Aggregate Q3 09 losses of $632 million for Canadian forest and paper companies

Recovery is slow; recent pulp prices offer some hope

December 8, 2009 — Canadian forest and paper companies continued to face challenging business conditions in the third quarter of 2009 with sluggish demand and pricing for commodity products. Pulp prices gained upward momentum during the quarter but closed below prior-year levels. According to the latest PricewaterhouseCoopers (PwC) quarterly net earnings review for the forest and paper industry in aggregate, losses of $632 million reported by Canadian companies in the third quarter of 2009 exceeded losses of $552 million reported in the same quarter of 2008.

The nine largest public forest and paper companies in Western Canada posted losses of $210 million for the third quarter of 2009, compared to $230 million losses reported for the prior year period. Four of the nine companies posted positive earnings and seven companies reported improved results, however the improvement was mainly due to fluctuations in non-operating results.

Western Canadian companies benefited from pre-tax foreign exchange gains of $164 million on the translation of US dollar denominated debt in the third quarter of 2009 compared to a loss of $87 million in the third quarter of 2008. Included in the results for West Fraser are asset impairment charges of $155 million.

In Eastern Canada, the six largest public forest and paper companies reported losses of $422 million for the third quarter of 2009, a further decline from the $322 million losses for the comparable period of 2008. Domtar and AbitibiBowater benefited from $266 million of alternative fuel tax credits available to their US kraft pulp mills. Also reflected in the 2009 third quarter results are $282 million of expenses recorded by AbitibiBowater related to asset impairments and reorganization items and $49 million recorded by Fraser Papers for impairment charges and reorganization costs.

“The third quarter financials for the sector are grim, adding to the tough times experienced over the last several years,” said Craig Campbell, leader of PwC’s Performance Improvement practice for the global forest and paper industry. “Some hope is offered by the current positive price trend for pulp, which we believe will continue in 2010. And, while still relatively small in terms of volumes, there is some optimism in Western Canada about the growth of lumber exports to China.”

Campbell added: “Tough times have sparked some innovation in the sector. We are seeing some forest products producers holding on by tweaking operations to run more efficiently at lower throughputs, taking advantage of government incentives and other programs to reduce energy consumption and others looking at potential new revenue streams from bio-energy products.”

Ten of the largest public US-based forest and paper companies posted earnings of US $1.2 billion in the third quarter of 2009, up almost US $500 million from earnings of US $733 million in the same period of 2008. All but two companies posted positive or improved earnings, resulting mainly from an estimated US $1.1 billion of tax credits for the use of black liquor as a biofuel to generate energy. The tax credit is due to expire at the end of the year.

Ten of the largest European-based forest and paper companies incurred overall losses of €469 million in the third quarter of 2009, comparable to losses of €486 million reported in the third quarter of 2008. Third quarter 2009 results for Stora Enso included €655 million of asset impairment and restructuring charges. Eight of the 10 companies experienced improvement in financial performance experienced improvement in financial performance compared to the same period in 2008 through supply and spending discipline.

Ten of the largest forest and paper companies in Japan and emerging markets reported earnings of US $453 million in the third quarter of 2009, up from losses of US $280 million in the third quarter of 2008.

Net Earnings (Loss): Western Canada

Three months ended September 30th - $ millions

Net Earnings (Loss): Eastern Canada

Three months ended September 30th - $ millions

* Under creditor protection in Canada and the US

For more information, please visit http://www.pwc.com/ca/en/forest-paper-packaging/global-net-earnings-summary.jhtml.