##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                to
 Commission file number 1-8712
 BOWATER
INCORPORATED
 
 Delaware
(State or other jurisdiction of
    
    62-0721803
(I.R.S. Employerincorporation or organization)
    
    Identification No.)
  
    
   þ o
 þ o
  Class
    
    Outstanding at August 4, 2005Common Stock, $1.00 Par Value
    
    55,922,574 Shares




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##### 



BOWATER INCORPORATED
I N D E X
 PageNumberPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2005, and 2004
    
    
    3Consolidated Balance Sheet at June 30, 2005 and December 31, 2004
    
    
    4Consolidated Statement of Capital Accounts for the Six Months Ended June 30, 2005
    
    
    5Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7  14Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15  33Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36




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##### 



BOWATER
INCORPORATED
 CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in millions of US dollars except per-share amounts)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Sales
    
    $
    897.5
    
    
    $
    788.0
    
    
    $
    1,734.5
    
    
    $
    1,533.3Cost of sales, excluding depreciation, amortization
and cost of timber harvested
    
    
    642.5
    
    
    
    577.3
    
    
    
    1,250.1
    
    
    
    1,144.8Depreciation, amortization and cost of timber harvested
    
    
    81.6
    
    
    
    84.9
    
    
    
    163.4
    
    
    
    171.1Distribution costs
    
    
    89.4
    
    
    
    79.4
    
    
    
    172.3
    
    
    
    156.4Selling and administrative expense
    
    
    41.1
    
    
    
    31.8
    
    
    
    80.0
    
    
    
    68.8Asset impairment
    
    
    11.9
    
    
    
    
    
    
    
    11.9
    
    
    
    Net gain on sale of assets
    
    
    9.8
    
    
    
    5.1
    
    
    
    20.8
    
    
    
    4.2Operating income (loss)
    
    
    40.8
    
    
    
    19.7
    
    
    
    77.6
    
    
    
    (3.6
    )Other expense (income)Interest income
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (2.2
    )
    
    
    (2.1
    )Interest expense, net of capitalized interest
    
    
    49.3
    
    
    
    49.9
    
    
    
    99.5
    
    
    
    98.1Other, net
    
    
    1.3
    
    
    
    (3.9
    )
    
    
    (2.9
    )
    
    
    (5.1
    )49.5
    
    
    
    44.9
    
    
    
    94.4
    
    
    
    90.9Loss before income taxes and minority interests
    
    
    (8.7
    )
    
    
    (25.2
    )
    
    
    (16.8
    )
    
    
    (94.5
    )Income tax benefit
    
    
    (5.6
    )
    
    
    (22.9
    )
    
    
    (13.4
    )
    
    
    (56.7
    )Minority interests in net income (loss) of subsidiaries
    
    
    0.5
    
    
    
    (1.0
    )
    
    
    (0.7
    )
    
    
    (4.0
    )Net loss
    
    
    (3.6
    )
    
    
    (1.3
    )
    
    
    (2.7
    )
    
    
    (33.8
    )Other comprehensive loss, net of taxForeign currency translation adjustments
    
    
    (0.6
    )
    
    
    (1.8
    )
    
    
    (1.2
    )
    
    
    (2.6
    )Minimum pension liability adjustments
    
    
    0.2
    
    
    
    1.8
    
    
    
    0.5
    
    
    
    2.0Net change in derivative instruments
    
    
    (18.3
    )
    
    
    (34.7
    )
    
    
    (44.1
    )
    
    
    (53.0
    )Comprehensive loss
    
    $
    (22.3
    )
    
    $
    (36.0
    )
    
    $
    (47.5
    )
    
    $
    (87.4
    )Basic loss per common share
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.59
    )Diluted loss per common share
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.59
    )Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.40
  3




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##### 



BOWATER INCORPORATED
 CONSOLIDATED BALANCE SHEET
(Unaudited, in millions of US dollars)
 June 30,
    
    December 31,2005
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    51.0
    
    
    $
    29.7Accounts receivable, net
    
    
    446.4
    
    
    
    377.0Inventories
    
    
    333.8
    
    
    
    327.9Unrealized gain on hedged transactions
    
    
    49.3
    
    
    
    100.2Other current assets
    
    
    57.6
    
    
    
    67.9Total current assets
    
    
    938.1
    
    
    
    902.7Timber and timberlands
    
    
    185.8
    
    
    
    186.2Fixed assets, net
    
    
    3,168.4
    
    
    
    3,301.1Goodwill
    
    
    828.2
    
    
    
    828.2Other assets
    
    
    217.6
    
    
    
    240.7Total assets
    
    $
    5,338.1
    
    
    $
    5,458.9LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    20.7
    
    
    $
    14.0Short-term bank debt
    
    
    105.0
    
    
    
    73.0Accounts payable and accrued liabilities
    
    
    444.4
    
    
    
    458.4Dividends payable
    
    
    11.2
    
    
    
    11.2Total current liabilities
    
    
    581.3
    
    
    
    556.6Long-term debt, net of current installments
    
    
    2,400.4
    
    
    
    2,427.9Pension, other post-retirement benefits and other long-term liabilities
    
    
    492.1
    
    
    
    495.2Deferred income taxes
    
    
    358.0
    
    
    
    403.4Minority interests in subsidiaries
    
    
    67.5
    
    
    
    68.5Shareholders equity:Common stock, $1 par value. Authorized 100,000,000 shares; issued
67,529,294 and 67,438,584 shares at June 30, 2005 and December 31,
2004, respectively
    
    
    67.5
    
    
    
    67.4Exchangeable shares, no par value. Unlimited shares authorized;
1,434,445 and 1,466,358 outstanding at June 30, 2005 and December 31,
2004, respectively
    
    
    68.1
    
    
    
    69.7Additional paid-in capital
    
    
    1,621.6
    
    
    
    1,618.3Retained earnings
    
    
    240.9
    
    
    
    266.5Unearned compensation
    
    
    
    
    
    
    (0.1
    )Accumulated other comprehensive loss
    
    
    (73.4
    )
    
    
    (28.6
    )Treasury stock, at cost, 11,606,382 and 11,608,385 shares at June 30, 2005
and December 31, 2004, respectively
    
    
    (485.9
    )
    
    
    (485.9
    )Total shareholders equity
    
    
    1,438.8
    
    
    
    1,507.3Total liabilities and shareholders equity
    
    $
    5,338.1
    
    
    $
    5,458.9
  4




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##### 



BOWATER INCORPORATED
 CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
For The Six Months Ended June 30, 2005
(Unaudited, in millions of US dollars except per-share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    OtherCommon
    
    Exchangeable
    
    Paid-in
    
    Retained
    
    Unearned
    
    Comprehensive
    
    TreasuryStock
    
    Shares
    
    Capital
    
    Earnings
    
    Compensation
    
    Loss
    
    StockBalance at December 31, 2004
    
    $
    67.4
    
    
    $
    69.7
    
    
    $
    1,618.3
    
    
    $
    266.5
    
    
    $
    (0.1
    )
    
    $
    (28.6
    )
    
    $
    (485.9
    )Retraction of exchangeable shares (31,913 shares issued
and exchangeable shares retracted)
    
    
    
    
    
    
    (1.6
    )
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.7
    )
    
    
    
    
    
    
    
    
    
    
    Dividends ($0.40 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22.9
    )
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    Stock options exercised (69,000) shares)
    
    
    0.1
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit on exercise of stock options
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension plan additional minimum liability,
net of tax provision of $0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    Treasury stock used for dividend reinvestment plans and
to pay employee and director benefits (2,003 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Restricted stock cancellation (10,203 shares)
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss on hedged transactions,
net of tax benefit of $27.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44.1
    )
    
    
    Balance at June 30, 2005
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    240.9
    
    
    $
    
    
    
    $
    (73.4
    )
    
    $
    (485.9
    )
  5




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##### 



BOWATER INCORPORATED
 CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in millions of US Dollars)
 Six Months EndedJune 30,
    
    June 30,2005
    
    2004Cash flows from operating activities:Net loss
    
    $
    (2.7
    )
    
    $
    (33.8
    )Adjustments to reconcile net loss to net cash from operating activities:Depreciation, amortization and cost of timber harvested
    
    
    163.4
    
    
    
    171.1Asset impairment charge
    
    
    11.9
    
    
    
    Deferred income taxes
    
    
    (18.8
    )
    
    
    (61.8
    )Amortization of unearned compensation
    
    
    0.1
    
    
    
    0.5Minority interests in net loss of subsidiaries
    
    
    (0.7
    )
    
    
    (4.0
    )Net gain on fixed assets and land sales
    
    
    (20.8
    )
    
    
    (4.2
    )Changes in working capital:Accounts receivable, net
    
    
    (69.4
    )
    
    
    (36.1
    )Inventories
    
    
    (5.9
    )
    
    
    6.2Income taxes receivable
    
    
    3.1
    
    
    
    Accounts payable and accrued liabilities
    
    
    (6.9
    )
    
    
    12.3Income taxes payable
    
    
    
    
    
    
    (27.2
    )Other, net
    
    
    (1.9
    )
    
    
    (1.3
    )Net cash from operating activities
    
    
    51.4
    
    
    
    21.7Cash flows from investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (50.1
    )
    
    
    (38.9
    )Disposition of assets, including timber and timberlands
    
    
    23.0
    
    
    
    7.3Net cash used for investing activities
    
    
    (27.1
    )
    
    
    (31.6
    )Cash flows from financing activities:Cash dividends, including minority interests
    
    
    (22.9
    )
    
    
    (23.2
    )Short-term financing
    
    
    340.0
    
    
    
    389.8Short-term financing repayments
    
    
    (308.0
    )
    
    
    (479.2
    )Long-term financing
    
    
    
    
    
    
    245.9Payments of long-term debt
    
    
    (14.0
    )
    
    
    (113.8
    )Stock options exercised
    
    
    1.9
    
    
    
    5.2Net cash from (used for) financing activities
    
    
    (3.0
    )
    
    
    24.7Net increase in cash and cash equivalents
    
    
    21.3
    
    
    
    14.8Cash and cash equivalents at beginning of year
    
    
    29.7
    
    
    
    19.4Cash and cash equivalents at end of period
    
    $
    51.0
    
    
    $
    34.2SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest, including capitalized interest of $0.2 and $0
    
    $
    94.3
    
    
    $
    98.3Income taxes
    
    $
    
    
    
    $
    30.5
  6




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##### 



BOWATER INCORPORATED
 Notes to Consolidated Financial Statements  Unaudited
 1.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying consolidated financial statements include the accounts of Bowater Incorporated
and subsidiaries (Bowater). The consolidated balance sheet as of June 30, 2005, and the
related statements of operations, capital accounts and cash flows for the periods ended June 30,
2005 and 2004 are unaudited. In our opinion, all adjustments (consisting of normal recurring
adjustments) necessary for fair presentation of the interim financial statements have been made.
The results of the interim period ended June 30, 2005, are not necessarily indicative of the
results to be expected for the full year. These financial statements should be read in
conjunction with the consolidated financial statements, critical accounting policies,
significant accounting policies and the notes to the consolidated financial statements included
in our most recent Annual Report on Form 10-K. Certain prior-year amounts in the financial
statements and the notes have been reclassified to conform to the 2005 presentation. The
reclassifications had no effect on total shareholders equity or net loss.2.
    
    Stock Based CompensationBowater accounts for stock-based compensation utilizing the intrinsic value method in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Under APB No. 25, compensation expense for employee stock options is generally not
recognized if the exercise price of the option equals or exceeds the fair value of the
underlying stock on the date of grant.The following table represents the pro forma effect on net loss and loss per share if we had
applied the fair value-based method and recognition provisions of SFAS No. 123 Accounting for
Stock-Based Compensation. The estimated fair value of the option is amortized to expense over
the vesting period of the option award, in accordance with the provisions of SFAS No. 123.
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(Unaudited, in millions, except per-share amounts)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss as reported:
    
    $
    (3.6
    )
    
    $
    (1.3
    )
    
    $
    (2.7
    )
    
    $
    (33.8
    )Add:Stock-based compensation expense included in
net loss, net of related tax effects
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.3Deduct:Stock-based compensation expense
determined under fair value based methods,
net of related tax effects
    
    
    (1.4
    )
    
    
    (1.8
    )
    
    
    (2.9
    )
    
    
    (3.6
    )Pro forma net loss
    
    $
    (5.0
    )
    
    $
    (3.0
    )
    
    $
    (5.6
    )
    
    $
    (37.1
    )Loss per share:Basic, as reported
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.59
    )Basic, pro forma
    
    
    (0.09
    )
    
    
    (0.05
    )
    
    
    (0.10
    )
    
    
    (0.65
    )Diluted, as reported
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.59
    )Diluted, pro forma
    
    
    (0.09
    )
    
    
    (0.05
    )
    
    
    (0.10
    )
    
    
    (0.65
    )
 7




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##### 



BOWATER INCORPORATED
 Notes to Consolidated Financial StatementsUnaudited
  Six Months EndedJune 30,2005
    
    2004Assumptions:Dividend yield
    
    
    2.2
    %
    
    
    1.8
    %Expected volatility
    
    
    29.0
    %
    
    
    30.6
    %Risk-free interest rate
    
    
    4.0
    %
    
    
    3.4
    %Expected option lives in years
    
    
    7.2
    
    
    
    6.8Weighted average fair value of each option
    
    $
    11.16
    
    
    $
    13.88
  3. Asset Impairment
  4. Inventories
 June 30,
    
    December 31,(Unaudited, in millions)
    
    2005
    
    2004At lower of cost or market:Raw materials
    
    $
    85.4
    
    
    $
    87.9Work in process
    
    
    24.6
    
    
    
    23.1Finished goods
    
    
    120.3
    
    
    
    112.7Mill stores and other supplies
    
    
    114.2
    
    
    
    114.9344.5
    
    
    
    338.6Excess of current cost over LIFO inventory value
    
    
    (10.7
    )
    
    
    (10.7
    )$
    333.8
    
    
    $
    327.9
 5. Other (Income) Expense
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2005
    
    2004
    
    2005
    
    2004Foreign exchange (gain) loss
    
    $
    3.3
    
    
    $
    (1.7
    )
    
    $
    1.8
    
    
    $
    (1.3
    )Income from joint venture
    
    
    (1.1
    )
    
    
    (1.4
    )
    
    
    (1.8
    )
    
    
    (1.5
    )Miscellaneous income
    
    
    (0.9
    )
    
    
    (0.8
    )
    
    
    (2.9
    )
    
    
    (2.3
    )$
    1.3
    
    
    $
    (3.9
    )
    
    $
    (2.9
    )
    
    $
    (5.1
    )
 8




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##### 



BOWATER INCORPORATED
 Notes to Consolidated Financial StatementsUnaudited
 6. Accumulated Other Comprehensive Loss
  June 30,
    
    December 31,(Unaudited, in millions)
    
    2005
    
    2004Pension plan additional minimum liabilities (1)
    
    $
    (112.6
    )
    
    $
    (113.1
    )Foreign currency translation (2)
    
    
    7.0
    
    
    
    8.2Unrealized gain on hedging transactions (3)
    
    
    32.2
    
    
    
    76.3$
    (73.4
    )
    
    $
    (28.6
    )
 (1)
    
    Net of deferred tax benefit of $65.2 million and $65.5 million, respectively.(2)
    
    No tax effect is recorded for foreign currency translation since the foreign net assets
translated are deemed permanently invested.(3)
    
    Net of deferred tax expense of $19.6 million and $46.7 million, respectively.
 7. Loss Per Share
  Three months ended
    
    Six months endedJune 30,
    
    June 30,(Unaudited, in millions, except per-share amounts)
    
    2005
    
    2004
    
    2005
    
    2004Basic computation:Basic loss available to common shareholders
    
    $
    (3.6
    )
    
    $
    (1.3
    )
    
    $
    (2.7
    )
    
    $
    (33.8
    )Basic weighted average shares outstanding
    
    
    57.4
    
    
    
    57.2
    
    
    
    57.3
    
    
    
    57.1Basic loss per common share
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.59
    )Diluted computation:Diluted loss available to common shareholders
    
    $
    (3.6
    )
    
    $
    (1.3
    )
    
    $
    (2.7
    )
    
    $
    (33.8
    )Basic weighted average shares outstanding
    
    
    57.4
    
    
    
    57.2
    
    
    
    57.3
    
    
    
    57.1Effect of dilutive securities:Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    57.4
    
    
    
    57.2
    
    
    
    57.3
    
    
    
    57.1Diluted loss per common share
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.59
    )
  9




---



##### 



BOWATER INCORPORATED
 Notes to Consolidated Financial StatementsUnaudited
 8. Pension and Postretirement Expense
   Three months ended
    
    Six months endedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2005
    
    2004
    
    2005
    
    2004Components of net periodic benefit cost:Service cost
    
    $
    9.3
    
    
    $
    9.6
    
    
    $
    18.5
    
    
    $
    19.1Interest cost
    
    
    28.5
    
    
    
    27.3
    
    
    
    57.2
    
    
    
    54.6Expected return on plan assets
    
    
    (28.0
    )
    
    
    (27.1
    )
    
    
    (56.3
    )
    
    
    (54.2
    )Amortization of prior service cost
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.9
    
    
    
    1.0Recognized net actuarial loss
    
    
    4.1
    
    
    
    3.2
    
    
    
    8.1
    
    
    
    6.4Net periodic benefit cost
    
    $
    14.3
    
    
    $
    13.5
    
    
    $
    28.4
    
    
    $
    26.9
  Three months ended
    
    Six months endedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2005
    
    2004
    
    2005
    
    2004Components of net periodic benefit cost:Service cost
    
    $
    1.1
    
    
    $
    1.2
    
    
    $
    2.3
    
    
    $
    2.4Interest cost
    
    
    4.4
    
    
    
    4.4
    
    
    
    8.7
    
    
    
    8.9Amortization of prior service cost
    
    
    (1.3
    )
    
    
    (1.6
    )
    
    
    (2.7
    )
    
    
    (3.1
    )Recognized net actuarial loss
    
    
    2.1
    
    
    
    2.7
    
    
    
    4.3
    
    
    
    5.3Net periodic benefit cost
    
    $
    6.3
    
    
    $
    6.7
    
    
    $
    12.6
    
    
    $
    13.5
 9. Commitments and Contingencies
   10




---



##### 



BOWATER INCORPORATED
 Notes to Consolidated Financial Statements  Unaudited
 10.
    
    Financial InstrumentsBowater utilizes certain derivative instruments to enhance its ability to manage risk relating
to cash flow exposure. Derivative instruments are entered into for periods consistent with related
underlying cash flow exposures and do not constitute positions independent of those positions. We
do not enter into contracts for speculative purposes; however, we do, from time to time enter into
commodity and certain forward contracts that are not accounted for as accounting hedges. On the
date in which the derivative contract is entered, we designate the derivative as a cash flow hedge.We pay a significant portion of the operating expenses of our Canadian mill sites in Canadian
dollars. To reduce our exposure to United States and Canadian dollar exchange rate fluctuations,
we enter into and designate Canadian dollar forward contracts to hedge certain of our forecasted
Canadian dollar cash outflows at the Canadian mill operations.The components of the cash flow hedges included in Accumulated other comprehensive loss for
the three and six-months ended June 30, 2005 and 2004 are as follows:
 Three months ended
    
    Six months endedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2005
    
    2004
    
    2005
    
    2004Gains reclassified to earnings on matured cash flow hedges
    
    $
    (22.2
    )
    
    $
    (26.4
    )
    
    $
    (56.8
    )
    
    $
    (58.3
    )Unrealized gain (loss) for change in value on
unmatured cash flow hedges
    
    
    (7.4
    )
    
    
    (29.5
    )
    
    
    (14.4
    )
    
    
    (27.2
    )(29.6
    )
    
    
    (55.9
    )
    
    
    (71.2
    )
    
    
    (85.5
    )Income tax benefit
    
    
    11.3
    
    
    
    21.2
    
    
    
    27.1
    
    
    
    32.5Net decrease in Accumulated other comprehensive loss
    
    $
    (18.3
    )
    
    $
    (34.7
    )
    
    $
    (44.1
    )
    
    $
    (53.0
    )
 We formally document all relationships between hedging instruments and hedged items, as
well as our risk-management objectives and strategies for undertaking various hedge transactions.
We link all hedges that are designated as cash flow hedges to forecasted transactions. The maximum
time period we have hedged transactions is two years. We also assess, both at the inception of the
hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge, we discontinue hedge accounting prospectively.Information regarding our Canadian dollar contracts notional amount, carrying value, fair
market value, and range of exchange rates of the contracts is summarized in the table below. The
notional amount of these contracts represents the amount of foreign currencies to be purchased or
sold at maturity and does not represent our exposure on these contracts.
 Net Asset
    
    Range OfNotional
    
    
    
    
    
    Fair
    
    U.S.$/CDN$June 30, 2005
    
    Amount of
    
    Carrying
    
    Market
    
    Exchange(Unaudited, in millions of U.S.
dollars)
    
    Derivatives
    
    Amount
    
    Value
    
    RatesForeign Currency Exchange AgreementsBuy Currency:Canadian dollarDue in 2005
    
    $
    238.0
    
    
    $
    31.5
    
    
    $
    31.5
    
    
    
    .7489-.6942Due in 2006
    
    
    183.0
    
    
    
    20.3
    
    
    
    20.3
    
    
    
    .7609-.7124$
    421.0
    
    
    $
    51.8
    
    
    $
    51.8
 11




---



##### 



BOWATER INCORPORATED
 Notes to Consolidated Financial Statements  Unaudited
 In order to reduce our exposure to exchange rate fluctuations on our Canadian dollar
denominated long-term debt, we periodically enter into Canadian dollar forward contracts. These
economic hedge contracts are marked to market through earnings. The contracts are settled
quarterly and gains or losses are included in Other, net in our Consolidated Statement of
Operations. The Canadian dollar forward contracts in effect during the first quarter matured on
March 30, 2005, and we did not enter into any new Canadian dollar forward contracts. We recognized
a gain of $0.9 million for the six-months ended June 30, 2005, as a result of these contracts.The counterparties to our derivative financial instruments are substantial and creditworthy
multi-national financial institutions and no one financial institution has more than 23% of our
derivative financial instruments. Therefore, the risk of counterparty nonperformance is considered
to be remote.11.
    
    Off-Balance Sheet Debt GuaranteesBowater has off-balance sheet debt guarantees of approximately $33.7 million at June 30, 2005,
with $24.8 million related to Ponderay Newsprint Company and $8.9 million related to Timber Note
Holdings LLC, one of our QSPEs.Bowater has a 40% interest in Ponderay Newsprint Company, an unconsolidated partnership.
Ponderay has a credit facility which is comprised of a term loan and a revolving credit
facility. The term loan balance at June 30, 2005 was $62.0 million and is guaranteed by the
partners of Ponderay. Bowater guarantees 40% or $24.8 million of this term loan. The revolving
credit facility has commitments from the lender for $25 million. This revolving credit facility
is not guaranteed by the partners. At June 30, 2005, there is a $10 million letter of credit
reducing this commitment. There are no other drawings on this facility. Ponderays outstanding
balance on the term loan is reduced annually by its excess cash flows as defined in the credit
facility and, although the final balance is due at maturity on April 12, 2006, we believe that
Ponderay intends to renew this facility. The term loan cannot be increased once paid down,
therefore, Bowaters guarantee is reduced as the outstanding balance is reduced. Bowater would
be required to perform on the guarantee if Ponderay were to default on its credit facility and
Ponderays assets, which collateralize the debt, were insufficient to pay off the credit
facility. Ponderay was in compliance with all its debt covenants as of June 30, 2005.
Ponderays total assets and liabilities at June 30, 2005, were approximately $158 million and
$80 million (which includes the above mentioned debt), respectively.In connection with Bowaters 1999 land sale and note monetization, we guarantee 25% of the
outstanding investor notes principal balance of Timber Note Holdings LLC, one of our QSPEs.
Bowater currently guarantees approximately $8.9 million of the investor notes principal balance.
This guarantee is proportionately reduced by annual principal repayments on the investor notes
(annual minimum repayments of $2.0 million) through 2008. The remaining investor notes
principal amount is to be repaid in 2009. Timber Note Holdings LLC has assets of approximately
$39 million and obligations of approximately $36 million, which include the investor notes.
Bowater would be required to perform on the guarantee if the QSPE were to default on the
investor notes or if there were a default on the notes receivable.12.
    
    Segment InformationBelow is a description of the types of products and services from which each reportable
segment derives its revenues:Effective January 1, 2005, Bowater is organized into four divisions: the Newsprint Division,
the Coated and Specialty Papers Division, the Canadian Forest Products Division, and the Pulp
Division. The fifth division that existed in 2004, the Forest Products Division, was merged into
the Newsprint and Canadian Forest Products Divisions and the Thunder Bay mill was moved from the
Newsprint Division to the Coated and Specialty Papers Division. Except for the Pulp Division, each
division is responsible for the sales and marketing of distinct product lines and the operation of
certain manufacturing sites. The Pulp Division is primarily a marketing and distribution division
whose administrative expenses are included in Corporate & Other Eliminations. Therefore, the
other three divisions are our reportable segments. Prior year results have been restated to
facilitate comparisons to the 2005 presentation.
 12




---



##### 



BOWATER INCORPORATED
 Notes to Consolidated Financial Statements  Unaudited
 newsprint division
  coated and specialty papers division
  canadian forest products division
  pulp division
  Factors management used to identify our segments:
   13




---



##### 



BOWATER INCORPORATED
 Notes to Consolidated Financial Statements  Unaudited
  Coated
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Assets
    
    Corporate/June 30, 2005
    
    Newsprint
    
    Papers
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales- external customers
    
    $
    328.2
    
    
    $
    289.5
    
    
    $
    282.3
    
    
    $
    
    
    
    $
    (2.5
    )
    
    $
    897.5Segment income (loss)
    
    
    19.0
    
    
    
    8.0
    
    
    
    4.9
    
    
    
    9.8
    
    
    
    (0.9
    )
    
    
    40.8Total assets at 6/30/05
    
    
    2,055.6
    
    
    
    1,389.3
    
    
    
    1,388.8
    
    
    
    
    
    
    
    504.4
    
    
    
    5,338.1
 Coated
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Assets
    
    Corporate/June 30, 2004
    
    Newsprint
    
    Papers
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales- external customers
    
    $
    289.4
    
    
    $
    259.9
    
    
    $
    241.5
    
    
    $
    
    
    
    $
    (2.8
    )
    
    $
    788.0Segment income (loss)
    
    
    1.9
    
    
    
    (1.6
    )
    
    
    3.6
    
    
    
    5.1
    
    
    
    10.7
    
    
    
    19.7Total assets at 6/30/04
    
    
    2,098.0
    
    
    
    1,462.6
    
    
    
    1,393.6
    
    
    
    
    
    
    
    498.5
    
    
    
    5,452.7
 Coated
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    on FixedSix Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Assets
    
    Corporate/June 30, 2005
    
    Newsprint
    
    Papers
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales- external customers
    
    $
    637.5
    
    
    $
    565.0
    
    
    $
    539.7
    
    
    $
    
    
    
    $
    (7.7
    )
    
    $
    1,734.5Segment income
    
    
    29.5
    
    
    
    9.6
    
    
    
    6.7
    
    
    
    20.8
    
    
    
    11.0
    
    
    
    77.6
 Coated
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    on FixedSix Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Assets
    
    Corporate/June 30, 2004
    
    Newsprint
    
    Papers
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales- external customers
    
    $
    573.1
    
    
    $
    507.2
    
    
    $
    459.1
    
    
    $
    
    
    
    $
    (6.1
    )
    
    $
    1,533.3Segment income (loss)
    
    
    (2.2
    )
    
    
    (13.0
    )
    
    
    (18.5
    )
    
    
    4.2
    
    
    
    25.9
    
    
    
    (3.6
    )
 14




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Organization
  Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data
   Accounting Policies and Estimates
    15




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview of Financial Performance
      Outlook
    16




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Consolidated Results of Operations
 Three Months Ended June 30,
    
    Six Months Ended June 30,(In millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeSales
    
    $
    897.5
    
    
    $
    788.0
    
    
    $
    109.5
    
    
    $
    1,734.5
    
    
    $
    1,533.3
    
    
    $
    201.2Operating income (loss)
    
    
    40.8
    
    
    
    19.7
    
    
    
    21.1
    
    
    
    77.6
    
    
    
    (3.6
    )
    
    
    81.2Significant items that increased
(decreased) operating income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    85.0
    
    
    
    
    
    
    
    
    
    
    $
    189.3Distribution costs
    
    
    
    
    
    
    
    
    
    
    (5.4
    )
    
    
    
    
    
    
    
    
    
    
    (11.7
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (42.0
    )
    
    
    
    
    
    
    
    
    
    
    (89.9
    )Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    (11.9
    )
    
    
    
    
    
    
    
    
    
    
    (11.9
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (9.3
    )
    
    
    
    
    
    
    
    
    
    
    (11.2
    )Net gain on fixed assets and land sales
    
    
    
    
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    
    
    
    $
    16.6$
    21.1
    
    
    
    
    
    
    
    
    
    
    $
    81.2
 Three months ended June 30, 2005 versus June 30, 2004
 Sales
 Operating income
 Product pricing
 Distribution costs
 Manufacturing costs
 Asset impairment charge
 Selling and administrative expenses
 Net gain on fixed assets and land sales
 17




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Six months ended June 30, 2005 versus June 30, 2004
 Sales
 Operating income
 Product pricing
 Distribution costs
 Manufacturing costs
 Asset impairment charge
 Selling and administrative expenses
 Net gain on fixed assets and land sales
 18




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Division/Segments and Product Line Information
  (In millions)
    
    
    
    
    
    Coated & Specialty
    
    Canadian Forest
    
    
    
    
    
    Corporate and OtherProduct Line
    
    Newsprint Division
    
    Papers Division
    
    Products Division
    
    Pulp Division
    
    Eliminations
    
    TotalNewsprint
    
    $
    431.9
    *
    
    $
    79.8
    
    
    $
    195.2
    
    
    $
    
    
    
    $
    0.3
    
    
    $
    707.2Coated & Specialties
    
    
    88.4
    
    
    
    308.8
    *
    
    
    134.5
    
    
    
    
    
    
    
    (0.2
    )
    
    
    531.5Pulp
    
    
    107.7
    
    
    
    176.2
    
    
    
    
    
    
    
    
    *
    
    
    (3.1
    )
    
    
    280.8Lumber
    
    
    

    
    
    
    
    
    
    
    202.1
    *
    
    
    
    
    
    
    
    
    
    
    202.1Other
    
    
    9.5
    
    
    
    0.2
    
    
    
    7.9
    
    
    
    
    
    
    
    (4.7
    )
    
    
    12.9$
    637.5
    
    
    $
    565.0
    
    
    $
    539.7
    
    
    $
    
    
    
    $
    (7.7
    )
    
    $
    1,734.5
 *
    
    Indicates division responsible for the sale of product line for the entire company Product Line Information
   Newsprint
 Product Line
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Sales (in millions)
    
    $
    367.3
    
    
    $
    323.8
    
    
    $
    707.2
    
    
    $
    650.3Average prices (per metric ton)
    
    $
    578
    
    
    $
    524
    
    
    $
    568
    
    
    $
    514Shipments (thousands of metric tons)
    
    
    635.8
    
    
    
    618.0
    
    
    
    1,244.8
    
    
    
    1,266.3Downtime (thousands of metric tons)
    
    
    41.7
    
    
    
    53.4
    
    
    
    83.1
    
    
    
    92.1Inventory at end of period
(thousands of metric tons)
    
    
    87.5
    
    
    
    82.0
    
    
    
    87.5
    
    
    
    82.0
 19




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Three months ended June 30, 2005, versus June 30, 2004
  Newsprint Third Party Data:
 Six months ended June 30, 2005, versus June 30, 2004
  Newsprint Third Party Data:
 Coated
and Specialty Papers  Product Line
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Sales (in millions)
    
    $
    280.0
    
    
    $
    224.3
    
    
    $
    531.5
    
    
    $
    420.2Average prices (per short ton)
    
    $
    700
    
    
    $
    594
    
    
    $
    688
    
    
    $
    588Shipments (thousands of short tons)
    
    
    399.8
    
    
    
    377.3
    
    
    
    772.6
    
    
    
    715.1Downtime (thousands of short tons)
    
    
    25.9
    
    
    
    23.3
    
    
    
    48.5
    
    
    
    54.9Inventory at end of period
(thousands of short tons)
    
    
    47.7
    
    
    
    55.8
    
    
    
    47.7
    
    
    
    55.8
 Three months ended June 30, 2005, versus June 30, 2004
  20




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Coated and Specialty Papers Third Party Data:
 Six months ended June 30, 2005, versus June 30, 2004
  Coated and Specialty Papers Third Party Data:
 Market
Pulp  Product Line
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Sales (in millions)
    
    $
    140.5
    
    
    $
    139.0
    
    
    $
    280.8
    
    
    $
    276.2Average prices (per metric ton)
    
    $
    546
    
    
    $
    534
    
    
    $
    544
    
    
    $
    509Shipments (thousands of metric tons)
    
    
    257.5
    
    
    
    260.2
    
    
    
    515.9
    
    
    
    542.7Downtime (thousands of metric tons)
    
    
    13.2
    
    
    
    18.6
    
    
    
    23.5
    
    
    
    23.6Inventory at end of period (thousands of metric tons)
    
    
    66.9
    
    
    
    46.7
    
    
    
    66.9
    
    
    
    46.7
 Three months ended June 30, 2005, versus June 30, 2004
  21




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Market Pulp Third Party Data:
 Six months ended June 30, 2005, versus June 30, 2004
  Market Pulp Third Party Data:
 Lumber
 Product Line
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Sales (in millions)
    
    $
    105.9
    
    
    $
    96.5
    
    
    $
    202.1
    
    
    $
    173.5Average prices (per metric ton)
    
    $
    372
    
    
    $
    365
    
    
    $
    372
    
    
    $
    341Shipments (thousands of metric tons)
    
    
    285.1
    
    
    
    264.3
    
    
    
    543.5
    
    
    
    509.2Downtime (thousands of metric tons)
    
    
    69.6
    
    
    
    82.9
    
    
    
    117.9
    
    
    
    150.0Inventory at end of period
(thousands of metric tons)
    
    
    53.2
    
    
    
    60.7
    
    
    
    53.2
    
    
    
    60.7
 Three months ended June 30, 2005, versus June 30, 2004
   22




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Third party data:
 Six months ended June 30, 2005, versus June 30, 2004
    Third party data:
 23




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Divisional Performance
 Newsprint Division
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(In millions)
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangeSales
    
    $
    328.2
    
    
    $
    289.4
    
    
    $
    38.8
    
    
    $
    637.5
    
    
    $
    573.1
    
    
    $
    64.4Segment income (loss)
    
    
    19.0
    
    
    
    1.9
    
    
    
    17.1
    
    
    
    29.5
    
    
    
    (2.2
    )
    
    
    31.7Significant items that increased
(decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    28.2
    
    
    
    
    
    
    
    
    
    
    $
    59.1Distribution costs
    
    
    
    
    
    
    
    
    
    
    (3.5
    )
    
    
    
    
    
    
    
    
    
    
    (5.8
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (8.3
    )
    
    
    
    
    
    
    
    
    
    
    (22.3
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7$
    17.1
    
    
    
    
    
    
    
    
    
    
    $
    31.7
 Three months ended June 30, 2005, versus June 30, 2004
   Six months ended June 30, 2005, versus June 30, 2004
   24




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Coated and Specialty Papers Division
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(In millions)
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangeSales
    
    $
    289.5
    
    
    $
    259.9
    
    
    $
    29.6
    
    
    $
    565.0
    
    
    $
    507.2
    
    
    $
    57.8Segment income (loss)
    
    
    8.0
    
    
    
    (1.6
    )
    
    
    9.6
    
    
    
    9.6
    
    
    
    (13.0
    )
    
    
    22.6Significant items that increased
(decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    35.8
    
    
    
    
    
    
    
    
    
    
    $
    72.9Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    (2.5
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (12.4
    )
    
    
    
    
    
    
    
    
    
    
    (35.3
    )Asset impairment
    
    
    
    
    
    
    
    
    
    
    (11.9
    )
    
    
    
    
    
    
    
    
    
    
    (11.9
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )$
    9.6
    
    
    
    
    
    
    
    
    
    
    $
    22.6
 Three months ended June 30, 2005, versus June 30, 2004
    Six months ended June 30, 2005, versus June 30, 2004
   25




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Canadian Forest Products Division
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(In millions)
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangeSales
    
    $
    282.3
    
    
    $
    241.5
    
    
    $
    40.8
    
    
    $
    539.7
    
    
    $
    459.1
    
    
    $
    80.6Segment income (loss)
    
    
    4.9
    
    
    
    3.6
    
    
    
    1.3
    
    
    
    6.7
    
    
    
    (18.5
    )
    
    
    25.2Significant items that increased
(decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    21.0
    
    
    
    
    
    
    
    
    
    
    $
    56.2Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (3.4
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (18.4
    )
    
    
    
    
    
    
    
    
    
    
    (26.6
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    (1.0
    )$
    1.3
    
    
    
    
    
    
    
    
    
    
    $
    25.2
 Three months ended June 30, 2005, versus June 30, 2004
   Six months ended June 30, 2005, versus June 30, 2004
   Net Gain on Fixed Assets and Land Sales and Corporate & Other Eliminations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(In millions)
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangeNet gain on fixed assets and
land sales
    
    $
    9.8
    
    
    $
    5.1
    
    
    $
    4.7
    
    
    $
    20.8
    
    
    $
    4.2
    
    
    $
    16.6Corporate & other eliminations:Sales
    
    
    (2.5
    )
    
    
    (2.8
    )
    
    
    0.3
    
    
    
    (7.7
    )
    
    
    (6.1
    )
    
    
    (1.6
    )Segment income (loss)
    
    
    (0.9
    )
    
    
    10.7
    
    
    
    (11.6
    )
    
    
    11.0
    
    
    
    25.9
    
    
    
    (14.9
    )
 26




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Net gain on fixed assets and land sales:
 Corporate & other eliminations
 Interest and Other Income and Expenses
    Income Taxes
     27




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Liquidity and Capital Resources
  Six MonthsEnded June 30,(In millions)
    
    2005
    
    
    2004Increase in cash and cash equivalents
    
    $
    21.3
    
    
    $
    14.8Cash from (used for) operations
    
    
    51.4
    
    
    
    21.7Net loss
    
    
    (2.7
    )

    
    
    (33.8
    )Adjustments to net loss:Depreciation
    
    
    163.4
    
    
    
    171.1Deferred taxes
    
    
    (18.8
    )
    
    
    (61.8
    )Net gain on land sales
    
    
    (20.8
    )
    
    
    (4.2
    )Asset impairment
    
    
    11.9
    
    
    
    Working capital:Accounts receivable, net
    
    
    (69.4
    )
    
    
    (36.1
    )Inventories
    
    
    (5.9
    )
    
    
    6.2Income taxes receivable
    
    
    3.1
    
    
    
    Accounts payable and accrued liabilities
    
    
    (6.9
    )
    
    
    12.3Income taxes payable
    
    
    
    
    
    
    (27.2
    )(79.1
    )
    
    
    (44.8
    )Cash used for investing activities
    
    
    (27.1
    )
    
    
    (31.6
    )Cash invested in fixed assets, timber and timberlands
    
    
    (50.1
    )
    
    
    (38.9
    )Disposition of fixed assets, timberlands and note monetizations
    
    
    23.0
    
    
    
    7.3Cash from (used for) financing activities
    
    
    (3.0
    )
    
    
    24.7Short-term financing, net
    
    
    32.0
    
    
    
    (89.4
    )Long-term financing, net
    
    
    (14.0
    )
    
    
    132.1Dividends
    
    
    (22.9
    )
    
    
    (23.2
    )
 Cash From Operations
   28




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Cash Used for Investing Activities
  Cash From (Used for) Financing Activities
    Credit Arrangements:
  WeightedAverageAmount
    
    
    Commitment
    
    
    Termination
    
    
    InterestShort-Term Bank Debt
    
    Commitment
    
    
    Outstanding
    
    
    Available (1)
    
    
    Date
    
    
    Rate(in millions except for dates and interest rates)Revolving credit facility (2)
    
    $
    435.0
    
    
    $
    
    
    
    $
    341.0
    
    
    
    04/07
    
    
    
    
    %364-day Accounts Receivable
Securitization Arrangement
(3)
    
    
    200.0
    
    
    
    105.0
    
    
    
    82.1
    
    
    
    12/05
    
    
    
    3.20
    %$
    635.0
    
    
    $
    105.0
    
    
    $
    423.1
 (1)
    
    The commitment available under the Revolving credit facility is subject to covenant
restrictions described on pages 30  31 of this Form 10-Q and is reduced by outstanding
letters of credit of $94.0 million.(2)
    
    Borrowings under the revolving credit facility incur interest based, at our option, on
specified market interest rates plus a margin tied to the credit rating of our long-term debt.(3)
    
    The amount that can be borrowed at any time under our 364-day accounts receivables
securitization arrangement depends on the amount and nature of the accounts receivable. The
interest rate is based on commercial paper issued by the lenders plus a margin. 29




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
  30




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
  Quarters EndedRolling 4(Unaudited, in millions)
    
    9/30/2004
    
    
    12/31/2004
    
    
    3/31/2005
    
    
    6/30/2005
    
    
    QtrsNet income (loss)
    
    $
    (18.1
    )
    
    $
    (35.2
    )
    
    $
    0.9
    
    
    $
    (3.6
    )
    
    $
    (56.0
    )Provision for income tax expense (benefit)
    
    
    12.0
    
    
    
    (10.1
    )
    
    
    (7.8
    )
    
    
    (5.6
    )
    
    
    (11.5
    )Depreciation, amortization and cost of timber harvested
    
    
    83.0
    
    
    
    81.1
    
    
    
    81.8
    
    
    
    81.6
    
    
    
    327.5Interest expense, net of capitalized interest
    
    
    48.4
    
    
    
    48.8
    
    
    
    50.2
    
    
    
    49.3
    
    
    
    196.7Interest income
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (4.3
    )EBITDA
    
    $
    124.2
    
    
    $
    83.6
    
    
    $
    124.0
    
    
    $
    120.6
    
    
    $
    452.4Adjustments:Severance
    
    
    
    
    
    
    8.7
    
    
    
    
    
    
    
    
    
    
    
    8.7Minority interest in net income (loss) of subsidiaries
    
    
    0.8
    
    
    
    (3.3
    )
    
    
    (1.2
    )
    
    
    0.5
    
    
    
    (3.2
    )Foreign exchange (gain)
loss
    
    
    1.2
    
    
    
    (2.9
    )
    
    
    (1.5
    )
    
    
    3.3
    
    
    
    0.1Asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.9
    
    
    
    11.9Income from joint venture
    
    
    (1.7
    )
    
    
    (1.2
    )
    
    
    (0.7
    )
    
    
    (1.1
    )
    
    
    (4.7
    )0.3
    
    
    
    1.3
    
    
    
    (3.4
    )
    
    
    14.6
    
    
    
    12.8EBITDA, as calculated according to our
credit facilitys guidelines
    
    $
    124.5
    
    
    $
    84.9
    
    
    $
    120.6
    
    
    $
    135.2
    
    
    $
    465.2
  (in millions, except ratios)
    
    June 30, 2005Total debt
    
    $
    2,526.1Less: Revaluation of debt
    
    
    (72.2
    )Total debt, per credit facilities
    
    $
    2,453.9Capitalization:Total shareholders equity
    
    $
    1,438.8Total debt
    
    
    2,526.1Minority interest
    
    
    67.5Less: Revaluation of debt
    
    
    (72.2
    )Plus: Additional minimum pension liability
    
    
    112.6Total capitalization, per credit facilities
    
    $
    4,072.8Total debt as a percentage of total capitalization in accordance with credit facilities
    
    
    60.3
    %Total debt as a percentage of total capitalization, in accordance with GAAP
    
    
    62.6
    %
  31




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
   Employees
    Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings
   Canadian Dollar Hedging Program
  32




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Recent Accounting Pronouncements
      ,
 33




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk
  Interest Rate Risk
  Commodity Price Risk
  Item 4. Controls and Procedures.
     34




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 PART II
 OTHER INFORMATION
 Item 1. Legal Proceedings.
 a.
    
    Bowater is involved in various legal proceedings relating to contracts, commercial
disputes, taxes, environmental issues, employment and workers compensation claims and other
matters. We periodically review the status of these proceedings with both inside and outside
counsel. 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 the
results of operations in a given quarter or the year.
 b.
    
    There have been no material developments to the legal proceedings described in our
annual report on Form 10-K filed on March 16, 2005.
 Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Modification of Employment Agreement, dated as of April 5, 2005, by and between Bowater
Incorporated and Arthur D. Fuller and Bowater (incorporated by reference to Exhibit 99.1 to
Bowater Incorporated Form 8-K dated April 7, 2005).10.2
    
    First Amendment to the Bowater Incorporated Mid-Term Incentive Plan, effective January
25, 2005.12.1
    
    Statement regarding Computation of Ratio of Earnings to Fixed Charges.31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 35




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
   BOWATER INCORPORATEDBy
    
    /s/ William G. HarveyWilliam G. HarveySenior Vice President and Chief Financial OfficerBy
    
    /s/ Michael F. NocitoMichael F. NocitoVice President and Controller
  36




---



##### 



INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Modification of Employment Agreement, dated as of April 5, 2005, by and between
Bowater Incorporated and Arthur D. Fuller and Bowater (incorporated by reference to
Exhibit 99.1 to Bowater Incorporated Form 8-K dated April 7, 2005).10.2
    
    First Amendment to the Bowater Incorporated Mid-Term Incentive Plan, effective
January 25, 2005.12.1
    
    Statement regarding Computation of Ratio of Earnings to Fixed Charges.31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.