8%, for standard uncoated mechanical papers was down 7.5% and in total for all specialty papers was down 7.8%. The North American operating rate for all specialty papers was 94% in 2011 compared to 91% in 2010. North American uncoated mechanical mill inventories were at 16 days of supply as of both December 31, 2011 and 2010.

 

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Table of Contents

Market Pulp

 

00000 00000 00000 00000
          Years Ended December 31,  
        Successor         Predecessor         
          2011         2010      Change  

Average price (per metric ton)

    $ 731                  $ 737               $ (6

Average cost (per metric ton)

    $ 637                  $ 596               $ 41   

Shipments (thousands of metric tons)

      902                970                 (68

Downtime (thousands of metric tons)

      97                47                 50   

Inventory at end of year (thousands of metric tons)

      79                58                 21   
 

(In millions)

                            

Segment sales

    $         659                  $         715               $ (56

Segment operating income

        85                137                 (52
000000 000000

Significant items that (unfavorably) favorably impacted segment operating income:

    

Product pricing

   $ (6

Shipments

     (50

Change in sales

     (56

Change in cost of sales, excluding depreciation, amortization and cost of timber harvested

       

Change in depreciation, amortization and cost of timber harvested

     19   

Change in selling, general and administrative expenses

     (15
     $ (52

Segment sales decreased $56 million, or 7.8%, from $715 million in 2010 to $659 million in 2011 due to lower shipment volumes and transaction prices.

Segment operating income decreased $52 million to $85 million in 2011 compared to $137 million in 2010. The above table presents the items that impacted segment operating income. A brief explanation of the major items follows.

Segment cost of sales, excluding depreciation, amortization and cost of timber harvested, was unchanged in 2011 compared to 2010. An unfavorable Canadian dollar currency exchange ($10 million), higher costs for energy ($5 million) and other unfavorable cost variances were offset by lower volumes ($18 million) and lower costs for wood and fiber ($3 million) and labor and benefits ($3 million). In addition, as discussed above, such costs in 2011 were favorably impacted by approximately $2 million for the NIER Program retroactive rebate recorded in the second quarter of 2011.

Segment depreciation, amortization and cost of timber harvested decreased $19 million in 2011 compared to 2010, primarily as a result of actions taken during the Creditor Protection Proceedings and the application of fresh start accounting, as discussed above.

Market Pulp Third-Party Data: World shipments for market pulp increased 3.5% in 2011 compared to 2010. Shipments were down 2.4% in Western Europe (the world’s largest pulp market), down 3.5% in North America, up 30.0% in China, down 2.7% in Latin America and up 0.1% in Africa and Asia (excluding China and Japan). World market pulp producers shipped at 91% of capacity in 2011 compared to 92% in 2010. World market pulp producer inventories of softwood and hardwood grades were at 36 days and 33 days, respectively, of supply as of December 31, 2011 compared to 25 days and 36 days, respectively, of supply as of December 31, 2010. World market pulp producer inventories of all grades were at 34 days of supply as of December 31, 2011 compared to 30 days of supply as of December 31, 2010.

 

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Table of Contents

Wood Products

 

00000 00000 00000 00000
          Years Ended December 31,  
        Successor         Predecessor         
          2011         2010          Change  

Average price (per thousand board feet)

    $ 294                  $ 304                  $ (10

Average cost (per thousand board feet)

    $ 310                  $ 297                  $ 13   

Shipments (millions of board feet)

      1,586                1,395                191   

Downtime (millions of board feet)

      560                954                (394

Inventory at end of year (millions of board feet)

      124                122                2   
 

(In millions)

                            

Segment sales

    $         468                  $         424                  $ 44   

Segment operating (loss) income

        (25)               9                (34
000000 000000

Significant items that (unfavorably) favorably impacted segment operating (loss) income:

   

Product pricing

  $ (14

Shipments

    58   

Change in sales

    44   

Change in cost of sales, excluding depreciation, amortization and cost of timber harvested

    (55

Change in depreciation, amortization and cost of timber harvested

    9   

Change in distribution costs

    (15

Change in selling, general and administrative expenses

    (17
    $ (34

Segment sales increased $44 million, or 10.4%, from $424 million in 2010 to $468 million in 2011 due to higher shipment volumes, partially offset by lower transaction prices.

In 2011, downtime at our facilities was market related.

Segment operating (loss) income decreased $34 million to an operating loss of $25 million in 2011 compared to operating income of $9 million in 2010. The above table presents the items that impacted segment operating (loss) income. A brief explanation of the major items follows.

Segment cost of sales, excluding depreciation, amortization and cost of timber harvested, increased $55 million in 2011 compared to 2010, primarily due to an unfavorable Canadian dollar currency exchange ($14 million), higher volumes ($38 million) and higher costs for wood and fiber ($13 million) and other unfavorable cost variances, partially offset by lower costs for labor and benefits ($22 million).

Segment depreciation, amortization and cost of timber harvested decreased $9 million in 2011 compared to 2010, primarily as a result of actions taken during the Creditor Protection Proceedings and the application of fresh start accounting, as discussed above.

Segment distribution costs increased $15 million in 2011 compared to 2010 due to higher shipment volumes and higher distribution costs per ton.

Wood Products Third-Party Data: Privately-owned housing starts in the U.S. increased 24.9% to a seasonally-adjusted annual rate of 657,000 units in December 2011 compared to 526,000 units in December 2010.

 

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Table of Contents

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 income (loss) in our Consolidated Statements of Operations.

 

            Years Ended December 31,  
          Successor            Predecessor        
(In millions)          2011            2010            Change  

Cost of sales, excluding depreciation, amortization and cost of timber harvested

      $ (14)                 $ (25)                $ 11   
 

Depreciation, amortization and cost of timber harvested

        –                    (19)              19   
 

Distribution costs

        –                    (3)              3   
 

Selling, general and administrative expenses

        (13)                   (94)              81   
 

Closure costs, impairment and other related charges

        (46)                   (11)              (35
 

Net gain on disposition of assets and other

          3                      30               (27

Operating loss

        $ (70)                   $ (122)                $         52   

Cost of sales, excluding depreciation, amortization and cost of timber harvested

Cost of sales, excluding depreciation, amortization and cost of timber harvested, in corporate and other included ongoing costs related to closed mills and other miscellaneous adjustments. Additionally, in 2011, we recorded charges of $3 million for write-downs of inventory as a result of the decision to cease paperboard production at our Coosa Pines paper mill, as well as the permanent closure of a paper machine at our Kenogami paper mill. Cost of sales, excluding depreciation, amortization and cost of timber harvested, in corporate and other in 2010 included approximately $31 million for ongoing costs related to closed mills.

Selling, general and administrative expenses

Beginning in 2011, all selling, general and administrative expenses, excluding employee termination costs and certain discretionary charges, are allocated to our segments. Prior to 2011, only direct selling expenses were allocated to our segments, with the balance of selling, general and administrative expenses included in corporate and other. In 2011, we recorded approximately $12 million of corporate employee termination costs and approximately $5 million of transaction costs in connection with our proposed acquisition of Fibrek, as well as the reversal of a capital tax reserve of approximately $4 million. In 2010, selling, general and administrative expenses included in corporate and other included the reversal of a $17 million bonus accrual, as well as a lease termination fee of approximately $2 million related to our head office in Montreal, Quebec.

Closure costs, impairment and other related charges

In 2011, we recorded closure costs, impairment and other related charges of $46 million for: (i) accelerated depreciation related to the permanent closures of a de-inking line at our Alma paper mill, a paper machine and a thermomechanical pulp line at our Baie-Comeau paper mill, as well as our Saint-Prime remanufacturing wood products facility; (ii) accelerated depreciation, long-lived asset impairment charges, severance costs and an OPEB benefit plan curtailment loss as a result of the decision to cease paperboard production at our Coosa Pines paper mill; (iii) long-lived asset impairment charges related to our Mokpo paper mill and certain scrapped equipment at our Calhoun paper mill; (iv) severance costs for an early retirement program for employees at our Mokpo paper mill; (v) accelerated depreciation, severance costs and a pension plan curtailment loss related to the permanent closure of a paper machine at our Kenogami paper mill and (vi) severance costs and a pension plan curtailment loss related to a workforce reduction at our Mersey operations.

In 2010, we recorded closure costs, impairment and other related charges of $11 million, primarily for the recording of a tax indemnification liability related to the 2009 sale of our investment in MPCo and long-lived asset impairment charges 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.

For additional information, see Note 5, “Closure Costs, Impairment and Other Related Charges,” to our Consolidated Financial Statements.

 

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Table of Contents

Net gain on disposition of assets and other

In 2011, we recorded a net gain on disposition of assets of $3 million related to the sale of our investment in ACH, our Alabama River paper mill and various other assets. In 2010, we recorded a net gain on disposition of assets and other of $30 million, primarily related to the sale of various assets, as well as a net gain related to a customer bankruptcy settlement.

For additional information, see Note 6, “Assets Held for Sale, Liabilities Associated with Assets Held for Sale and Net Gain on Disposition of Assets and Other – Net gain on disposition of assets and other,” to our Consolidated Financial Statements.

Year Ended December 31, 2010 versus December 31, 2009

Newsprint

 

000000000 000000000 000000000
      Predecessor  
     Years Ended December 31,  
      2010     2009     Change  

Average price (per metric ton)

   $ 600      $ 571      $ 29   

Average cost (per metric ton)

   $ 657      $ 682      $ (25

Shipments (thousands of metric tons)

     3,005        3,157        (152

Downtime (thousands of metric tons)

     738        1,404        (666

Inventory at end of year (thousands of metric tons)

     75        117        (42

(In millions)

                        

Segment sales

   $ 1,804      $ 1,802      $ 2   

Segment operating loss

     (171     (353     182   
000000000

Significant items that favorably (unfavorably) impacted segment operating loss:

  

Product pricing

   $ 93   

Shipments

     (91

Change in sales

     2   

Change in cost of sales and depreciation, amortization and cost of timber harvested

     211   

Change in distribution costs

     (22

Change in selling, general and administrative expenses

     (9
     $     182   

Segment sales increased $2 million, or 0.1%, from $1,802 million in 2009 to $1,804 million in 2010 due to higher transaction prices, offset by lower shipment volumes. Shipments in 2010 decreased 152,000 metric tons, or 4.8%, compared to 2009.

In 2010, downtime was primarily at indefinitely idled facilities.

Segment operating loss decreased $182 million to $171 million in 2010 compared to $353 million in 2009. The above table presents the items that impacted operating loss. A brief explanation of the major items follows.

Segment cost of sales and depreciation, amortization and cost of timber harvested decreased $211 million in 2010 compared to 2009, primarily due to lower volumes ($166 million), lower costs for wood and fiber ($7 million), energy ($4 million), fuel ($5 million), labor and benefits ($55 million), depreciation ($68 million) and other favorable cost variances. These lower costs were partially offset by an unfavorable currency exchange ($96 million, primarily due to the Canadian dollar), as well as benefits from the alternative fuel mixture tax credits of $15 million that were recorded in 2009. The average cost per ton decreased $30 in 2010 compared to 2009, excluding the benefit of $5 per ton credited in 2009 due to the benefits from the alternative fuel mixture tax credits in 2009.

Segment distribution costs increased $22 million in 2010 compared to 2009 due to higher distribution costs per ton, partially offset by lower shipment volumes.

 

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Newsprint Third-Party Data: In 2010, North American newsprint demand declined 6.0% compared to 2009. In 2010, North American net exports of newsprint were 47.9% higher than 2009. Inventories for North American mills as of December 31, 2010 were 187,000 metric tons, which is 34.2% lower than as of December 31, 2009. The days of supply at the U.S. daily newspapers was 44 days as of December 31, 2010 compared to 47 days as of December 31, 2009. The North American operating rate for newsprint was 92% in 2010 compared to 75% in 2009.

Coated Papers

 

000000000 000000000 000000000
     Predecessor  
    Years Ended December 31,  
     2010     2009     Change  

Average price (per short ton)

  $ 718      $ 730      $ (12

Average cost (per short ton)

  $ 672      $ 574      $ 98   

Shipments (thousands of short tons)

    671        571        100   

Downtime (thousands of short tons)

    10        114        (104

Inventory at end of year (thousands of short tons)

    20        22        (2

(In millions)

                       

Segment sales

  $ 482      $ 416      $ 66   

Segment operating income

    31        89        (58
000000000

Significant items that (unfavorably) favorably impacted segment operating income:

 

Product pricing

  $ (6

Shipments

    72   

Change in sales

    66   

Change in cost of sales and depreciation, amortization and cost of timber harvested

    (117

Change in distribution costs

    (6

Change in selling, general and administrative expenses

    (1
    $ (58

Segment sales increased $66 million, or 15.9%, from $416 million in 2009 to $482 million in 2010 due to significantly higher shipment volumes, partially offset by lower transaction prices.

Segment operating income decreased $58 million to $31 million in 2010 compared to $89 million in 2009. The above table presents the items that impacted operating income. A brief explanation of the major items follows.

Segment cost of sales and depreciation, amortization and cost of timber harvested increased $117 million in 2010 compared to 2009, primarily due to benefits from the alternative fuel mixture tax credits of $62 million that were recorded in 2009, higher volumes ($31 million) and higher costs for wood and fiber ($10 million), fuel ($2 million), chemicals ($8 million), labor and benefits ($2 million), maintenance ($7 million) and depreciation ($2 million), partially offset by favorable cost variances. The average cost per ton decreased $11 in 2010 compared to 2009, excluding the benefit of $109 per ton credited in 2009 due to the benefits from the alternative fuel mixture tax credits in 2009.

Segment distribution costs increased $6 million in 2010 compared to 2009 due to higher shipment volumes.

Coated Papers Third-Party Data: North American demand for coated mechanical papers increased 1.8% in 2010 compared to 2009. The North American operating rate for coated mechanical papers was 88% in 2010 compared to 78% in 2009. North American coated mechanical mill inventories were at 14 days of supply as of December 31, 2010 compared to 19 days of supply as of December 31, 2009.

 

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Specialty Papers

 

          Predecessor  
        Years Ended December 31,  
          2010           2009            Change  

Average price (per short ton)

    $ 687         $ 731          $ (44

Average cost (per short ton)

    $ 709         $ 685          $ 24   

Shipments (thousands of short tons)

      1,924           1,819                    105   

Downtime (thousands of short tons)

      115           521            (406

Inventory at end of year (thousands of short tons)

      88           86            2   
(In millions)                                       

Segment sales

    $     1,321         $     1,331          $ (10

Segment operating (loss) income

      (44        85            (129
                                        

Significant items that (unfavorably) favorably impacted segment operating (loss) income:

  

     

Product pricing

               $ (82

Shipments

                                   72   

Change in sales

                 (10

Change in cost of sales and depreciation, amortization and cost of timber harvested

                 (114

Change in distribution costs

                 (3

Change in selling, general and administrative expenses

                                   (2
          $ (129 )  
                                        

Segment sales decreased $10 million, or 0.8%, from $1,331 million in 2009 to $1,321 million in 2010 due to lower average transaction prices, partially offset by higher shipment volumes.

In 2010, downtime at our facilities was market related.

Segment operating (loss) income decreased $129 million to an operating loss of $44 million in 2010 compared to $85 million of operating income in 2009. The above table presents the items that impacted operating (loss) income. A brief explanation of the major items follows.

Segment cost of sales and depreciation, amortization and cost of timber harvested increased $114 million in 2010 compared to 2009, primarily due to an unfavorable Canadian dollar currency exchange ($78 million), benefits from the alternative fuel mixture tax credits of $34 million that were recorded in 2009, higher volumes ($8 million) and higher costs for energy ($23 million), maintenance ($10 million) and other unfavorable cost variances. These higher costs were partially offset by lower costs for wood and fiber ($3 million), depreciation ($23 million), chemicals ($14 million) and fuel ($3 million). The average cost per ton increased $5 in 2010 compared to 2009, excluding the benefit of $19 per ton credited in 2009 due to the benefits from the alternative fuel mixture tax credits in 2009.

Segment distribution costs increased $3 million in 2010 compared to 2009 due to higher shipment volumes, partially offset by lower distribution costs per ton.

Specialty Papers Third-Party Data: In 2010 compared to 2009, North American demand for supercalendered high gloss papers was up 1.8%, for lightweight or directory grades was down 8.1%, for standard uncoated mechanical papers was up 3.5% and in total for all specialty papers was up 1.1%. The North American operating rate for all specialty papers was 91% in 2010 compared to 76% in 2009. North American uncoated mechanical mill inventories were at 16 days of supply as of December 31, 2010 compared to 18 days supply as of December 31, 2009.

 

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Market Pulp

 

            Predecessor  
          Years Ended December 31,  
            2010            2009            Change  

Average price (per metric ton)

      $     737          $     548          $ 189   

Average cost (per metric ton)

      $ 596          $ 430          $ 166   

Shipments (thousands of metric tons)

        970            946            24   

Downtime (thousands of metric tons)

        47            138            (91

Inventory at end of year (thousands of metric tons)

        58            53            5   
(In millions)                                          

Segment sales

      $ 715          $ 518          $ 197   

Segment operating income

          137              112              25   

Significant items that favorably (unfavorably) impacted segment operating income:

                 

Product pricing

                  $ 180   

Shipments

                                      17   

Change in sales

                    197   

Change in cost of sales and depreciation, amortization and cost of timber harvested

                    (159

Change in distribution costs

                    (10

Change in selling, general and administrative expenses

                                      (3 )  
            $ 25   
                                           

Segment sales increased $197 million, or 38.0%, from $518 million in 2009 to $715 million in 2010 due to significantly higher transaction prices and slightly higher shipment volumes.

Segment operating income increased $25 million to $137 million in 2010 compared to $112 million in 2009. The above table presents the items that impacted operating income. A brief explanation of the major items follows.

Segment cost of sales and depreciation, amortization and cost of timber harvested increased $159 million in 2010 compared to 2009, primarily due to benefits from the alternative fuel mixture tax credits of $165 million that were recorded in 2009, an unfavorable Canadian dollar currency exchange ($26 million), higher costs for maintenance ($6 million) and other unfavorable cost variances. These higher costs were partially offset by lower volumes ($10 million) and lower costs for energy ($2 million), fuel ($2 million), chemicals ($13 million), labor and benefits ($15 million) and depreciation ($3 million). The average cost per ton decreased $9 in 2010 compared to 2009, excluding the benefit of $175 per ton credited in 2009 due to the benefits from the alternative fuel mixture tax credits in 2009.

Segment distribution costs increased $10 million in 2010 compared to 2009 due to higher distribution costs per ton and higher shipment volumes.

Market Pulp Third-Party Data: World shipments for market pulp increased 0.3% in 2010 compared to 2009. Shipments were up 7.6% in Western Europe (the world’s largest pulp market), up 5.7% in North America, down 17.4% in China, up 11.3% in Latin America and down 7.0% in Africa and Asia (excluding China and Japan). World market pulp producers shipped at 92% of capacity in 2010 compared to 91% in 2009. World market pulp producer inventories were at 30 days of supply as of December 31, 2010 compared to 27 days of supply as of December 31, 2009.

 

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Wood Products

 

            Predecessor  
          Years Ended December 31,  
            2010            2009           Change  

Average price (per thousand board feet)

      $ 304          $ 254         $ 50   

Average cost (per thousand board feet)

      $ 297          $ 303         $ (6

Shipments (millions of board feet)

            1,395            1,143           252   

Downtime (millions of board feet)

        954                1,761           (807

Inventory at end of year (millions of board feet)

        122            106           16   

(In millions)

                                        

Segment sales

      $ 424          $ 290         $ 134   

Segment operating income (loss)

          9              (56          65   

Significant items that favorably (unfavorably) impacted segment operating income (loss):

                

Product pricing

                 $ 57   

Shipments

                                     77   

Change in sales

                   134   

Change in cost of sales and depreciation, amortization and cost of timber harvested

                   (54 )  

Change in distribution costs

                   (17

Change in selling, general and administrative expenses

                   2   
                       $         65   

Segment sales increased $134 million, or 46.2%, from $290 million in 2009 to $424 million in 2010 due to significantly higher shipment volumes and transaction prices. Despite a decrease in U.S. housing starts, shipments were higher in 2010, primarily due to an increase in Canadian housing starts.

In 2010, downtime at our facilities was market related.

Segment operating income (loss) improved $65 million to operating income of $9 million in 2010 compared to a $56 million operating loss in 2009. The above table presents the items that impacted operating income (loss). A brief explanation of the major items follows.

Segment cost of sales and depreciation, amortization and cost of timber harvested increased $54 million in 2010 compared to 2009, primarily due to an unfavorable Canadian dollar currency exchange ($48 million) and higher volumes ($105 million), partially offset by lower costs for wood ($14 million), energy ($5 million), depreciation ($6 million), labor and benefits ($12 million), administrative overhead ($38 million) and other favorable cost variances.

Segment distribution costs increased $17 million in 2010 compared to 2009 due to higher shipment volumes and higher distribution costs per ton.

Wood Products Third-Party Data: Privately-owned housing starts in the U.S. decreased 8.2% in December 2010 compared to December 2009.

 

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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 income (loss) in our Consolidated Statements of Operations.

 

            Predecessor  
          Years Ended December 31,  
(In millions)          2010           2009           Change  

Sales

      $         $ 9         $ (9

Cost of sales and depreciation, amortization and cost of timber harvested

        (44        (8        (36

Distribution (costs) credit

        (3        6           (9

Selling, general and administrative expenses

        (94        (148        54   

Closure costs, impairment and other related charges

        (11        (202        191   

Net gain on disposition of assets and other

        30           91           (61

Operating loss

        $ (122        $ (252        $ 130   

Cost of sales and depreciation, amortization and cost of timber harvested

Cost of sales and depreciation, amortization and cost of timber harvested in 2010 included an accrual of approximately $6 million for the 2010 short-term incentive plan and approximately $31 million for ongoing costs related to closed mills. Cost of sales and depreciation, amortization and cost of timber harvested in 2009 included $17 million for the write-down of inventory, primarily associated with our Alabama River, Alabama and Dalhousie, New Brunswick mills, as well as two paper machines at our Calhoun mill.

Selling, general and administrative expenses

The decrease in selling, general and administrative expenses in 2010 compared to 2009 was due to our continued cost reduction initiatives, the reversal of a $17 million bonus accrual in 2010, as well as $10 million of costs incurred in 2009 related to our unsuccessful refinancing efforts. These decreases were partially offset by a $16 million reversal that was recorded in 2009 for previously recorded Canadian capital tax liabilities as a result of legislation which eliminated this tax, an accrual of approximately $7 million in 2010 for the 2010 short-term incentive plan and a lease termination fee of approximately $2 million in 2010 related to our head office in Montreal, Quebec.

Closure costs, impairment and other related charges

In 2010, we recorded closure costs, impairment and other related charges of $11 million, primarily for the recording of a tax indemnification liability related to the 2009 sale of our investment in MPCo and long-lived asset impairment charges 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 2009, we recorded closure costs, impairment and other related charges of $202 million, primarily for asset impairment charges related to assets held for sale for our interest in MPCo, as well as certain of our newsprint mill assets, accelerated depreciation charges for two paper machines at our Calhoun mill, which were previously indefinitely idled, and additional asset impairment charges primarily related to two previously permanently closed mills. In addition, in 2009, we recorded severance and other costs related to the permanent closures of our Westover, Alabama sawmill and Goodwater, Alabama planer mill operations and the continued idling of our Alabama River newsprint mill.

For additional information, see Note 5, “Closure Costs, Impairment and Other Related Charges,” to our Consolidated Financial Statements.

Net gain on disposition of assets and other

In 2010, we recorded a net gain on disposition of assets and other of $30 million, primarily related to the sale of various assets, as well as a net gain related to a customer bankruptcy settlement. In 2009, we recorded a net gain on disposition of assets and other of $91 million, primarily related to the sale of 491,356 acres of timberlands, primarily located in Quebec, Canada and other assets.

 

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For additional information, see Note 6, “Assets Held for Sale, Liabilities Associated with Assets Held for Sale and Net Gain on Disposition of Assets and Other – Net gain on disposition of assets and other,” to our Consolidated Financial Statements.

Liquidity and Capital Resources

Overview

In addition to cash and cash equivalents and net cash provided by operations, our principal external source of liquidity is the ABL Credit Facility, which is defined and discussed below. As of December 31, 2011, we had cash and cash equivalents of $369 million and had $515 million of availability under the ABL Credit Facility. We believe that these sources provide us with adequate liquidity. In 2012, we anticipate that we may use cash on hand to redeem additional 2018 Notes pursuant to existing redemption features in the notes indenture. In addition, if we consummate the Fibrek Transaction, we would expect to use cash on hand to pay the cash portion of the consideration of up to Cdn$71.5 million ($70 million, based on the exchange rate in effect on December 31, 2011) and to repay Fibrek’s existing outstanding indebtedness, which, as of December 31, 2011, was approximately Cdn$112 million ($109 million, based on the exchange rate in effect on December 31, 2011).

On May 27, 2011, we announced the sale of our 75% equity interest in ACH. Cash proceeds from the sale, including cash available at closing, were approximately Cdn$290 million ($296 million, based on the exchange rate in effect on May 27, 2011). The proceeds were applied in accordance with the terms of the 2018 Notes indenture, which requires, among other things, that the first $100 million of net proceeds from the sale of certain assets, including our interest in ACH, be used to redeem 2018 Notes (including accrued and unpaid interest) if the closing occurs within six months of the Emergence Date (as further discussed below). We also used the ACH proceeds to redeem an additional $85 million of principal amount of the 2018 Notes and repaid $90 million of other long-term debt (as further discussed below). The purchaser assumed the outstanding debt of ACH. Accordingly, ACH’s total long-term debt ($280 million as of December 31, 2010) is no longer reflected in our Consolidated Balance Sheet.

As further discussed below, on November 4, 2011, we redeemed an additional $85 million of principal amount of the 2018 Notes.

10.25 % senior secured notes due 2018

On December 9, 2010, AbitibiBowater Inc. and each of its material, wholly-owned U.S. subsidiaries entered into a supplemental indenture with Wells Fargo Bank, National Association, as trustee and collateral agent, pursuant to which AbitibiBowater Inc. assumed the obligations of ABI Escrow Corporation with respect to $850 million in aggregate principal amount of 10.25% senior secured notes due 2018 (the “2018 Notes” or “notes”), originally issued on October 4, 2010 pursuant to an indenture as of that date (as supplemented, the “indenture”). ABI Escrow Corporation was a wholly-owned subsidiary of AbitibiBowater Inc. created solely for the purpose of issuing the 2018 Notes. The notes were issued in a private placement exempt from registration under the Securities Act. Interest is payable on the notes on April 15 and October 15 of each year beginning on April 15, 2011, until their maturity date of October 15, 2018. In accordance with certain conditions in the indenture, the net proceeds of the notes offering were placed into an escrow account on October 4, 2010. On December 9, 2010, upon satisfaction of the escrow conditions, the funds deposited into escrow were released to AbitibiBowater Inc. and we used the net proceeds to repay certain indebtedness pursuant to the Plans of Reorganization. On May 12, 2011, the indenture was amended and restated in its entirety to make certain technical corrections and conforming changes.

The notes are and will be guaranteed by our current and future wholly-owned material U.S. subsidiaries (the “guarantors”) and are secured on a first priority basis, subject to permitted liens, by the capital stock of our subsidiaries (limited to 65% of the capital stock in first tier foreign subsidiaries) now owned or acquired in the future by AbitibiBowater Inc. and the guarantors and substantially all of AbitibiBowater Inc.’s and the guarantors’ assets (other than certain excluded assets and assets that are first priority collateral in respect of the ABL Credit Facility) now owned or acquired in the future. The notes and the guarantees are also secured on a second priority basis by the collateral securing the ABL Credit Facility, including accounts receivable, inventory and cash deposit and investment accounts.

The notes rank equally in right of payment with all of AbitibiBowater Inc.’s post-emergence senior indebtedness and senior in right of payment to all of its subordinated indebtedness. The note guarantees rank equally in right of payment with all of the guarantors’ post-emergence senior indebtedness and are senior in right of payment to all of the guarantors’ post-emergence subordinated indebtedness. In addition, the notes are structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that do not guarantee the notes. The notes and the guarantees are also effectively junior to indebtedness under the ABL Credit Facility to the extent of the value of the collateral that secures the ABL Credit Facility on a first priority basis and to indebtedness secured by assets that are not collateral securing the 2018 Notes to the extent of the value of such assets.

 

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At any time prior to October 15, 2014, we may redeem some or all of the notes at a price equal to 100% of the principal amount plus accrued and unpaid interest plus a “make-whole” premium. We may also redeem some or all of the notes on and after October 15, 2014, at a redemption price of 105.125% of the principal amount thereof if redeemed during the twelve-month period beginning on October 15, 2014, 102.563% of the principal amount thereof if redeemed during the twelve-month period beginning on October 15, 2015, and 100% of the principal amount thereof if redeemed on or after October 15, 2016, plus, in each case, accrued and unpaid interest. We may also redeem up to 35% of the notes using the proceeds of certain equity offerings completed before October 15, 2013 at a redemption price of 110.250% of the principal amount thereof, plus accrued and unpaid interest. Prior to October 15, 2013, we may also redeem up to 10% of the notes per twelve-month period at a redemption price of 103% of the principal amount, plus accrued and unpaid interest. If we experience specific kinds of changes in control, we must offer to purchase the notes at a redemption price of 101% of the principal amount thereof plus accrued and unpaid interest. For certain of our assets, including our interest in ACH, sold within six months of the Emergence Date, we must use the first $100 million of the net proceeds received from any such sales to redeem a portion of the notes at a redemption price of 105% of the principal amount plus accrued and unpaid interest. If we sell certain of our assets thereafter, and we do not use the proceeds to pay down certain indebtedness, purchase additional assets or make capital expenditures, each as specified in the indenture, we must offer to purchase the notes at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date with the net cash proceeds from the asset sale.

On June 13, 2011, we applied the first $100 million of net proceeds from the sale of ACH (as discussed above) to redeem $94 million of principal amount of the 2018 Notes at a redemption price of 105% of the principal amount, plus accrued and unpaid interest. Additionally, on both June 29, 2011 and November 4, 2011, we redeemed $85 million of principal amount of the 2018 Notes at a redemption price of 103% of the principal amount, plus accrued and unpaid interest. As a result of these redemptions, during the year ended December 31, 2011, we recorded net gains on extinguishment of debt of $6 million, which were included in “Other expense, net” in our Consolidated Statements of Operations.

The terms of the indenture impose certain restrictions, subject to a number of exceptions and qualifications, on us, including limits on our ability to: incur, assume or guarantee additional indebtedness; issue redeemable stock and preferred stock; pay dividends or make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase certain debt; make loans and investments; incur liens; restrict dividends, loans or asset transfers from our subsidiaries; sell or otherwise dispose of assets, including capital stock of subsidiaries; consolidate or merge with or into, or sell substantially all of our assets to, another person; enter into transactions with affiliates and enter into new lines of business. The indenture also contains customary events of default.

As a result of our application of fresh start accounting, as of December 31, 2010, the 2018 Notes were recorded at their fair value of $905 million, which resulted in a premium of $55 million, which is being amortized to interest expense using the effective interest method over the term of the notes. As of December 31, 2011, the carrying value of the 2018 Notes was $621 million, which included the unamortized premium of $35 million.

In connection with the issuance of the notes, during 2010, we incurred fees of $27 million, which were written off to “Reorganization items, net” in our Consolidated Statements of Operations as a result of the application of fresh start accounting.

ABL Credit Facility

On December 9, 2010, AbitibiBowater Inc. and three of its post-emergence wholly-owned subsidiaries, AbiBow US Inc. and AbiBow Recycling LLC, (collectively, the “U.S. Borrowers”) and AbiBow Canada Inc. (the “Canadian Borrower” and, together with the U.S. Borrowers, the “Borrowers”) entered into a senior secured asset-based revolving credit facility (the “ABL Credit Facility”) with certain lenders and Citibank, N.A., as administrative agent and collateral agent (the “agent”).

On October 28, 2011, the Borrowers and the subsidiaries of AbitibiBowater Inc. that are guarantors of the ABL Credit Facility entered into an amendment (the “amendment”) to the credit agreement that governs the ABL Credit Facility. The ABL Credit Facility, as amended, provides for an asset-based, revolving credit facility with an aggregate lender commitment of up to $600 million at any time outstanding, subject to borrowing base availability, including a $60 million (increased from $20 million) swingline sub-facility and a $200 million (increased from $150 million) letter of credit sub-facility. The ABL Credit Facility includes a $400 million tranche available to the Borrowers and a $200 million tranche available solely to the U.S. Borrowers, in each case subject to the borrowing base availability of those Borrowers. The ABL Credit Facility also provides for an uncommitted incremental loan facility of up to $100 million, subject to certain terms and conditions set forth in the ABL Credit Facility. The amendment extends the maturity of the ABL Credit Facility from December 9, 2014 to October 28, 2016.

 

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Revolving loan (and letter of credit) availability under the ABL Credit Facility is subject to a borrowing base, which at any time is equal to: (a) for U.S. Borrowers, the sum of (i) 85% of eligible accounts receivable of the U.S. Borrowers plus (ii) the lesser of 65% of eligible inventory of the U.S. Borrowers or 85% of the net orderly liquidation value of eligible inventory of the U.S. Borrowers, minus reserves established by the agent and (b) for the Canadian Borrower, the sum of (i) 85% of eligible accounts receivable of the Canadian Borrower plus (ii) the lesser of 65% of eligible inventory of the Canadian Borrower or 85% of the net orderly liquidation value of eligible inventory of the Canadian Borrower, minus reserves established by the agent.

The borrowing base availability of each borrower is subject to certain reserves, which are established by the agent in its discretion. The reserves may include dilution reserves, inventory reserves, rent reserves and any other reserves that the agent determines are necessary and have not already been taken into account in the calculation of the borrowing base. As of December 31, 2010, an additional reserve of $286 million was in place against the borrowing base of the Canadian Borrower until the adoption, by the governments of Quebec and Ontario, of regulations to implement previously-announced funding relief with respect to aggregate solvency deficits in our material Canadian registered pension plans, as discussed in Note 18, “Pension and Other Postretirement Benefit Plans – Canadian pension funding relief,” to our Consolidated Financial Statements. As of the third quarter of 2011, both the provinces of Quebec and Ontario had adopted these funding relief regulations. As a result, this reserve against the borrowing base of the Canadian Borrower was removed in the third quarter of 2011.

The obligations of the U.S. Borrowers under the ABL Credit Facility are guaranteed by each of the other U.S. Borrowers and certain material U.S. subsidiaries of AbitibiBowater Inc. (the “U.S. Guarantors”), and secured by first priority liens on and security interests in accounts receivable, inventory and related assets of the U.S. Borrowers and the U.S. Guarantors and second priority liens on and security interests in all of the collateral of the U.S. Borrowers and the U.S. Guarantors pledged to secure the 2018 Notes, as described above. The obligations of the Canadian Borrower under the ABL Credit Facility are guaranteed by each of the other Borrowers, the U.S. Guarantors and certain material Canadian subsidiaries of AbitibiBowater Inc. (the “Canadian Guarantors” and, together with the U.S. Guarantors, the “Guarantors”), and are secured by first priority liens on and security interests in accounts receivable, inventory and related assets of the Borrowers and the Guarantors and second priority liens on and security interests in all of the collateral of the U.S. Borrowers and the U.S. Guarantors pledged to secure the 2018 Notes.

Borrowings under the ABL Credit Facility bear interest at a rate equal to, at the Borrower’s option, the base rate, the Canadian prime rate or the Eurodollar rate, in each case plus an applicable margin. The base rate under the ABL Credit Facility equals the greater of: (i) the agent’s base rate, (ii) the Federal Funds rate plus 0.5%, (iii) the agent’s rate for certificates of deposit having a term of three months plus 0.5% or (iv) the Eurodollar rate for a one month interest period plus 1.0%. The amendment reduced the interest rate margin applicable to borrowings under the ABL Credit Facility to 1.75% – 2.25% per annum with respect to Eurodollar rate and bankers’ acceptance rate borrowings (reduced from 2.75% – 3.25%) and 0.75% – 1.25% per annum with respect to base rate and Canadian prime rate borrowings (reduced from 1.75% – 2.25%), in each case depending on excess availability under the ABL Credit Facility. The applicable margin is subject, in each case, to monthly pricing adjustments based on the average monthly excess availability under the ABL Credit Facility, with such adjustments commencing after the end of the second full fiscal quarter following the Emergence Date.

In addition to paying interest on the outstanding borrowings under the ABL Credit Facility, the Borrowers are required to pay a fee in respect of unutilized commitments, which was equal to 0.75% per annum initially. Commencing after the end of the second full fiscal quarter following the Emergence Date, the fee is subject to monthly pricing adjustments based on the unutilized commitment of the ABL Credit Facility over the prior month. Initially, the Borrowers were required to pay a fee equal to 0.75% per annum when the unutilized commitment of the ABL Credit Facility was greater than or equal to 50% of the total commitments and 0.50% per annum when the unutilized commitment of the ABL Credit Facility was less than 50% of the total commitments. The amendment reduced the unutilized commitment fee payable by the Borrowers under the ABL Credit Facility to 0.375% – 0.50% per annum, subject to monthly pricing adjustments based on the unutilized commitment of the ABL Credit Facility. The Borrowers must also pay a fee on outstanding letters of credit under the ABL Credit Facility at a rate equal to the applicable margin in respect of Eurodollar borrowings, plus a facing fee as agreed to in writing from time to time, and certain administrative fees.

The Borrowers are able to voluntarily repay outstanding loans and reduce unused commitments, in each case, in whole or in part, at any time without premium or penalty. The Borrowers are required to repay outstanding loans anytime the outstanding loans exceed the maximum availability then in effect. The Borrowers are also required to use net proceeds from certain significant asset sales to repay outstanding loans, but may re-borrow following such prepayments if the conditions to borrowings are met.

 

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The ABL Credit Facility contains customary covenants for asset-based credit agreements of this type, including, among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence and repayment of indebtedness; (iii) restrictions on the existence or incurrence of liens; (iv) restrictions on making certain restricted payments; (v) restrictions on making certain investments; (vi) restrictions on certain mergers, consolidations and asset dispositions; (vii) restrictions on transactions with affiliates; (viii) restrictions on amendments or modifications to the Canadian pension and benefit plans and (ix) restrictions on modifications to material indebtedness. Additionally, the amendment reduced to 1.0:1.0 (reduced from 1.1:1.0) the minimum consolidated fixed charge coverage ratio required if at any time excess availability falls below the greater of: (i) $60 million and (ii) 12.5% of the lesser of (A) the total commitments and (B) the borrowing base then in effect. Prior to the effectiveness of the amendment, this springing fixed charge coverage ratio covenant was triggered if excess availability fell below 15% of the total commitments then in effect. The amendment also eases certain other covenants, including covenants restricting our ability to: (i) prepay certain indebtedness, (ii) consummate permitted acquisitions and (iii) make certain restricted payments. Subject to customary grace periods and notice requirements, the ABL Credit Facility also contains customary events of default.

As of December 31, 2011, the Borrowers had no borrowings and $62 million of letters of credit outstanding under the ABL Credit Facility. As of December 31, 2011, we had $515 million of availability under the ABL Credit Facility, which was comprised of $280 million for the U.S. Borrowers and $235 million for the Canadian Borrower.

In accordance with its stated purpose, the proceeds of the ABL Credit Facility were used to fund amounts payable under the Plans of Reorganization and can be used by us for, among other things, working capital, capital expenditures, permitted acquisitions and other general corporate purposes. Upon receipt of the North American Free Trade Agreement (“NAFTA”) settlement amount (see Note 3, “Creditor Protection Proceedings – Reorganization items, net,” to our Consolidated Financial Statements), we repaid the $100 million we had borrowed on the Emergence Date under the ABL Credit Facility.

As consideration for amending the ABL Credit Facility in 2011 and entering into the ABL Credit Facility in 2010, during 2011 and 2010, we incurred fees of $3 million and $19 million, respectively, which were recorded as deferred financing costs in “Other assets” in our Consolidated Balance Sheets as of December 31, 2011 and 2010, respectively, and are being amortized to interest expense over the term of the facility.

Promissory note

As of December 31, 2010, ANC, which operates our newsprint mill in Augusta, Georgia, was owned 52.5% by us. Our consolidated financial statements included this entity on a fully consolidated basis. On January 14, 2011, we acquired the noncontrolling interest in ANC and ANC became a wholly-owned subsidiary of ours. As part of the consideration for the transaction, ANC paid cash of $15 million and issued a secured promissory note (the “note”) in the principal amount of $90 million. On June 30, 2011, the note, including accrued interest, was repaid with cash in full.

Flow of funds

Summary of cash flows

A summary of cash flows for the years ended December 31, 2011, 2010 and 2009 was as follows:

 

      Successor       Predecessor  
(In millions)    2011            2010                2009  

Net cash provided by operating activities

   $ 198              $         39              $ 46   

Net cash provided by investing activities

     245            96                484   

Net cash (used in) provided by financing activities

     (393)           (572             34   

Net increase (decrease) in cash and cash equivalents

   $ 50                $ (437             $     564   

Cash provided by operating activities

The $159 million increase in cash provided by operating activities in 2011 compared to 2010 was primarily due to operating income in 2011 compared to an operating loss in 2010, lower interest payments in 2011 compared to 2010 (primarily due to significantly lower debt levels in connection with our emergence from the Creditor Protection Proceedings) and lower cash reorganization and restructuring costs, as well as a larger increase in cash generated by the changes in working capital in 2011 compared to 2010. These increases in cash provided by operating activities were partially offset by higher pension contributions in 2011 (primarily due to voluntary additional and prepaid contributions to our Canadian pension plans in the third quarter of 2011 and suspended contributions of prior service costs to our Canadian pension plans in 2010 as a result of the Creditor Protection Proceedings), as well as the receipt of the NAFTA settlement in 2010 (see “Newfoundland and Labrador Expropriation” below for additional information).

 

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The $7 million decrease in cash provided by operating activities in 2010 compared to 2009 was primarily due to the alternative fuel mixture tax credits received in 2009 and payments in 2010 related to our emergence from the Creditor Protection Proceedings for professional fees, administrative, priority and convenience claims and a backstop commitment agreement termination fee related to a rights offering that we elected not to pursue. These decreases in cash provided by operating activities were partially offset by reductions in our pension contributions and SG&A expenses in 2010, as well as the receipt of the NAFTA settlement in 2010.

Cash provided by investing activities

The $149 million increase in cash provided by investing activities in 2011 compared to 2010 was primarily due to higher proceeds from the disposition of assets (primarily the disposition of our investment in ACH) in 2011 and the proceeds in 2011 from the holdback related to the disposition of the investment in MPCo in 2009, partially offset by an increase in cash invested in fixed assets in 2011 and the decrease in restricted cash in 2010 as a result of the emergence from Creditor Protection Proceedings.

The $388 million decrease in cash provided by investing activities in 2010 compared to 2009 was primarily due to the proceeds from the sale of our interest in MPCo in 2009, lower proceeds from the disposition of assets in 2010 and an increase in deposit requirements for letters of credit in 2010, partially offset by a reduction in cash invested in fixed assets in 2010 and a decrease in restricted cash in 2010.

Capital expenditures for all periods include compliance, maintenance and projects to increase returns on production assets.

Cash (used in) provided by financing activities

The $179 million decrease in cash used in financing activities in 2011 compared to 2010 was primarily due to lower debt repayments in 2011 (primarily due to the repayment of secured pre-petition debt obligations upon our emergence from the Creditor Protection Proceedings in 2010) and lower payments of financing fees in 2011 compared to 2010, partially offset by the proceeds received from the issuance of the 2018 Notes in 2010 and the acquisition of the noncontrolling interest in ANC and dividends and distribution to noncontrolling interests in 2011.

The $606 million decrease in cash provided by financing activities in 2010 compared to 2009 was primarily due to the repayment of borrowings under our debtor in possession financing arrangement in 2010 versus the amount of borrowings and repayments under the debtor in possession financing arrangements in 2009, the repayment of secured pre-petition debt obligations upon our emergence from the Creditor Protection Proceedings versus the repayments of long-term debt in 2009 and the payment of financing fees on our exit financing, partially offset by the proceeds received from the issuance of the 2018 Notes in 2010 and lower debtor in possession financing costs in 2010.

Contractual Obligations

In addition to our debt obligations as of December 31, 2011, we had other commitments and contractual obligations that require us to make specified payments in the future. As of December 31, 2011, the scheduled maturities of our contractual obligations were as follows:

 

(In millions)    Total    2012    2013 – 2014    2015 – 2016    Thereafter

Long-term debt (1)

     $ 1,006        $ 60        $ 120        $ 120        $ 706  

Non-cancelable operating lease obligations (2)

       35          7          10          10          8  

Purchase obligations (3)

       262          34          39          27          162  

Pension and OPEB funding (4)

       522          130          98          98          196  

Tax reserves

       2                   2                    
       $ 1,827        $ 231        $ 269        $ 255        $ 1,072  

 

(1) 

Long-term debt commitments include interest payments but exclude the related premium on the debt of $35 million as of December 31, 2011, as this item requires no cash outlay.

(2) 

We lease timberlands, certain office premises, office equipment and transportation equipment under operating leases.

(3) 

As of December 31, 2011, purchase obligations include, among other things, a bridge and railroad contract for our Fort Frances operations with commitments totaling $131 million through 2044.

 

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(4) 

Pension and OPEB funding is calculated on an annual basis for the following year only. The contributions for all other years are estimated based on the assumption that only the basic contribution required under the provisions of the Canadian pension funding relief will be made. However, additional contributions may be necessary (see Note 18, “Pension and Other Postretirement Benefit Plans – Canadian pension funding relief,” to our Consolidated Financial Statements). Contributions for all years exclude contributions to our defined contribution plans.

In addition to the items shown in the table above, we have contractual obligations related to certain undertakings with the provinces of Quebec and Ontario, as discussed further in Note 18, “Pension and Other Postretirement Benefit Plans – Canadian pension funding relief,” to our Consolidated Financial Statements. We are also party to employment and change-in-control agreements with our executive officers. See Part III, Item 11, “Executive Compensation,” of this Form 10-K.

Employee Benefit Plans

Canadian pension funding relief

As of the third quarter of 2011, both the provinces of Quebec and Ontario had adopted specific regulations to implement funding relief measures with respect to aggregate solvency deficits in our material Canadian registered pension plans. The basic funding parameters are described in Note 18, “Pension and Other Postretirement Benefit Plans – Canadian pension funding relief,” to our Consolidated Financial Statements. The regulations also provide that corrective measures would be required if the aggregate solvency ratio in the registered pension plans falls below a prescribed level under the target provided by the regulations as of December 31 in any year through 2014. Such measures may include additional funding over five years to attain the target solvency ratio prescribed in the regulations. Thereafter, supplemental contributions, as described in Note 18, “Pension and Other Postretirement Benefit Plans – Canadian pension funding relief,” to our Consolidated Financial Statements, would be required if the aggregate solvency ratio in the registered pension plans falls below a prescribed level under the target provided by the regulations as of December 31 in any year on or after 2015 for the remainder of the period covered by the regulations.

The aggregate solvency ratio in the Canadian registered pension plans covered by the Quebec and Ontario funding relief is determined annually as of December 31. The calculation is based on a number of factors and assumptions, including the accrued benefits to be provided by the plans, interest rate levels, membership data and demographic experience. In light of low yields on government securities in Canada, which are used to determine the applicable discount rate, when we file the actuarial report in respect of these plans later this year, we expect that the aggregate solvency ratio in these Canadian registered plans will have fallen below the minimum level prescribed by the regulations and that we will therefore be required to adopt corrective measures by March 2013. At this time, we cannot estimate the additional contributions, if any, that may be required in future years, but they could be material.

Pension and OPEB plans

The determination of benefit obligations and the recognition of expenses related to our pension and OPEB obligations are dependent on assumptions used in calculating these amounts. These assumptions include: discount rates, expected rates of return on plan assets, rate of future compensation increases, mortality rates, termination rates, health care inflation trend rates and other factors. All assumptions are reviewed periodically with third-party actuarial consultants and adjusted as necessary.

Any deterioration in the global securities markets could impact the value of the assets included in our defined benefit pension plans, which could materially impact future minimum cash contributions. Should values deteriorate in 2012, the decline in fair value of our plans could result in increased total pension costs for 2013 as compared to total pension costs in 2012. Any decreases in discount rates could result in increases in our pension and OPEB benefit obligations.

We fund our pension and OPEB plans as required by applicable laws and regulations, taking into account the agreements entered into with the provinces of Quebec and Ontario discussed above and may, from time to time, make additional payments. In 2011, gross contributions to our defined benefit pension and OPEB plans were $220 million, which include a $20 million voluntary contribution to our Canadian registered pension plans covered by the funding relief regulations and a $25 million prepayment of our 2012 funding obligations thereunder. We estimate our 2012 contributions to be approximately $105 million to our pension plans (excluding contributions to our defined contribution plans) and approximately $25 million to our OPEB plans.

For a further discussion of our pension and OPEB plans, see Note 18, “Pension and Other Postretirement Benefit Plans,” to our Consolidated Financial Statements.

 

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Exchange Rate Fluctuation Effect on Earnings

We compete with North American, European and Asian producers in most of our product lines. Our products are sold and denominated in U.S. dollars, Canadian dollars and selected foreign currencies. A substantial portion of our manufacturing costs are denominated in Canadian dollars. In addition to the impact of product supply and demand, changes in the relative strength or weakness of such currencies, particularly the U.S. dollar, may also affect international trade flows of these products. A stronger U.S. dollar may attract imports into North America from foreign producers, increase supply and have a downward effect on prices, while a weaker U.S. dollar may encourage U.S. exports and increase manufacturing costs that are in Canadian dollars or other foreign currencies. Variations in the exchange rates between the U.S. dollar and other currencies, particularly the Euro and the currencies of Canada, Sweden and certain Asian countries, will significantly affect our competitive position compared to many of our competitors.

We are particularly sensitive to changes in the value of the Canadian dollar versus the U.S. dollar. The impact of these changes depends primarily on our production and sales volume, the proportion of our production and sales that occur in Canada, the proportion of our financial assets and liabilities denominated in Canadian dollars, our hedging levels and the magnitude, direction and duration of changes in the exchange rate. We expect exchange rate fluctuations to continue to impact costs and revenues; however, we cannot predict the magnitude or direction of this effect for any quarter, and there can be no assurance of any future effects. During the last two years, the relative value of the Canadian dollar ranged from a high of US$1.06 in July 2011 to a low of US$0.93 in May 2010 and was US$0.98 as of December 31, 2011. Based on operating projections for 2012, a one-cent increase in the Canadian-U.S. dollar exchange rate would decrease our annual operating income by approximately $16 million.

If the Canadian dollar continues to remain strong or appreciates as against the U.S. dollar, it could influence the foreign exchange rate assumptions that are used in our evaluation of long-lived assets for impairment and consequently, result in asset impairment charges.

Newfoundland and Labrador Expropriation

On August 24, 2010, we reached a settlement agreement with the government of Canada, which was subsequently approved by the Courts, concerning the December 2008 expropriation of certain of our assets and rights in the province of Newfoundland and Labrador by the provincial government. Under the agreement, the government of Canada agreed to pay AbiBow Canada Inc. Cdn$130 million ($130 million) following our emergence from the Creditor Protection Proceedings. On February 25, 2010, we had filed a Notice of Arbitration against the government of Canada under NAFTA, asserting that the expropriation was arbitrary, discriminatory and illegal. As part of the settlement agreement, we agreed to waive our legal actions and claims against the government of Canada under NAFTA.

In December 2010, following our emergence from the Creditor Protection Proceedings, we received the settlement amount. Since the receipt of the settlement was contingent upon our emergence from the Creditor Protection Proceedings, we recorded the settlement in “Reorganization items, net” in our Consolidated Statements of Operations for the year ended December 31, 2010.

Environmental Matters

For information regarding our environmental matters, see Note 20, “Commitments and Contingencies – Environmental matters,” to our Consolidated Financial Statements.

 

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Monetization of Timber Notes

In connection with certain timberland sales transactions in 2002 and prior years, Bowater received a portion of the sale proceeds in notes receivable from institutional investors. In order to increase our liquidity, we monetized these notes receivable using qualified special purpose entities (“QSPEs”) set up in accordance with FASB ASC 860, “Transfers and Servicing.” The more significant aspects of the QSPEs are discussed in Note 17, “Monetization of Timber Notes,” to our Consolidated Financial Statements.

The following summarizes our retained interest in our QSPEs and the QSPEs’ total assets and obligations as of December 31, 2011:

 

(In millions)    Retained
Interest
     Total
Assets
     Total
Obligations
     Excess of
Assets over
Obligations
 

Calhoun Note Holdings AT LLC

   $ 8             $ 74           $ 64           $ 10         

Calhoun Note Holdings TI LLC

     12               74             62             12         
     $ 20             $ 148           $ 126           $ 22         

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.

Critical Accounting Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires us to make accounting estimates based on assumptions, judgments and projections of future results of operations and cash flows. These estimates and assumptions affect the reported amounts of revenues and expenses during the periods presented and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements.

We base our estimates, assumptions and judgments on a number of factors, including historical experience, recent events, existing conditions, internal budgets and forecasts, projections obtained from industry research firms and other data that we believe are reasonable under the circumstances. We believe that our accounting estimates are appropriate and that the resulting financial statement amounts are reasonable. Due to the inherent uncertainties in making estimates, actual results could differ materially from these estimates, requiring adjustments to financial statement amounts in future periods.

A summary of our significant accounting policies is disclosed in Note 2, “Summary of Significant Accounting Policies,” to our Consolidated Financial Statements. Based upon a review of our significant accounting policies, we believe the following accounting policies require us to make accounting estimates that can significantly affect the results reported in our Consolidated Financial Statements. We have reported the development, selection and disclosures of our critical accounting estimates to the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosures relating to these estimates.

Pension and OPEB benefit obligations

Description of accounts impacted by the accounting estimate

We record assets and liabilities associated with our pension and OPEB benefit obligations, net of pension plan assets that may be considered material to our financial position. We also record net periodic benefit costs associated with these net obligations as our employees render service. As of December 31, 2011, we have pension and OPEB benefit obligations aggregating $6,815 million and accumulated pension plan assets at fair value of $5,259 million. Our 2011 net periodic pension and OPEB benefit costs were $54 million.

 

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Judgments and uncertainties involved in the accounting estimate

The following inputs are used to determine our net obligations and our net periodic benefit costs each year and the determination of these inputs requires judgment:

 

   

discount rate – used to arrive at the net present value of our pension and OPEB benefit obligations and the interest cost component of our net periodic pension and OPEB benefit costs;

 

   

return on assets – used to estimate the growth in the value of invested assets that are available to satisfy pension benefit obligations and to arrive at the expected return on plan assets component of our net periodic pension benefit costs;

 

   

mortality rate – used to estimate the impact of mortality on pension and OPEB benefit obligations;

 

   

rate of compensation increase – used to calculate the impact future pay increases will have on pension benefit obligations; and

 

   

health care cost trend rate – used to calculate the impact of future health care costs on OPEB benefit obligations.

We determined the discount rate by considering the timing and amount of projected future benefit payments, which, for our U.S. plans, is based on a portfolio of long-term high quality corporate bonds of a similar duration and, for our Canadian and other plans, is based on a model that matches the plan’s duration to published yield curves. To develop our expected long-term rate of return on assets, we considered the historical returns and the future expectations for returns for each class of assets held in our pension portfolios, as well as the target asset allocation of those portfolios. For the mortality rate, we used actuarially-determined mortality tables that were consistent with our historical mortality experience and future expectations for mortality of the employees who participate in our pension and OPEB plans. In determining the rate of compensation increase, we reviewed historical salary increases and promotions, while considering current industry conditions, the terms of collective bargaining agreements with our employees and the outlook for our industry. For the health care cost trend rate, we considered historical trends for these costs, as well as recently enacted healthcare legislation.

Effect if actual results differ from assumptions

Variations in assumptions could have a significant effect on the net periodic benefit costs and net unfunded pension and OPEB benefit obligations reported in our Consolidated Financial Statements. For example, a 25 basis point change in any one of these assumptions would have increased (decreased) our net periodic benefit costs for our pension and OPEB plans and our net pension and OPEB benefit obligations as follows (in millions):

 

      2011 Net Periodic Benefit Cost      Net Pension and OPEB
Benefit Obligations as of

December 31, 2011
 
Assumption    25 Basis Point
Increase
     25 Basis Point
Decrease
     25 Basis Point
Increase
     25 Basis Point
Decrease
 

Discount rate

   $ 5                  $ (6)             $ (177)             $ 183          

Return on assets

     (13)                   13                –                –          

Rate of compensation increase

     –                    –                6                (6)         

Health care cost trend rate

     1                    (1)               11                (9)         

As of December 31, 2011, the most significant change in our assumptions was a decrease to 4.9% from 5.5% as of December 31, 2010 in the weighted-average discount rate for our pension benefit obligations.

The net periodic benefit costs of our pension plans is based on the expected return on plan assets and not the actual return on plan assets, and the net periodic benefit cost of our pension and OPEB plans is based on the expected change in pension and OPEB benefit obligations arising from the time value of money and not the actual change in pension and OPEB benefit obligations. Differences between these expected and actual results were recorded in “Accumulated other comprehensive loss” in our Consolidated Balance Sheets as an actuarial gain or loss. These accumulated differences were eliminated as of December 31, 2010 as a result of our application of fresh start accounting. Net losses arising in 2011, before tax, and deferred in “Accumulated other comprehensive loss” were $446 million. These losses will be amortized into income in future years and will increase our 2012 net periodic benefit costs by approximately $1 million.

 

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Recoverability of deferred income tax assets

Description of accounts impacted by the accounting estimate

We have significant net deferred income tax assets of $1,783 million recorded in our Consolidated Balance Sheet as of December 31, 2011. These deferred income tax assets consist of $1,281 million, net in Canada and $502 million, net in the U.S. and are comprised primarily of:

United States:

   

Deferred income tax assets for Federal and state net operating loss carryforwards of approximately $572 million. Our federal operating loss carryforwards are subject to certain annual limitations; however, these ordinary losses expire between 2020 and 2031 and we expect to fully utilize them during this period. In some instances, we have applied a valuation allowance to certain state operating loss carryforwards.

 

   

Our remaining U.S. deferred income tax balances net to a deferred income tax liability position of approximately $70 million, which includes a deferred income tax liability on our fixed assets of $259 million, offset by a deferred income tax asset of $189 million related to liabilities for our pension and OPEB plans.

 

   

We have approximately $446 million of deferred income tax assets related to capital loss carryforwards against which we have applied a full valuation allowance because we are not assured of realizing capital gains in the carryforward period.

Canada:

   

Deferred income tax assets for operating loss carryforwards of approximately $74 million and tax credit carryforwards of approximately $143 million that expire between 2013 and 2030 and which we expect to fully utilize during this period.

 

   

Deferred income tax assets related to a pool of indefinite lived scientific research and experimental development costs of approximately $264 million, which we expect to fully utilize in the future.

 

   

Indefinite lived deferred income tax assets related to undepreciated capital costs of approximately $484 million and deferred income tax assets related to liabilities for our pension and OPEB plans of approximately $278 million.

Upon emergence from the Creditor Protection Proceedings, in 2010 and 2011, we evaluated the need for a valuation allowance against our net deferred income tax assets and determined that we expect to generate sufficient taxable income in the future to realize most of the deferred income tax assets and accordingly, determined that a valuation allowance was only needed against certain deferred income tax assets. In making this determination, we primarily focused on a post-reorganization outlook, which reflected a new capital structure, new contractual arrangements and a new asset structure with new values under the application of fresh start accounting as of December 31, 2010. The weight of positive evidence, which included our expected future performance, resulted in the conclusion by management that upon emergence from the Creditor Protection Proceedings, valuation allowances were not required for most of the deferred income tax assets. Therefore, the majority of the valuation allowances were reversed in 2010 as part of the implementation of the Plans of Reorganization and the application of fresh start accounting. In 2011, our results and expected future performance continue to support the recoverability of the deferred income tax assets. Prior to emergence from the Creditor Protection Proceedings, in 2009 and 2010 until the Emergence Date, due to the existence of significant negative evidence such as a cumulative three-year loss and our financial condition, we had concluded that a valuation allowance was necessary on substantially all of our net deferred income tax assets.

Judgments and uncertainties involved in the accounting estimate

We are required to assess whether it is more likely than not that the deferred income tax assets will be realized, based on the nature, frequency and severity of recent losses, forecasted income, or where necessary, the implementation of prudent and feasible tax planning strategies. The carrying value of our deferred income tax assets (tax benefits expected to be realized in the future) assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred income tax benefits, or in the absence of sufficient future taxable income, that we would implement tax planning strategies to generate sufficient taxable income.

Effect if actual results differ from assumptions

If actual financial results are not consistent with the assumptions and judgments used in determining and estimating the realization of our deferred income tax assets, we may be required to reduce the value of our net deferred income tax assets by recording additional valuation allowances, resulting in an additional income tax expense that could be material.

 

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Long-lived assets

Description of accounts impacted by the accounting estimate

We have long-lived assets recorded in our Consolidated Balance Sheets of $2,527 million as of December 31, 2011. These long-lived assets include fixed assets, net (including timber and timberlands); amortizable intangible assets, net; and long-lived assets included in assets held for sale. In 2011, we recorded depreciation and amortization of $220 million and impairment and accelerated depreciation charges aggregating $24 million associated with these long-lived assets. The depreciation and amortization and impairment charges are based on accounting estimates.

The unit of accounting for impairment testing for long-lived assets is its asset group (see Note 2, “Summary of Significant Accounting Policies – Impairment of long-lived assets,” to our Consolidated Financial Statements). The unit of accounting for the depreciation and amortization of long-lived assets is at a lower level, either an individual asset or a group of closely-related assets. The cost of a long-lived asset is amortized over its estimated remaining useful life, which is subject to change based on events and circumstances or management’s intention for the use of the asset.

Losses related to the impairment of long-lived assets to be held and used are recognized when circumstances indicate the carrying value of an asset group may not be recoverable, such as continuing losses in certain businesses. When indicators that the carrying value of an asset group may not be recoverable are triggered, we evaluate the carrying value of the asset group in relation to its expected undiscounted future cash flows. If the carrying value of an asset group is greater than the expected undiscounted future cash flows to be generated by the asset group, an impairment charge is recognized based on the excess of the asset group’s carrying value over its fair value. If it is determined that the carrying value of an asset group is recoverable, we review and adjust, as necessary, the estimated useful lives of the assets in the group.

When an asset group meets the criteria for classification as an asset held for sale, an impairment charge is recognized, if necessary, based on the excess of the asset group’s carrying value over the expected net proceeds from the sale (the estimated fair value minus the estimated costs to sell the asset group).

Our long-lived asset impairment and accelerated depreciation charges are disclosed in Note 3, “Creditor Protection Proceedings – Reorganization items, net,” and Note 5, “Closure Costs, Impairment of Assets and Other Related Charges,” to our Consolidated Financial Statements.

Judgments and uncertainties involved in the accounting estimate

The calculation of depreciation and amortization of long-lived assets requires us to apply judgment in selecting the remaining useful lives of the assets. The remaining useful life of an asset must address both physical and economic considerations. The remaining economic life of a long-lived asset is frequently shorter than its physical life. The pulp and paper industry in recent years has been characterized by considerable uncertainty in business conditions. Estimates of future economic conditions for our long-lived assets and therefore, their remaining useful economic life, require considerable judgment.

Asset impairment for long-lived assets to be held and used is tested at the lowest asset group level having largely independent cash flows. Determining the asset groups for long-lived assets to be held and used requires management’s judgment.

Asset impairment loss calculations require us to apply judgment in estimating asset group fair values and future cash flows, including periods of operation, projections of product pricing, first quality production levels, product costs, market supply and demand, foreign exchange rates, inflation, projected capital spending and, specifically for fixed assets acquired, assigned useful lives, functional obsolescence, asset condition and discount rates. When performing impairment tests, we estimate the fair values of the assets using management’s best assumptions, which we believe would be consistent with the assumptions that a hypothetical marketplace participant would use. Estimates and assumptions used in these tests are evaluated and updated as appropriate. One key assumption, especially for our long-lived assets in Canada, is the foreign exchange rate. Foreign exchange rates were determined based on our budgeted exchange rates for 2012. The assessment of whether an asset group should be classified as held for sale requires us to apply judgment in estimating the probable timing of the sale, and in testing for impairment loss, judgment is required in estimating the net proceeds from the sale.

Effect if actual results differ from assumptions

If our estimate of the remaining useful life changes, such a change is accounted for prospectively in our determination of depreciation and amortization. Actual depreciation and amortization charges for an individual asset may therefore be significantly accelerated if the outlook for its remaining useful life is shortened considerably. One group of assets, for which the remaining useful life is being monitored closely, are the tangible and intangible assets associated with our Jim-Gray hydroelectric installation, which is part of the Hydro Saguenay facility that provides hydroelectric power to certain mills in the province of Quebec. The province of Quebec informed us on

 

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December 30, 2011 that it intended to terminate our water rights associated with this facility and to require us to transfer property of the associated installation to the province for no consideration. The termination and transfer would be effective as of March 2, 2012. The province’s actions are not consistent with our understanding of the agreement in question. We continue to evaluate our legal options. The net book value of this hydroelectric facility was tested for impairment with the other assets in its asset group and no impairment was indicated. At this time, we believe that the remaining useful life of the assets remains unchanged, as we continue pursuing the renewal of our water rights at the facility. The carrying value of the long-lived assets associated with the Jim-Gray installation as of December 31, 2011 was approximately $95 million. If we are unable to renew the water rights at this facility, we will reevaluate the remaining useful life of these assets, which may result in accelerated depreciation and amortization charges in the first quarter of 2012.

A number of judgments were made in the determination of our asset groups. If a different conclusion had been reached for any one of those assumptions, it could have resulted in the identification of asset groups different from those we actually identified. This may have resulted in a different conclusion when comparing the expected undiscounted future cash flows or the fair value to the carrying value of the asset group.

Actual asset impairment losses could vary considerably from estimated impairment losses if actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, and for assets held for sale, the probable timing of the sale and the net proceeds from the sale.

Assets with proportionately greater risk of acceleration in depreciation and amortization or additional impairment are the Jim-Gray hydroelectric facility (as discussed above) and those facilities which are presently idled, closed or held for sale. Information on certain of our idled assets can be found in Note 3, “Creditor Protection Proceedings – Reorganization items, net,” and in Note 5, “Closure Costs, Impairment of Assets and Other Related Charges – Impairment of long-lived assets,” to our Consolidated Financial Statements. Information on the carrying amounts of our assets held for sale can be found in Note 6, “Assets Held for Sale, Liabilities Associated with Assets Held for Sale and Net Gain on Disposition of Assets and Other,” to our Consolidated Financial Statements. The carrying amount of facilities which are closed and not classified as held for sale as of December 31, 2011 was approximately $28 million.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to risks associated with fluctuations in foreign currency exchange rates, interest rates, commodity prices and credit risk on the accounts receivable from our customers.

Foreign Currency Exchange Risk

We have manufacturing operations in Canada, the United States and South Korea and sales offices located throughout the world. As a result, we are exposed to movements in foreign currency exchange rates in countries outside the United States. Our most significant foreign currency exposure relates to Canada. Over half of our pulp and paper production capacity and all of our wood products production capacity are in Canada, with manufacturing costs primarily denominated in Canadian dollars. Also, certain other assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. As a result, our earnings are affected by increases or decreases in the value of the Canadian dollar. Long-term increases in the value of the Canadian dollar versus the United States dollar will tend to reduce reported earnings, and long-term decreases in the value of the Canadian dollar will tend to increase reported earnings. See “Exchange Rate Fluctuation Effect on Earnings” in Item 7 for additional information on foreign exchange risks related to our earnings.

Interest Rate Risk

We are exposed to interest rate risk on our fixed-rate long-term debt (the 2018 Notes) and our variable-rate short-term bank debt (borrowings under the ABL Credit Facility). As of December 31, 2011, we had $621 million ($586 million principal amount) of fixed-rate long-term debt and no variable-rate short-term bank debt. Our fixed-rate long-term debt is exposed to fluctuations in fair value resulting from changes in market interest rates, but such changes do not affect earnings or cash flows.

Commodity Price Risk

We purchase significant amounts of energy, chemicals, wood fiber and recovered paper to supply our manufacturing facilities. These raw materials are market-priced commodities and as such, are subject to fluctuations in market prices. Increases in the prices of these commodities will tend to reduce our reported earnings and decreases will tend to increase our reported earnings. From time to time, we may enter into contracts aimed at securing a stable source of supply for commodities such as timber, wood fiber, energy, chemicals and recovered paper. These contracts typically require us to pay the market price at the time of purchase. Thus, under these contracts, we generally remain subject to market fluctuations in commodity prices.

Credit Risk

We are exposed to credit risk on the accounts receivable from our customers. In order to manage our credit risk, we have adopted policies, which include the analysis of the financial position of our customers and the regular review of their credit limits. We also subscribe to credit insurance and, in some cases, require bank letters of credit. Our customers are mainly in the newspaper publishing, specialty, advertising and paper converting, as well as lumber wholesaling and retailing businesses. See Part I, Item 1A, “Risk Factors – Bankruptcy of a significant customer could have a material adverse effect on our liquidity, financial condition or results of operations,” of this Form 10-K.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

 

         Page    

Consolidated Statements of Operations for the Years Ended December 31, 2011 (Successor),
2010 (Predecessor) and 2009 (Predecessor)

       58  

Consolidated Balance Sheets as of December 31, 2011 (Successor) and 2010 (Successor)

       59  

Consolidated Statements of Changes in (Deficit) Equity for the Years Ended December 31, 2011 (Successor), 2010 (Predecessor) and 2009 (Predecessor)

       60  

Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2011 (Successor), 2010 (Predecessor) and 2009 (Predecessor)

       61  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 (Successor),
2010 (Predecessor) and 2009 (Predecessor)

       62  

Notes to Consolidated Financial Statements

       63  

Reports of Independent Registered Public Accounting Firm

       117  

Management’s Report on Financial Statements and Assessment of Internal Control over Financial Reporting

       119  

 

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ABITIBIBOWATER INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

 

      Years Ended December 31,  
     Successor          Predecessor  
      2011            2010      2009  

Sales

   $ 4,756          $         4,746       $         4,366   

Costs and expenses:

           

Cost of sales, excluding depreciation, amortization and cost of timber harvested

     3,590            3,724         3,343   

Depreciation, amortization and cost of timber harvested

     220            493         602   

Distribution costs

     547            553         487   

Selling, general and administrative expenses

     158            155         198   

Closure costs, impairment and other related charges

     46            11         202   

Net gain on disposition of assets and other

     (3           (30      (91

Operating income (loss)

     198            (160      (375

Interest expense (contractual interest of $714 and $788 for the years ended December 31, 2010 and 2009, respectively) (Note 16)

     (95         (483      (597

Other expense, net

     (48           (89      (71

Income (loss) before reorganization items and income taxes

     55            (732      (1,043

Reorganization items, net (Note 3)

                  1,901         (639

Income (loss) before income taxes

     55            1,169         (1,682

Income tax (provision) benefit

     (16           1,606         122   

Net income (loss) including noncontrolling interests

     39            2,775         (1,560

Net loss (income) attributable to noncontrolling interests

     2              (161      7   

Net income (loss) attributable to AbitibiBowater Inc.

   $ 41            $ 2,614       $ (1,553
 

Net income (loss) per share attributable to AbitibiBowater Inc. common shareholders:

           

Basic

   $ 0.42          $ 45.30       $ (26.91

Diluted

   $ 0.42            $ 27.63       $ (26.91

Weighted-average number of AbitibiBowater Inc. common shares outstanding:

           

Basic

     97.1            57.7         57.7   

Diluted

     97.1              94.6         57.7   

See accompanying notes to consolidated financial statements.

 

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ABITIBIBOWATER INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amount)

 

      Successor
     December 31,       December 31,  
      2011           2010       

Assets

         

Current assets:

         

Cash and cash equivalents

   $ 369         $ 319     

Accounts receivable, net

     750           833     

Inventories, net

     475           438     

Assets held for sale

     7           698     

Deferred income tax assets

     109           47     

Other current assets

     59             88       

Total current assets

     1,769             2,423       

Fixed assets, net

     2,502           2,641     

Amortizable intangible assets, net

     18           19     

Deferred income tax assets

     1,749           1,736     

Other assets

     260           316     

Total assets

   $ 6,298           $ 7,135       

Liabilities and equity

         

Current liabilities:

         

Accounts payable and accrued liabilities

   $ 544         $ 547     

Liabilities associated with assets held for sale

               289     

Total current liabilities

     544             836       

Long-term debt

     621           905     

Pension and other postretirement benefit obligations

     1,524           1,272     

Deferred income tax liabilities

     75           72     

Other long-term liabilities

     57           63     

Total liabilities

     2,821             3,148       

Commitments and contingencies

         

Equity:

         

AbitibiBowater Inc. shareholders’ equity: