##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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
    
    62-0721803(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602
(Address of principal executive offices)                    (Zip Code) (864) 271-7733
(Registrants telephone number, including area code) 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. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). þ o
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of May 2, 2005. Class
    
    Outstanding at May 2, 2005Common Stock, $1.00 Par Value
    
    55,921,945 Shares




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##### 



BOWATER INCORPORATED
I N D E X Page NumberPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Statement of Operations for the Three Months Ended
March 31, 2005 and 2004
    
    
    3Consolidated Balance Sheet at March 31, 2005 and December 31, 2004
    
    
    4Consolidated Statement of Capital Accounts for the Three Months
Ended March 31, 2005
    
    
    5Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7  14Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15  31Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34




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##### 



CONSOLIDATED STATEMENT OF OPERATIONS BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in millions of US dollars except per-share amounts) Three Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004Sales
    
    $
    837.0
    
    
    $
    745.3Cost of sales, excluding depreciation, amortization
and cost of timber harvested
    
    
    607.6
    
    
    
    567.5Depreciation, amortization and cost of timber harvested
    
    
    81.8
    
    
    
    86.2Distribution costs
    
    
    82.9
    
    
    
    77.0Selling and administrative expense
    
    
    38.9
    
    
    
    37.0Net gain (loss) on sale of assets
    
    
    11.0
    
    
    
    (0.9
    )Operating income (loss)
    
    
    36.8
    
    
    
    (23.3
    )Other expense (income)Interest income
    
    
    (1.1
    )
    
    
    (1.0
    )Interest expense, net of capitalized interest
    
    
    50.2
    
    
    
    48.2Other, net
    
    
    (4.2
    )
    
    
    (1.2
    )44.9
    
    
    
    46.0Loss before income taxes and minority interests
    
    
    (8.1
    )
    
    
    (69.3
    )Provision for income tax benefit
    
    
    (7.8
    )
    
    
    (33.8
    )Minority interests in net loss of subsidiaries
    
    
    (1.2
    )
    
    
    (3.0
    )Net income (loss)
    
    
    0.9
    
    
    
    (32.5
    )Other comprehensive loss, net of taxForeign currency translation adjustments
    
    
    (0.6
    )
    
    
    (0.8
    )Minimum pension liability adjustments
    
    
    0.3
    
    
    
    0.2Net change
in derivative instruments
    
    
    (25.8
    )
    
    
    (18.3
    )Comprehensive loss
    
    $
    (25.2
    )
    
    $
    (51.4
    )Basic earnings (loss) per common share
    
    $
    0.02
    
    
    $
    (0.57
    )Diluted earnings (loss) per common share
    
    $
    0.02
    
    
    $
    (0.57
    )Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
 See accompanying notes to consolidated financial statements 3




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##### 



CONSOLIDATED BALANCE SHEET BOWATER INCORPORATED
CONSOLIDATED BALANCE SHEET
(Unaudited, in millions of US dollars) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    47.3
    
    
    $
    29.7Accounts receivable, net
    
    
    401.4
    
    
    
    377.0Inventories
    
    
    353.5
    
    
    
    327.9Unrealized gain on hedged transactions
    
    
    71.6
    
    
    
    100.2Other current assets
    
    
    55.1
    
    
    
    67.9Total current assets
    
    
    928.9
    
    
    
    902.7Timber and timberlands
    
    
    185.6
    
    
    
    186.2Fixed assets, net
    
    
    3,237.6
    
    
    
    3,301.1Goodwill
    
    
    828.2
    
    
    
    828.2Other assets
    
    
    230.0
    
    
    
    240.7Total assets
    
    $
    5,410.3
    
    
    $
    5,458.9LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    20.8
    
    
    $
    14.0Short-term bank debt
    
    
    96.0
    
    
    
    73.0Accounts payable and accrued liabilities
    
    
    458.1
    
    
    
    458.4Dividends payable
    
    
    11.2
    
    
    
    11.2Total current liabilities
    
    
    586.1
    
    
    
    556.6Long-term debt, net of current installments
    
    
    2,414.9
    
    
    
    2,427.9Pension, other post-retirement benefits and other long-term liabilities
    
    
    492.2
    
    
    
    495.2Deferred income taxes
    
    
    377.4
    
    
    
    403.4Minority interests in subsidiaries
    
    
    67.1
    
    
    
    68.5Commitments and contingencies
    
    
    
    
    
    
    Common stock, $1 par value. Authorized 100,000,000 shares; issued
67,519,294 and 67,438,584 shares at March 31, 2005
and December 31, 2004, respectively
    
    
    67.5
    
    
    
    67.4Exchangeable shares, no par value. Unlimited shares authorized;
1,444,445 and 1,466,358 outstanding at March 31, 2005
and December 31, 2004, respectively
    
    
    68.6
    
    
    
    69.7Additional paid-in capital
    
    
    1,621.2
    
    
    
    1,618.3Retained earnings
    
    
    255.9
    
    
    
    266.5Unearned compensation
    
    
    
    
    
    
    (0.1
    )Accumulated other comprehensive loss
    
    
    (54.7
    )
    
    
    (28.6
    )Treasury stock, at cost, 11,606,824 and 11,608,385 shares at
March 31, 2005 and December 31, 2004, respectively
    
    
    (485.9
    )
    
    
    (485.9
    )Total shareholders equity
    
    
    1,472.6
    
    
    
    1,507.3Total liabilities and shareholders equity
    
    $
    5,410.3
    
    
    $
    5,458.9
 See accompanying notes to consolidated financial statements 4




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##### 



CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
For The Three Months Ended March 31, 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 (21,913 shares issued
and exchangeable shares retracted)
    
    
    
    
    
    
    (1.1
    )
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    Dividends ($0.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.5
    )
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    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 expense of $0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    Treasury stock used for dividend reinvestment plans and
to pay employee and director benefits (1,561 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Restricted stock cancellation (10,203 shares)
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss on hedged transactions,
net of tax benefit of $15.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25.8
    )
    
    
    Balance at March 31, 2005
    
    $
    67.5
    
    
    $
    68.6
    
    
    $
    1,621.2
    
    
    $
    255.9
    
    
    $
    0.0
    
    
    $
    (54.7
    )
    
    $
    (485.9
    )
 See accompanying notes to consolidated financial statements 5




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##### 



CONSOLIDATED STATEMENT OF CASH FLOWS BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in millions of US Dollars) Three Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004Cash flows from (used for) operating activities:Net income (loss)
    
    $
    0.9
    
    
    $
    (32.5
    )Adjustments to reconcile net income (loss) to net cash
from (used for) operating activities:Depreciation, amortization and cost of
timber harvested
    
    
    81.8
    
    
    
    86.2Deferred income taxes
    
    
    (10.5
    )
    
    
    (37.5
    )Amortization of unearned compensation
    
    
    0.1
    
    
    
    0.3Minority interests in net loss of subsidiaries
    
    
    (1.2
    )
    
    
    (3.0
    )Net (gain) loss on fixed assets and land sales
    
    
    (11.0
    )
    
    
    0.9Changes in working capital:Accounts receivable, net
    
    
    (24.4
    )
    
    
    (11.3
    )Inventories
    
    
    (25.6
    )
    
    
    (9.1
    )Income taxes receivable
    
    
    7.3
    
    
    
    Accounts payable and accrued liabilities
    
    
    7.8
    
    
    
    7.4Income taxes payable
    
    
    
    
    
    
    (18.7
    )Other, net
    
    
    (5.3
    )
    
    
    (3.7
    )Net cash from (used for) operating activities
    
    
    19.9
    
    
    
    (21.0
    )Cash flows from (used for) investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (25.1
    )
    
    
    (18.9
    )Disposition of assets, including timber and timberlands
    
    
    12.4
    
    
    
    1.6Net cash used for investing activities
    
    
    (12.7
    )
    
    
    (17.3
    )Cash flows from (used for) financing activities:Cash dividends, including minority interests
    
    
    (11.4
    )
    
    
    (11.5
    )Short-term financing
    
    
    225.0
    
    
    
    259.8Short-term financing repayments
    
    
    (202.0
    )
    
    
    (340.3
    )Long-term financing
    
    
    
    
    
    
    246.1Payments of long-term debt
    
    
    (3.1
    )
    
    
    (102.5
    )Stock options exercised
    
    
    1.9
    
    
    
    2.9Net cash from financing activities
    
    
    10.4
    
    
    
    54.5Net increase in cash and cash equivalents
    
    
    17.6
    
    
    
    16.2Cash and cash equivalents at beginning of year
    
    
    29.7
    
    
    
    19.4Cash and cash equivalents at end of period
    
    $
    47.3
    
    
    $
    35.6SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest, including capitalized interest of $0.1 and $0
    
    $
    27.5
    
    
    $
    22.6Income taxes
    
    $
    
    
    
    $
    20.6
 See accompanying notes to consolidated financial statements 6




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Notes to Consolidated Financial Statements 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 March 31, 2005 and the
related statements of operations, capital accounts and cash flows for the periods ended March
31, 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 March 31, 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 EndedMarch 31,(Unaudited, in millions, except per-share amounts)
    
    2005
    
    
    2004Net income (loss) as reported:
    
    $
    0.9
    
    
    $
    (32.5
    )Add: Stock-based compensation expense included in
net income (loss), net of related tax effects
    
    
    
    
    
    
    0.2Deduct: Stock-based compensation expense
determined under fair value based methods, net of
related tax effects
    
    
    (1.5
    )
    
    
    (1.8
    )Pro forma net loss
    
    $
    (0.6
    )
    
    $
    (34.1
    )Income (loss) per share:Basic, as reported
    
    $
    0.02
    
    
    $
    (0.57
    )Basic, pro forma
    
    
    (0.01
    )
    
    
    (0.60
    )Diluted, as reported
    
    $
    0.02
    
    
    $
    (0.57
    )Diluted, pro forma
    
    
    (0.01
    )
    
    
    (0.60
    )
 7




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited The fair value of each option granted in the three months ended March 31, 2005 and 2004, was
estimated on the date of grant using the Black-Scholes option-pricing model with the weighted
average assumptions below. Three Months EndedMarch 31,2005
    
    
    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
    
    
    
    6.5Weighted average fair value of each option
    
    $
    11.19
    
    
    $
    13.64
  In January 2005 and 2004, respectively, Bowater granted 740,750 and 862,000 options pursuant to
its 2002 stock option plan at an exercise price of $37 and $45 per share, respectively. The
options generally become exercisable over a period of two years and expire 10 years from date of
grant.3.
    Inventories March 31,
    
    
    December 31,(Unaudited, in millions)
    
    2005
    
    
    2004At lower of cost or market:Raw materials
    
    $
    93.6
    
    
    $
    87.9Work in process
    
    
    26.0
    
    
    
    23.1Finished goods
    
    
    131.7
    
    
    
    112.7Mill stores and other supplies
    
    
    113.0
    
    
    
    114.9364.3
    
    
    
    338.6Excess of current cost over LIFO inventory value
    
    
    (10.8
    )
    
    
    (10.7
    )$
    353.5
    
    
    $
    327.9
  4.
    Other (Income) ExpenseOther, net in the Consolidated Statement of Operations includes the following: Three Months Ended March 31,(Unaudited, in millions)
    
    2005
    
    
    2004Foreign exchange (gain) loss
    
    $
    (1.5
    )
    
    $
    0.4Income from joint venture
    
    
    (0.7
    )
    
    
    (0.1
    )Miscellaneous income
    
    
    (2.0
    )
    
    
    (1.5
    )$
    (4.2
    )
    
    $
    (1.2
    )
 8




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  5.
    Accumulated Other Comprehensive LossThe components of Accumulated other comprehensive loss in the Consolidated Balance Sheet are
as follows: March 31,
    
    
    December 31,(Unaudited, in millions)
    
    2005
    
    
    2004Pension plan additional minimum liabilities (1)
    
    $
    (112.8
    )
    
    $
    (113.1
    )Foreign currency translation (2)
    
    
    7.6
    
    
    
    8.2Unrealized gain on hedging transactions (3)
    
    
    50.5
    
    
    
    76.3$
    (54.7
    )
    
    $
    (28.6
    )
  (1)
    Net of deferred tax benefit of $65.4 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 $30.9 million and $46.7 million, respectively.  6.
    Income (Loss) Per ShareBasic and diluted income (loss) per share are based on net income (loss) and do not include any
impact from Other comprehensive loss. Three Months EndedMarch 31,(Unaudited, in millions, except per-share amounts)
    
    2005
    
    
    2004Basic computation:Basic income (loss) available to common shareholders
    
    $
    0.9
    
    
    $
    (32.5
    )Basic weighted average shares outstanding
    
    
    57.3
    
    
    
    57.1Basic income (loss) per common share
    
    $
    0.02
    
    
    $
    (0.57
    )Diluted computation:Diluted income (loss) available to common shareholders
    
    $
    0.9
    
    
    $
    (32.5
    )Basic weighted average shares outstanding
    
    
    57.3
    
    
    
    57.1Effect of dilutive securities:Options
    
    
    0.1
    
    
    
    Diluted weighted average shares outstanding
    
    
    57.4
    
    
    
    57.1Diluted income (loss) per common share
    
    $
    0.02
    
    
    $
    (0.57
    )
 The dilutive effect of options outstanding is calculated using the treasury stock method.
Options for approximately 4.2 million and 4.8 million shares outstanding at March 31, 2005, and
2004, respectively, were excluded in the calculation of diluted earnings per share as the impact
would have been antidilutive. 9




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited  7.
    Pension and Postretirement ExpenseThe components of net periodic benefit costs relating to Bowaters pension and other
postretirement plans are as follows for the three months ended March 31, 2005 and 2004: Pension Plans
    
    
    Other Postretirement Plans(Unaudited, in millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Components of net periodic benefit cost:Service cost
    
    $
    9.2
    
    
    $
    9.5
    
    
    $
    1.1
    
    
    $
    1.2Interest cost
    
    
    28.7
    
    
    
    27.3
    
    
    
    4.4
    
    
    
    4.5Expected return on plan assets
    
    
    (28.3
    )
    
    
    (27.1
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    0.5
    
    
    
    0.5
    
    
    
    (1.3
    )
    
    
    (1.5
    )Recognized net actuarial loss
    
    
    4.0
    
    
    
    3.2
    
    
    
    2.1
    
    
    
    2.6Net periodic benefit cost
    
    $
    14.1
    
    
    $
    13.4
    
    
    $
    6.3
    
    
    $
    6.8
  8.
    Commitments and ContingenciesBowater 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.There have been no material developments to the legal proceedings described in our annual report
on Form 10-K filed on March 16, 2005.9.
    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. 10




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited The components of the cash flow hedges included in Accumulated other comprehensive loss for
the three months ended March 31, 2005 and 2004 are as follows: Three Months Ended March 31,(Unaudited, in millions)
    
    2005
    
    
    2004Gains reclassified to earnings on matured cash flow hedges
    
    $
    (34.6
    )
    
    $
    (31.9
    )Unrealized gain (loss) for change in value on unmatured
cash flow hedges
    
    
    (7.0
    )
    
    
    2.4(41.6
    )
    
    
    (29.5
    )Income tax benefit
    
    
    15.8
    
    
    
    11.2Net decrease in Accumulated other comprehensive loss
    
    $
    (25.8
    )
    
    $
    (18.3
    )
 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. Notional
    
    
    Net Asset
    
    
    Range OfMarch 31, 2005
    
    Amount of
    
    
    Carrying
    
    
    Fair
    
    
    U.S.$/CDN$(Unaudited, in millions of U.S. dollars)
    
    Derivatives
    
    
    Amount
    
    
    Market Value
    
    
    Exchange RatesForeign Currency Exchange AgreementsBuy Currency:Canadian dollarDue in 2005
    
    $
    378.0
    
    
    $
    59.7
    
    
    $
    59.7
    
    
    
    .7489-.6451Due in 2006
    
    
    183.0
    
    
    
    21.7
    
    
    
    21.7
    
    
    
    .7609-.7124$
    561.0
    
    
    $
    81.4
    
    
    $
    81.4
 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 quarter ended March 31, 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 21% of our
derivative financial instruments. Therefore, the risk of counterparty nonperformance is
considered to be remote. 11




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  10.
    Off-Balance Sheet Debt GuaranteesBowater has off-balance sheet debt guarantees of approximately $36.1 million at March 31, 2005,
with $27.0 million related to Ponderay Newsprint Company and $9.1 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 March 31, 2005 was $67.5 million and is guaranteed by the
partners of Ponderay. Bowater guarantees 40% or $27.0 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 March 31, 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 March 31, 2005.
Ponderays total assets and liabilities at March 31, 2005 were approximately $162 million and
$86 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 $9.1 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
$42 million and obligations of approximately $37 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.11.
    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.newsprint divisionThe Newsprint Division operates six manufacturing sites (including Ponderay Newsprint Company,
an unconsolidated partnership) in the United States, Canada and South Korea. The principal
product at these manufacturing sites is newsprint, but several of the sites also produce market
pulp and uncoated specialty papers. This division has primary responsibility for the domestic
and international marketing and sales of newsprint. The division also manages 1.0 million acres
of owned or leased timberland in the United States and the Canadian province of Nova Scotia on
which we have cutting rights. Effective January 1, 2005, the Thunder Bay mill became part of the
Coated and Specialty Papers Division. 12




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  coated and specialty papers divisionThe Coated and Specialty Papers Division operates a manufacturing site that produces coated and
uncoated specialty papers and market pulp and two Nuway coating facilities, all three located in
the United States. This division also operates a manufacturing site in Canada which produces
newsprint, specialty papers and market pulp. Effective January 1, 2005, the Thunder Bay mill
became part of the Coated and Specialty Papers Division. This division has primary
responsibility for the marketing and sales of the full spectrum of coated and uncoated specialty
papers manufactured by Bowater. The division also manages 8.4 million acres of Crown-owned land
in the Canadian province of Ontario on which we have cutting rights.canadian forest products divisionThe Canadian Forest Products Division operates four paper manufacturing sites in Canada. The
division manages 0.4 million acres of owned or leased timberland and approximately 21.2 million
acres of Crown-owned land in the Canadian provinces of Quebec and New Brunswick on which we have
cutting rights. The division also operates twelve sawmills, supplies wood to four paper mills
and seven sawmills, and is responsible for the marketing and sales of its timber and lumber
production. Effective January 1, 2005, the sawmill operations of the Forest Products Division
were merged into the Canadian Forest Products Division.pulp divisionThe Pulp Division markets and distributes market pulp produced by other divisions. Financial
results for the production and sale of market pulp are included in the Newsprint Division or the
Coated and Specialty Papers Division, depending upon which site manufactures the product. The
Pulp Divisions selling and administrative expenses are included in Corporate and Other
Eliminations. Accordingly, no separate results are reported for this division.Factors management used to identify our segments:Bowaters reportable segments are business units responsible for the marketing and sales of
different products. They are managed separately because of the different products they are
responsible for manufacturing and distributing.The line entitled Segment income (loss) in the following tables is equal to Operating income
(loss) as presented in our Consolidated Statement of Operations. In addition, none of the
income or loss items following Operating income (loss) in our Consolidated Statement of
Operations are allocated to our segments, since they are reviewed separately by Bowaters
management.The following tables summarize information about segment profit and loss for the three month
periods ended March 31, 2005 and 2004 and segment assets as of March 31, 2005 and 2004: Coated
    
    
    
    
    
    
    Net Gainand
    
    
    Canadian
    
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    Assets
    
    
    Corporate/March 31, 2005
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    and Land
    
    
    Other(Unaudited, in millions)
    
    Division
    
    
    Division
    
    
    Division
    
    
    Sales
    
    
    Eliminations
    
    
    TotalSales- external customers
    
    $
    309.3
    
    
    $
    275.5
    
    
    $
    266.3
    
    
    $
    
    
    
    $
    (14.1
    )
    
    $
    837.0Segment income
    
    
    10.5
    
    
    
    1.6
    
    
    
    1.8
    
    
    
    11.0
    
    
    
    11.9
    
    
    
    36.8Total assets at 3/31/05
    
    
    2,056.2
    
    
    
    1,398.5
    
    
    
    1,389.7
    
    
    
    
    
    
    
    565.9
    
    
    
    5,410.3
 13




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited Coated
    
    
    
    
    
    
    Net Gainand
    
    
    Canadian
    
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    Assets
    
    
    Corporate/March 31, 2004
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    and Land
    
    
    Other(Unaudited, in millions)
    
    Division
    
    
    Division
    
    
    Division
    
    
    Sales
    
    
    Eliminations
    
    
    TotalSales- external customers
    
    $
    283.7
    
    
    $
    247.3
    
    
    $
    215.2
    
    
    $
    
    
    
    $
    (0.9
    )
    
    $
    745.3Segment income (loss)
    
    
    (3.9
    )
    
    
    (11.4
    )
    
    
    (21.1
    )
    
    
    (0.9
    )
    
    
    14.0
    
    
    
    (23.3
    )Total assets at 3/31/04
    
    
    2,115.7
    
    
    
    1,478.4
    
    
    
    1,407.4
    
    
    
    
    
    
    
    558.1
    
    
    
    5,559.6
 14




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Organization 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. Newsprint Division The Newsprint Division operates six manufacturing sites (including Ponderay Newsprint Company, an
unconsolidated partnership) in the United States, Canada and South Korea. The principal product at
these manufacturing sites is newsprint, but several of the sites also produce market pulp and
uncoated specialty papers. This division has primary responsibility for the domestic and
international marketing and sales of newsprint. The division also manages 1.0 million acres of
owned or leased timberland in the United States and the Canadian province of Nova Scotia on which
we have cutting rights. Effective January 1, 2005, the Thunder Bay mill became part of the Coated
and Specialty Papers Division. Coated and Specialty Papers Division The Coated and Specialty Papers Division operates a manufacturing site that produces coated and
uncoated specialty papers and market pulp and two Nuway coating facilities, all three located in
the United States. This division also operates a manufacturing site in Canada which produces
newsprint, specialty papers and market pulp. Effective January 1, 2005, the Thunder Bay mill
became part of the Coated and Specialty Papers Division. This division has primary responsibility
for the marketing and sales of the full spectrum of coated and uncoated specialty papers
manufactured by Bowater. The division also manages 8.4 million acres of Crown-owned land in the
Canadian province of Ontario on which we have cutting rights. Canadian Forest Products Division The Canadian Forest Products Division operates four paper manufacturing sites in Canada. The
division manages 0.4 million acres of owned or leased timberland and approximately 21.2 million
acres of Crown-owned land in the Canadian provinces of Quebec and New Brunswick on which we have
cutting rights. The division also operates twelve sawmills, supplies wood to four paper mills and
seven sawmills, and is responsible for the marketing and sales of its timber and lumber production.
Effective January 1, 2005, the sawmill operations of the Forest Products Division were merged
into the Canadian Forest Products Division. Pulp Division The Pulp Division markets and distributes market pulp produced by other divisions. Financial
results for the production and sale of market pulp are included in the Newsprint Division or the
Coated and Specialty Papers Division, depending upon which site manufactures the product. The Pulp
Divisions selling and administrative expenses are included in Corporate and Other Eliminations.
Accordingly, no separate results are reported for this division. 15




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data Statements that are not reported financial results or other historical information are
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include, for example, statements about our business outlook,
assessment of market conditions, strategies, future plans, future sales, prices for our major
products, inventory levels, capital spending and tax and exchange rates. These forward-looking
statements are not guarantees of future performance. These statements are based on managements
expectations that involve a number of business risks and uncertainties, any of which could cause
actual results to differ materially from those expressed in or implied by the forward-looking
statements. In addition to specific factors described in connection with any particular
forward-looking statement, factors that could cause actual results to differ materially include,
but are not limited to, those described under the caption Cautionary Statements Regarding
Forward-Looking Information and Use of Third Party Data in Bowaters annual report on Form 10-K
for the year ended December 31, 2004, and from time to time, in Bowaters other filings with the
Securities and Exchange Commission. In addition, other risks could adversely affect us, as it is
not possible for us to predict or assess all risks. We disclaim any obligation to publicly update
or revise any forward-looking statements even if our situation changes in the future. Information about industry or general economic conditions contained in this report are derived from
third party sources (e.g. trade publications) that Bowater believes are widely accepted and
accurate; however, Bowater has not independently verified this information and cannot provide
assurances of its accuracy. Accounting Policies and Estimates The following discussion and analysis provides information that we believe is useful in
understanding our operating results, cash flows and financial condition on our unaudited
Consolidated Financial Statements included in this quarterly report. Our significant accounting
policies are described in Note 1 to the Consolidated Financial Statements in Bowaters annual
report on Form 10-K for the year ended December 31, 2004. Bowaters critical accounting policies
and estimates are described under the caption Critical Accounting Policies and Estimates in Item
7 of Bowaters annual report on Form 10-K for the year ended December 31, 2004. The preparation of financial statements in conformity with generally accepted accounting principles
requires us to make estimates, assumptions and judgments and rely on projections of future results
of operations and cash flows. We base our estimates and assumptions on historical data and other
assumptions that we believe are reasonable under the circumstances. These estimates and
assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities in our financial statements. In addition, they affect the reported amounts
of revenues and expenses during the reporting period. Our judgments are based on our assessment as to the effect certain estimates, assumptions of future
trends or events may have on the financial condition and results of operations reported in our
Consolidated Financial Statements. It is important that the reader of our financial statements
understand that actual results could differ materially from these estimates, assumptions,
projections and judgments. Overview of Financial Performance Our net income for the first three months of 2005 was $0.9 million, as compared to a net loss of
$32.5 million for the same period in 2004. Our cash flow from operating activities was lower than
our capital spending and dividends, resulting in slightly higher debt levels. As a result, our
total debt to capitalization ratio, calculated in accordance with our credit facilities, increased
slightly to 59.8%. During the first quarter of 2005, prices increased for all of our products, increasing our sales by
$91.7 million as compared to the first quarter of 2004. Shipments also increased in lumber and
coated and specialty papers. Our sales in the first quarter of 2005 were 12% higher than in the
first quarter of 2004. However, our costs were also higher primarily due to the stronger Canadian
dollar and higher recycled fiber, energy and labor costs. Our unit 16




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations manufacturing costs were up 6% in newsprint, 12% in market pulp and 8% in lumber. Consolidated
Results of Operations on page 18 provides specifics regarding manufacturing cost changes during
the first quarter of 2005. We improved our product mix significantly during the first quarter of 2005. Shipments of higher
value added coated and specialty papers increased by 10% as compared to the same period of 2004. Newsprint demand in North America declined 7% in the first quarter of 2005 compared to the same
period last year as a cyclical advertising recovery continued to be offset by conservation measures
taken by publishers, reduced North American newspaper circulation and substitution between uncoated
mechanical grades. Global demand for newsprint in the first quarter of 2005 was healthy. Coated
mechanical demand in North America was essentially flat compared to the same period of 2004.
Uncoated mechanical demand increased by 11.5% and supercalendered high gloss specialty paper demand
increased by 7.5%. Global market pulp demand continues to be healthy. Overall, pulp and paper
markets were stronger during the first quarter of 2005. In the first quarter of 2005 we spent approximately $25 million on capital projects. We expect to
spend approximately $170 million in 2005, compared to projected depreciation expense of $330
million. We believe that this level of spending is adequate to effectively maintain our
manufacturing facilities. This level of capital expenditures excludes capital requirements for the
conversion opportunities discussed below. We intend to direct any excess cash flows to reduce
debt. Outlook Markets and prices for our products have improved. However, North American newsprint demand may
continue to decline over the next few years and we expect our newsprint capacity to decline as we
continue to shift production to coated and specialty grades. In particular, we have attractive
opportunities for further investment to enhance our product mix by converting newsprint capacity to
coated and uncoated specialty papers capacity at our Calhoun and Thunder Bay mills. We are
currently reviewing marketing and engineering plans for these strategic initiatives. The timing of
these initiatives will take into account our financial flexibility and debt reduction goals. Later
this year, we expect to be in a position to announce whether or not we will proceed with these
projects. We believe our operations are positioned to deliver quality products and that capital reinvestment
in the business can be held to acceptable levels. We expect to generate positive cash flows in the
remainder of 2005, reducing debt and enhancing our financial flexibility. However, if pricing or
demand fall significantly below our projections, our ability to generate sufficient cash flows may
be adversely impacted and we may be required to seek additional external sources of capital. We
believe our access to our credit facilities and the capital markets will be sufficient to provide
for our requirements. 17




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations Three Months EndedMarch 31,(In millions)
    
    2005
    
    
    2004
    
    
    ChangeSales
    
    $
    837.0
    
    
    $
    745.3
    
    
    $
    91.7Operating income (loss)
    
    
    36.8
    
    
    
    (23.3
    )
    
    
    60.1Significant items that increased (decreased) operating income:Net gain on fixed assets and land sales
    
    
    
    
    
    
    
    
    
    $
    11.9Product pricing
    
    
    
    
    
    
    
    
    
    
    102.1Distribution costs
    
    
    
    
    
    
    
    
    
    
    (5.9
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (46.1
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (1.9
    )$
    60.1
 Three months ended March 31, 2005 versus March 31, 2004 Salesincreased in the first quarter of 2005 as compared to the first quarter of 2004 due primarily
to higher transaction prices for all products and due to increased shipments of coated and
specialty papers and lumber as further discussed in the Product Line Information section. Operating incomeincreased in the first quarter of 2005 as compared to the first quarter of 2004.
The above table analyzes the major items that increased operating income. A brief explanation of
these major items follows: Net gain on fixed assets and land salesrelates primarily to land sales and the disposition or
write-off of fixed assets. The increase is due to higher land sales in the first quarter of
2005 compared to the first quarter of 2004. Product pricingfor all of our major product groups was higher in the first quarter of 2005 as
compared to the first quarter of 2004. Please refer to the discussion of Product Line
Information for a more detailed analysis of product pricing and shipments. Distribution costswere higher in the first quarter of 2005 as compared to the first quarter of
2004 as a result of increased shipments to export markets and increased fuel costs. Manufacturing costswere higher in the first quarter of 2005 as compared to the first quarter of
2004 resulting from higher recycled fiber ($3.4 million) and wood costs ($7.3 million),
increased chemical costs ($4.6 million), higher energy costs ($2.8 million), higher labor and
repair materials costs ($8.0 million), and a stronger Canadian
dollar ($21.4 million). These cost increases were partially
offset by improved volumes ($5.2 million) and lower depreciation expense ($3.3 million). 18




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Division/Segments and Product Line Information Bowater is organized by Division. Bowater also provides product line disclosures for
informational purposes to our analysts and investors. The Divisions have operational
responsibility over their group of operating assets. The Divisions also have sales
responsibilities that overlap several of the Companys operating Divisions/Segments. The matrix
below depicts the various products that are manufactured by each of the Companys operating
Divisions/Segments and corresponding sales dollars for the three months ended March 31, 2005 and
depicts the Division that is responsible for the sale of the product line for the entire company. (In millions)Coated &
    
    
    CanadianSpecialty
    
    
    Forest
    
    
    
    
    
    
    Corporate andNewsprint
    
    
    Papers
    
    
    Products
    
    
    Pulp
    
    
    OtherProduct Line
    
    Division
    
    
    Division
    
    
    Division
    
    
    Division
    
    
    Eliminations
    
    
    TotalNewsprint
    
    $
    208.6
    *
    
    $
    40.2
    
    
    $
    100.4
    
    
    $
    
    
    
    $
    (9.3
    )
    
    $
    339.9Coated & Specialties
    
    
    39.7
    
    
    
    148.2
    *
    
    
    63.6
    
    
    
    
    
    
    
    
    
    
    
    251.5Pulp
    
    
    56.1
    
    
    
    87.0
    
    
    
    
    
    
    
    
    *
    
    
    (2.8
    )
    
    
    140.3Lumber
    
    
    
    
    
    
    
    
    
    
    96.2
    *
    
    
    
    
    
    
    
    
    
    
    96.2Other
    
    
    4.9
    
    
    
    0.1
    
    
    
    6.1
    
    
    
    
    
    
    
    (2.0
    )
    
    
    9.1$
    309.3
    
    
    $
    275.5
    
    
    $
    266.3
    
    
    $
    
    
    
    $
    (14.1
    )
    
    $
    837.0
  *
    
    Indicates division responsible for the sale of product line for the entire company Product Line Information Presented below is a discussion of each significant product line followed by a discussion of the
results of each of the reported divisions. In general, our products are globally-traded commodities. Pricing and the level of shipments of
these products will continue to be 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 exchange rates. Newsprint  Product Line Three Months Ended March 31,2005
    
    
    2004Sales (in millions)
    
    $
    339.9
    
    
    $
    326.5Average prices (per metric ton)
    
    $
    558
    
    
    $
    504Shipments (thousands of metric tons)
    
    
    609.0
    
    
    
    648.2Downtime (thousands of metric tons)
    
    
    41.4
    
    
    
    38.7Inventory at end of period (thousands of metric tons)
    
    
    107.0
    
    
    
    75.6
 19




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Three months ended March 31, 2005, versus March 31, 2004 Our average newsprint transaction price for all markets was 10.7% higher in the first quarter of
2005 compared to the first quarter of 2004. The increase reflects the realization of price
increases in the North American and International markets. Newsprint shipments decreased by 6% in
the first quarter of 2005 primarily due to increases in specialty production. The market downtime
is primarily attributable to an idled paper machine at our Thunder Bay mill (since late June 2003).
We plan to take approximately 40,000 metric tons of market and maintenance downtime in the second
quarter of 2005. We expect this market downtime to continue until market conditions improve. We
will continue to match production to orders. Inventories increased during the first quarter of
2005 to support our expanding export markets. We have announced a $35 per metric ton price increase for the domestic market effective June 1,
2005. Market conditions will determine whether we realize this increase. Newsprint Third Party Data:In the first quarter of 2005, total U.S. demand and consumption of
newsprint decreased 7.3% and 4.6%, respectively as compared to the same period last year. North
American net exports of newsprint decreased 0.5% from first quarter 2004 levels. Total inventories
(North American mills and users) at March 31, 2005 were 1.4 million metric tons, approximately
13,000 metric tons, or 0.9%, lower than the end of the first quarter 2004. At March 31, 2005 the
days of supply at the U.S. daily newspapers was 43 days, unchanged from March 2004. Excluding
idled capacity, the North American operating rate was 97% for the first quarter of 2005. Newspaper
advertising linage declined 2.3% in March 2005 compared to March 2004 and declined 1.0% on a
year-to-date basis. Coated and Specialty Papers  Product Line Three Months Ended March 31,2005
    
    
    2004Sales (in millions)
    
    $
    251.5
    
    
    $
    195.9Average prices (per short ton)
    
    $
    675
    
    
    $
    580Shipments (thousands of short tons)
    
    
    372.8
    
    
    
    337.8Downtime (thousands of short tons)
    
    
    22.5
    
    
    
    31.6Inventory at end of period (thousands of short tons)
    
    
    51.0
    
    
    
    60.9
 Three months ended March 31, 2005, versus March 31, 2004 Our average transaction price for coated paper was 18.1% higher in the first quarter of 2005
compared to the first quarter of 2004 due to the realization of price increases in 2004 and March
2005, as well as the addition of ultra-light weight coated grades to our mix. Our coated
mechanical papers shipments increased 7.9% in the first quarter of 2005 as compared to the first
quarter of 2004 due to strong market demand. Our average transaction price for specialty papers
was 14.3% higher in the first quarter of 2005 compared to the first quarter of 2004 due to the
realization of price increases in 2004. Our shipments of specialty papers increased 13.2% in the
first quarter of 2005 compared to the first quarter of 2004 due to book market customers
down-grading from traditional freesheet grades to mechanical specialties and retailer circular
customers upgrading from newsprint to specialties. Market downtime in the first quarter of 2005
was at our Nuway facilities. Effective April 1, 2005, Bowater announced price increases of $60 and $40 per short ton for
selected supercalendered and uncoated mechanical products, respectively. Effective March 1, 2005,
Bowater announced price increases of $60 per short ton across all coated grades. Coated and Specialty Papers Third Party Data:U.S. magazine advertising pages increased 1.2% in the
first quarter of 2005 compared to the first quarter of 2004 and catalog mailings (indicated by
standard mail pieces) increased 20




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations 8.2% in the fourth quarter of 2004 compared to the same period in
2003. North American demand for coated mechanical papers was flat in
the first three months of
2005 compared to the first three months of 2004. North American demand
for supercalendered
high gloss papers and other uncoated mechanical papers was up 7.5%
and up 12.0%, respectively,
in the first three months of 2005 compared to the first three months of 2004. Market Pulp Three Months Ended March 31,2005
    
    
    2004Sales (in millions)
    
    $
    140.3
    
    
    $
    137.2Average prices (per metric ton)
    
    $
    543
    
    
    $
    485Shipments (thousands of metric tons)
    
    
    258.4
    
    
    
    282.5Downtime (thousands of metric tons)
    
    
    10.3
    
    
    
    5.0Inventory at end of period (thousands of metric tons)
    
    
    54.6
    
    
    
    50.3
 Three months ended March 31, 2005, versus March 31, 2004 Our average transaction price for market pulp was 12% higher in the first quarter of 2005 compared
to the first quarter of 2004. The increase reflects the realization of price increases brought
about by improved world supply and demand over the last three quarters of 2004 and first quarter of
2005. Temporary and permanent supply reductions in North America coupled with improved demand from
paper makers combined to help improve market conditions. Shipments were lower during the first
quarter of 2005 as a result of maintenance downtime and increased fiber consumption by several of
our paper mills. Our Catawba, SC facility was down in the first quarter of 2005 for a
scheduled maintenance, removing approximately 5,000 metric tons from production. Our market pulp
inventories ended the first quarter of 2005 at 16 days supply. Generally, our inventories are
below the industry average because our mills are geographically closer to the markets they serve.
In the third quarter of 2005, our Coosa Pines facility will be down for scheduled maintenance,
removing approximately 20,000 metric tons of production. As a result, we will increase our market
pulp inventory prior to the shut. We believe our inventory levels are appropriate. A $20 per metric ton price increase for both Northern and Southern Hardwood grades was announced to
our North American customer base effective April 1, 2005. Market Pulp Third Party Data:World demand for market pulp decreased in the first quarter of 2005
compared to the same period last year. World shipments were down 1.4% in the first quarter of 2005
compared to the same period in 2004. World producers shipped at 94% of capacity. World producer
inventories have increased to 34 days supply, which is 2 days more than the corresponding period in
2004. Lumber Three Months Ended March 31,2005
    
    
    2004Sales (in millions)
    
    $
    96.2
    
    
    $
    77.0Average prices
    
    $
    372
    
    
    $
    315Shipments (million board feet)
    
    
    258.4
    
    
    
    244.9Downtime (million board feet)
    
    
    48.3
    
    
    
    67.1Inventory at end of period (million board feet)
    
    
    71.3
    
    
    
    68.1
 21




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Three months ended March 31, 2005, versus March 31, 2004 Lumber prices increased in the first quarter of 2005 as compared to the first quarter of 2004 as a
result of market volatility and continued high demand which was fueled by record housing starts.
Our lumber shipments increased 5.5% in the first quarter of 2005 due primarily to the increased
output at our Maniwaki sawmill following completion of the modernization project in December 2003. The Province of Québec has mandated that annual harvests of softwood timber on Crown-owned land
must be reduced 20% below 2004 levels. The 20% reduction must be achieved, on average, for the
three year period beginning April 1, 2005 and ending
March 31, 2008. We do not expect
that these requirements will have any material impact on our results
of operations or financial
condition in 2005. We are assessing the impact of these reductions for future years. The U.S. Department of Commerce (DOC) imposed antidumping duties (ADD) of 8.43% on all of Bowaters
Canadian softwood lumber imports and countervailing duties (CVD) of 18.79% on softwood lumber
imported from all provinces except New Brunswick and Nova Scotia. The duties became effective for
lumber shipments beginning May 22, 2002. Bowater accrued lumber duties based upon the DOCs
preliminarily imposed effective dates of August 16, 2001, for countervailing duties and November 6,
2001, for antidumping duties. During the second quarter of 2002, Bowater reversed approximately
$7.3 million for previously recorded lumber duties for periods prior to the effective date of May
22, 2002. Since May 22, 2002 Bowater has been posting cash deposits to cover the duties. On
December 20, 2004 the CVD rate was adjusted to 17.18% and the ADD rate was adjusted to 4.03% for
the period of May 22, 2002 to April 30, 2003 pursuant to a review by the DOC. Bowater began to
accrue on this new published rate and will continue to accrue and pay duties based on rates
established by the DOC until new rates are published. The CVD rate was amended to 16.37% on
February 24, 2005 and the ADD rate was amended to 3.78% on January 24, 2005. Lumber duties are
included as a component of distribution costs on our consolidated statement of operations. The Canadian government has appealed the duties to the World Trade Organization (WTO) and under the
terms of the North American Free Trade Agreement (NAFTA) and requested that the duties be refunded.
The final amount of CVD and ADD that may be assessed on Canadian softwood lumber imports into the
U.S. will depend upon negotiations among the governments involved in the dispute or upon
determinations made by the NAFTA, WTO or other adjudicatory panels to which the duties may be
appealed. Until the dispute about the duties is resolved, we will continue to pay the duties as
required by the DOC. To date, we have paid CV and AD duties of approximately $77.3 million.
Should these duty rates be eliminated or decreased, a portion or all of the $77.3 million could be
reversed into operating income in future periods. Third party data:The U.S. housing starts increased 8.0% in the first quarter of 2005 as compared
to the same period last year. 22




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Divisional Performance Newsprint Division Three Months EndedMarch 31,(In millions)
    
    2005
    
    
    2004
    
    
    ChangeSales
    
    $
    309.3
    
    
    $
    283.7
    
    
    $
    25.6Segment income (loss)
    
    
    10.5
    
    
    
    (3.9
    )
    
    
    14.4Significant items that increased
(decreased) segment income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    30.3Distribution costs
    
    
    
    
    
    
    
    
    
    
    (2.3
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (13.2
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.4
    )$
    14.4
 Three months ended March 31, 2005, versus March 31, 2004 Sales increased in the first quarter of 2005 as compared to the first quarter of 2004 primarily as
a result of higher product pricing for newsprint ($21.0 million), market pulp ($5.3 million) and
specialty papers ($3.1 million), and higher shipments of specialty papers ($10.0 million) and
market pulp ($1.6 million). These product price and shipment increases were
offset by lower shipments of newsprint ($15.2 million). See the previous discussion of product line
results. Segment income increased in the first quarter of 2005 primarily as a result of higher product
pricing and shipments noted above. These product pricing improvements were partially offset by
higher manufacturing costs. Manufacturing costs were higher as a result of higher prices for
recycled fiber, energy, labor, and chemicals ($11.6 million) and a stronger Canadian dollar ($2.6
million), partially offset by improved wood costs ($1.0 million). 23




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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 EndedMarch 31,(In millions)
    
    2005
    
    
    2004
    
    
    ChangeSales
    
    $
    275.5
    
    
    $
    247.3
    
    
    $
    28.2Segment income (loss)
    
    
    1.6
    
    
    
    (11.4
    )
    
    
    13.0Significant items that increased
(decreased) segment income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    37.0Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.3
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (22.5
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.2
    )$
    13.0
 Three months ended March 31, 2005, versus March 31, 2004 Sales increased in the first quarter of 2005 as compared to the first quarter of 2004 primarily as
a result of increased product pricing in coated and specialty papers ($24.0 million), newsprint
($3.3 million) and market pulp ($9.7 million), partially offset by lower shipments of pulp ($11.4
million). See the previous discussion of product line results. Segment income increased in the first quarter of 2005 as compared to the first quarter of 2004
primarily as a result of higher product pricing as discussed above, offset in part by higher
manufacturing costs including higher costs ($11.1 million) for wood, fuel, chemicals, electricity
and labor costs, a stronger Canadian dollar ($8.2 million) and repair materials associated with the
first quarter maintenance outage at our Catawba facility. These increased manufacturing costs were
offset by lower depreciation expense ($3.5 million). Canadian Forest Products Division Three Months EndedMarch 31,(In millions)
    
    2005
    
    
    2004
    
    
    ChangeSales
    
    $
    266.3
    
    
    $
    215.2
    
    
    $
    51.1Segment income (loss)
    
    
    1.8
    
    
    
    (21.1
    )
    
    
    22.9Significant items that increased
(decreased) segment income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    34.8Distribution costs
    
    
    
    
    
    
    
    
    
    
    (2.4
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (8.5
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (1.0
    )$
    22.9
 24




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Three months ended March 31, 2005, versus March 31, 2004 Sales increased in the first quarter of 2005 as compared to the first quarter of 2004 as a result
of higher product pricing for newsprint ($10.0 million), coated and specialty papers ($8.6
million), lumber ($15.4 million), and timber ($0.7 million) and higher shipments. See the previous
discussion of product line results. Segment income increased in the first quarter of 2005 as compared to the first quarter of 2004
primarily as a result of higher product pricing as discussed above. These improvements were offset by higher manufacturing costs and higher
distribution costs. The higher manufacturing costs were due to a stronger Canadian dollar ($13.4
million) and higher wood costs ($5.7 million), partially offset
by improved volumes ($5.9 million), lower power ($0.5 million),
lower fuel ($1.6 million), lower repair materials ($1.0 million) and lower labor costs ($0.8
million). Net Gain on Fixed Assets and Land Sales and Corporate & Other Eliminations Net gain (loss) on fixed assets and land sales and corporate and other eliminations are included in
order to reconcile division sales and segment income (loss) to our total sales and operating income
(loss) on our Consolidated Statement of Operations. Three Months EndedMarch 31,(In millions)
    
    2005
    
    
    2004
    
    
    ChangeNet gain (loss) on fixed assets and land sales
    
    $
    11.0
    
    
    $
    (0.9
    )
    
    $
    11.9Corporate & other eliminations:Sales
    
    
    (14.1
    )
    
    
    (0.9
    )
    
    
    (13.2
    )Segment income
    
    
    11.9
    
    
    
    14.0
    
    
    
    (2.1
    )
 Net gain on fixed assets and land sales:During the three months ended March 31, 2005, Bowater
recorded a net pre-tax gain of $11.0 million related primarily to the sale of approximately 3,700
acres of land and gains or losses on fixed assets. During the three months ended March 31, 2004,
Bowater recorded a net pre-tax loss of $0.9 million related to land sales and gains or losses on
fixed assets. The increase is primarily due to higher land sales in 2005 compared to 2004. Corporate & other
eliminations: The elimination of intersegment sales increased $13.2 million in
the first quarter of 2005 versus the same period in 2004. Corporate income decreased $2.1 million
in the first quarter of 2005 over the same period in 2004 due primarily to decreased gains on
foreign currency hedges. Interest and Other Income and Expenses Interest expense increased $2.0 million from $48.2 million for the first quarter of 2004 to $50.2
million for the first quarter of 2005. This increase in both periods is primarily attributable to
higher average debt balances and higher interest rates. Other income increased $3.0 million from $1.2 million during the first quarter of 2004 to $4.2
million during the first quarter of 2005 primarily as a result of an increases in foreign currency
exchange gains ($1.9 million), income from joint ventures ($0.6 million) and other miscellaneous
income ($0.5 million) during the period. Bowater recorded a foreign exchange gain of $1.5 million
during the first quarter of 2005 compared to a loss of $0.4 million for the same period of 2004.
The majority of our exchange gain/loss amounts are attributable to the revaluation of unhedged
foreign denominated assets and liabilities into United States dollars. For a further discussion of
the effect of fluctuations in the Canadian  U.S. Dollar exchange rates, see Canadian  U.S.
Dollar Exchange Rate Fluctuation Effect on Earnings. 25




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Income Taxes Bowaters effective tax rate for the first quarter of 2005 was 96.3% versus 48.8% for the first
quarter of 2004. 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
special tax treatment on foreign currency gains and losses. We have a number of foreign
subsidiaries whose unconsolidated foreign currency gains and losses are taxed locally. On
consolidation, a portion of such gains and losses are eliminated but we are still impacted by the
foreign taxes on such items. The rate for the first quarter of 2005 was impacted by certain
foreign currency exchange gains on which Bowater provides no tax expense. The rates in both 2005
and 2004 were also influenced by permanent tax differences that are not dependent on pre-tax income
(loss). 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. Liquidity and Capital Resources The primary components of our cash flows are as follows: Three MonthsEnded March 31,(In millions)
    
    2005
    
    
    2004Increase in cash and cash equivalents
    
    $
    17.6
    
    
    $
    16.2Cash from (used for) operations
    
    
    19.9
    
    
    
    (21.0
    )Net income (loss)
    
    
    0.9
    
    
    
    (32.5
    )Adjustments to net (income) loss:Depreciation
    
    
    81.8
    
    
    
    86.2Deferred taxes
    
    
    (10.5
    )
    
    
    (37.5
    )Net (gain) loss in land sales
    
    
    (11.0
    )
    
    
    0.9Working capital:Accounts receivable, net
    
    
    (24.4
    )
    
    
    (11.3
    )Inventories
    
    
    (25.6
    )
    
    
    (9.1
    )Income taxes receivable
    
    
    7.3
    
    
    
    Accounts payable and accrued liabilities
    
    
    7.8
    
    
    
    7.4Income taxes payable
    
    
    
    
    
    
    (18.7
    )(34.9
    )
    
    
    (31.7
    )Cash used for investing activities
    
    
    (12.7
    )
    
    
    (17.3
    )Cash invested in fixed assets, timber and timberlands
    
    
    (25.1
    )
    
    
    (18.9
    )Disposition of fixed assets, timberlands and note monetizations
    
    
    12.4
    
    
    
    1.6Cash from financing activities
    
    
    10.4
    
    
    
    54.5Short-term financing, net
    
    
    23.0
    
    
    
    (80.5
    )Long-term financing, net
    
    
    (3.1
    )
    
    
    143.6Dividends
    
    
    (11.4
    )
    
    
    (11.5
    )
 Cash From Operations Cash generated from operations increased $40.9 million from the first quarter of 2004 to the first
quarter of 2005, due primarily to lower cash losses from operations. The lower cash losses in the
first quarter of 2005 were 26




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations primarily the result of higher product pricing and increased production volumes, partially offset
by higher manufacturing costs and lower shipments. See discussion of manufacturing costs,
distribution costs and product pricing in the Product Line Information and Divisional
Performance sections of our Managements Discussion and Analysis. Working capital in the first quarter of 2005 was negatively impacted by an increase in accounts
receivable primarily from higher pricing and timing of collection of our receivables and higher
inventory levels to support export markets. These working capital changes were partially offset by
an increase in accounts payable and accrued liabilities primarily due to the timing of payments and
income tax refunds received. Working capital in 2004 was negatively impacted by an increase in
accounts receivable primarily from higher pricing and timing of collection of our receivables,
higher inventory levels in our specialty paper and lumber product lines, and reductions in our
income taxes payable. These working capital changes were partially offset by an increase in
accounts payable and accrued liabilities primarily due to the timing of payments. Cash Used for Investing Activities Cash used for investing activities totaled $12.7 million and $17.3 million for the first three
months of 2005 and 2004, respectively. The decrease in cash used for investing activities during
the first three months of 2005 is due primarily to increased proceeds from land sales, offset
partially by increased capital expenditures. For 2005, capital expenditures primarily have been,
and will continue to be, for compliance and maintenance requirements. We expect capital
expenditures to be approximately $170 million in 2005. This level of capital expenditures excludes
capital requirements for the conversion opportunities discussed in the Outlook section on page 17
of this report. Cash From Financing Activities Cash generated from financing activities totaled $10.4 million and $54.5 million for the first
three months of 2005 and 2004, respectively. Bowater paid cash dividends of $11.4 million and
increased its net short term borrowings by $23.0 million in the first three months of 2005. Cash generated from financing activities in the first three months of 2004 includes the sale of
$250.0 million of registered notes that are due March 15, 2010. We received net proceeds from the
notes of $246.2 million which were used to pay amounts outstanding under the short-term bank debt
credit facilities ($146.2 million) and the three-year term loan ($100.0 million). Bowater paid
cash dividends of $11.5 million in the first three months of 2004. We intend to continue the payment of a quarterly dividend in 2005 at a quarterly dividend rate of
$0.20 per share. This dividend equates to a use of cash of approximately $46 million annually. 27




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Credit Arrangements: As of March 31, 2005, Bowater had available borrowings on our short-term bank debt  credit
facilities as follows: WeightedAverageCommitment
    
    
    
    
    
    
    InterestShort-Term Bank Debt
    
    Commitment
    
    
    Amount Outstanding
    
    
    Available(1)
    
    
    Termination Date
    
    
    Rate(in millions except for dates and interest rates)Revolving credit facility (2)
    
    $
    435.0
    
    
    $
    
    
    
    $
    342.7
    
    
    
    04/07
    
    
    
    
    %364-day Accounts Receivable
Securitization Arrangement
(3)
    
    
    200.0
    
    
    
    96.0
    
    
    
    79.0
    
    
    
    12/05
    
    
    
    2.81
    %$
    635.0
    
    
    $
    96.0
    
    
    $
    421.7
  (1)
    The commitment available under the Revolving credit facility is subject to covenant
restrictions described on pages 28  29 of this Form 10-Q and is reduced by outstanding
letters of credit of $92.3 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. At the end of the quarter, we had ample room under the various financial covenant tests in our
revolving credit facility. However, in April, to be conservative, we adjusted the financial
covenant tests in our revolving credit facility. These various covenants, as amended, including
requirements to maintain a minimum consolidated net worth (generally defined as common
shareholders equity, excluding hedging gains in place as of December 31, 2003, plus any
outstanding preferred stock plus minimum pension liability amounts) of $1.4 billion, a maximum
65.0% ratio of total debt to total capital (defined as total debt less revaluation of debt assumed
through acquisitions, plus net worth including minority interest, plus minimum pension liability
amounts), and to maintain an annual minimum EBITDA (generally defined as net income, excluding
extraordinary, non-recurring or non-cash items, plus income taxes plus depreciation plus net
interest expense) of $250.0 million measured quarterly beginning March 31, 2005, through December
31, 2005 and $400.0 million at the end of each quarter thereafter. If we generate net income, the
minimum net worth requirement increases by half of our consolidated net income for each fiscal
quarter, excluding gains from cash flow hedges in place as of December 31, 2003. At March 31,
2005, our consolidated net worth was approximately $1,585.4 million, and, calculated in according
to our credit facilitys guidelines, our ratio of total debt to total capital was 59.8% and our
trailing-twelve-months EBITDA was $435.4 million. 28




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations The following tables reconcile EBITDA and debt as a percentage of total capitalization, as
calculated according to our credit facilitys guidelines, to our financial statements. We use
these measures, and believe they are useful because of their relevance to our credit facility. The
following table reconciles EBITDA as calculated according to our credit facilitys guidelines to
the line on our Consolidated Statement of Operations entitled Net income (loss): Quarters EndedRolling 4(Unaudited, in millions)
    
    6/30/2004
    
    
    9/30/2004
    
    
    12/31/2004
    
    
    3/31/2005
    
    
    QtrsNet income (loss)
    
    $
    (1.3
    )
    
    $
    (18.1
    )
    
    $
    (35.2
    )
    
    $
    0.9
    
    
    $
    (53.7
    )Provision for income tax expense (benefit)
    
    
    (22.9
    )
    
    
    12.0
    
    
    
    (10.1
    )
    
    
    (7.8
    )
    
    
    (28.8
    )Depreciation, amortization and cost of timber harvested
    
    
    84.9
    
    
    
    83.0
    
    
    
    81.1
    
    
    
    81.8
    
    
    
    330.8Interest expense, net of capitalized interest
    
    
    49.9
    
    
    
    48.4
    
    
    
    48.8
    
    
    
    50.2
    
    
    
    197.3Interest income
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (1.1
    )
    
    
    (4.3
    )EBITDA
    
    $
    109.5
    
    
    $
    124.2
    
    
    $
    83.6
    
    
    $
    124.0
    
    
    $
    441.3Adjustments:Severance
    
    
    
    
    
    
    
    
    
    
    8.7
    
    
    
    
    
    
    
    8.7Minority interest in net income (loss) of subsidiaries
    
    
    (1.0
    )
    
    
    0.8
    
    
    
    (3.3
    )
    
    
    (1.2
    )
    
    
    (4.7
    )Foreign exchange (gain) loss
    
    
    (1.7
    )
    
    
    1.2
    
    
    
    (2.9
    )
    
    
    (1.5
    )
    
    
    (4.9
    )Income from joint venture
    
    
    (1.4
    )
    
    
    (1.7
    )
    
    
    (1.2
    )
    
    
    (0.7
    )
    
    
    (5.0
    )(4.1
    )
    
    
    0.3
    
    
    
    1.3
    
    
    
    (3.4
    )
    
    
    (5.9
    )EBITDA, as calculated according to our
credit facilitys guidelines
    
    $
    105.4
    
    
    $
    124.5
    
    
    $
    84.9
    
    
    $
    120.6
    
    
    $
    435.4
 A reconciliation of the GAAP items to the calculation of total debt as a percentage of total
capitalization, in accordance with our credit facility, is as follows: (in millions, except ratios)
    
    March 31, 2005Total debt
    
    $
    2,531.7Less: Revaluation of debt
    
    
    (74.6
    )Total debt, per credit facilities
    
    $
    2,457.1Capitalization:Total shareholders equity
    
    $
    1,472.6Total debt
    
    
    2,531.7Minority interest
    
    
    67.1Less: Revaluation of debt
    
    
    (74.6
    )Plus: Additional minimum pension liability
    
    
    112.8Total capitalization, per credit facilities
    
    $
    4,109.6Total debt as a percentage of total capitalization in accordance with credit facilities
    
    
    59.8%Total debt as a percentage of total capitalization, in accordance with GAAP
    
    
    62.2%
 We believe we are in compliance with all of our covenants and other requirements set forth in our
credit facilities. We believe that cash generated from operations and access to our credit facilities will be
sufficient to provide for our anticipated requirements for working capital, contractual obligations
and capital expenditures for the next 12 months. In addition, we periodically review timberland
holdings and sell timberlands. 29




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations In April 2005, Moodys and S&P affirmed Bowaters credit ratings of Ba3 with a negative outlook and
BB with a stable outlook, respectively. There is no way to predict with certainty any future
rating actions by these two agencies. The interest rates associated with the bank lines of credit
described above are based on Bowaters highest credit rating. Any reduction in the highest rating
will increase our cost of borrowing. In addition to higher interest rates, although further
downgrades would have no material impact on availability under our present debt and credit
agreements, it could impact our access to and cost of capital and financial flexibility in the
future. Employees As of March 31, 2005, Bowater employed 8,000 people, of whom 5,600 were represented by bargaining
units. Labor agreements covering approximately 2,200 employees at five of our six Canadian paper
mills expired on April 30, 2004. These employees are represented predominantly by the
Communications, Energy and Paper Union (CEP). The CEP negotiated with Abitibi Consolidated Inc.
as the target company for the region and they reached a five-year collective bargaining
agreement, which was ratified on July 16, 2004. Traditionally, agreements reached with the target
company have been the basis for other agreements in the region. The Company has completed
negotiations at the local mill level and has begun negotiations on the main economic issues at the
group level. The union recently announced that a strike vote has been
taken. The results of the strike vote have not yet been announced. Strike votes are not
uncommon and do not necessarily reflect that a strike will occur. At the Companys request, the
negotiations adjourned the week of April 18, 2005 to allow both sides to review current positions
and progress achieved thus far. We expect negotiations to resume later this quarter. During the first quarter of 2005, labor agreements covering approximately 150 employees at 3 of our
sawmills expired. In April 2005, a labor agreement covering approximately 200 employees at our
Donnacona facility expired. The wage portion of the labor agreement covering approximately 150
employees at our Mokpo, Korea facility expires in July 2005. While we consider relations with our employees to be good and we do not expect a work stoppage to
occur prior to the finalization of new labor agreements, we can provide no assurance regarding
these outcomes or the timing of these negotiations or their effect on our operations. Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings Nearly half of our manufacturing costs and certain financial liabilities are denominated in
Canadian dollars. Sales are denominated in the currency of the country in which they occur.
Accordingly, changes in the Canadian-U.S. dollar exchange rate may significantly impact our
revenues and costs. The magnitude and direction of this impact primarily depends on our production
and sales volume, the proportion of our production and sales that occur in Canada, the proportion
of our tax and other financial liabilities denominated in Canadian dollars, our hedging levels, and
the magnitude, direction and duration of changes in the Canadian-U.S. dollar exchange rate.
Increases in the value of the Canadian dollar versus the U.S. dollar reduce our earnings, which are
reported in U.S. dollar terms. We attempt to partially limit our exposure to Canadian-U.S. dollar exchange rate fluctuations
through hedging transactions. At March 31, 2005 we had $561 million of Canadian dollar contracts
outstanding, however, we are not currently entering into new hedging agreements. Under the
exchange rates, hedging levels and operating conditions that existed during the three months ended
March 31, 2005, for every one-cent change in the Canadian-U.S. dollar exchange rate, our operating
income, net of hedging, for the three months ended March 31, 2005 would have been impacted by
approximately $1.6 million, or approximately $7.0 million for the full year 2005. For a
description of our hedging activities, see Note 9 to the Notes to Consolidated Financial Statements
included in this quarterly report. Canadian Dollar Hedging Program At March 31, 2005, we had approximately $81.4 million of unrealized gains recorded on our Canadian
dollar hedging program compared to approximately $123.0 million of unrealized gains at December 31,
2004. These 30




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BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations unrealized gains are classified in Other current assets or Other assets in our Consolidated
Balance Sheet depending on the maturity date of the hedging contract. Recent Accounting Pronouncements In December 2004, the
FASB issued SFAS 123(R), Share-Based Payment, which requires the
measurement of all employee share-based payments to employees, including grants of employee stock
options, using a fair-value-based method and the recording of such expense in our consolidated
statements of income. In April 2005, the S.E.C. announced a delay in the effective date of SFAS
123R. Therefore, the accounting provisions of SFAS 123R are effective for annual reporting periods
beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement recognition. We are required to adopt SFAS
123R in the first quarter of 2006 and are currently evaluating the effect that the adoption of FASB
123R will have on our financial position and results of operation. In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 (FAS 109-1), Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities provided by the American Jobs Creation Act of 2004. The American Jobs Creation Act
(AJCA) introduces a special 9% tax deduction (when fully phased in) on qualified production
activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax
deduction in accordance with Statement 109. Bowaters evaluation of the AJCA with respect to the
additional deduction is still in process and it expects to complete the evaluation process by the
end of the third quarter of 2005. The range of reasonably possible amounts of the additional
deduction that are still being considered as a result of this provision cannot be reasonably
determined as yet. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (FAS 109-2), Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creations Act of 2004. The AJCA introduces a limited time 85% dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided
certain criteria are met. FAS109-2 provides accounting and disclosure guidance for the repatriation
provision. Although FAS 109-2 is effective immediately, we do not expect to be able to complete our
evaluation of the repatriation provision until after Congress or the Treasury Department provides
additional clarifying language on key elements of the provision. In January 2005, the Treasury
Department began to issue the first of a series of clarifying guidance documents related to this
provision. We expect to complete our evaluation of the effects of the repatriation provision in the
third quarter of 2005. In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB No. 43, Chapter
4,which clarifies the types of costs that should be expensed rather than capitalized as
inventory. This statement also clarifies the circumstances under which fixed overhead costs
associated with operating facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005 and we will
adopt this standard in 2006. We have not yet evaluated the effect that the adoption of SFAS 151
will have on our financial position or results of operations. 31




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BOWATER INCORPORATED AND SUBSIDIARIES 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Foreign Exchange Risk We have updated the disclosure concerning our Canadian dollar forward contracts, which is included
in Note 9 to the Notes to Consolidated Financial Statements included in this quarterly report. For
information about the effect of Canadian-U.S. dollar exchange rate fluctuations on our
manufacturing costs and Canadian dollar denominated liabilities, see the section entitled
Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings. Interest Rate Risk We are exposed to interest rate risk on our fixed-rate long-term debt and our short-term variable
rate bank and long-term debt. Our objective is to manage the impact of interest rate changes on
earnings and cash flows and on the market value of our borrowings. We maintain a mix of fixed rate
and variable rate borrowings. At March 31, 2005, we had $2,152.2 million of fixed rate long-term
debt and $379.5 million of short and long-term variable rate debt. The fixed rate long-term debt
is exposed to fluctuations in fair value resulting from changes in market interest rates, but not
earnings or cash flows. Our variable rate debt approximates fair value as it bears interest rates
that approximate market, but changes in interest rates do affect future earnings and cash flows.
Based on our short and long-term variable rate debt at March 31, 2005, of $379.5 million, a 100
basis point increase in interest rates would increase our quarterly interest expense by
approximately $1.0 million. 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. 
 Item 4. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures: We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2005. Based on that evaluation, the Chairman, President and Chief
Executive Officer and the Chief Financial Officer concluded that our disclosure controls and
procedures are effective in recording, processing, summarizing, and timely reporting information
required to be disclosed in our reports to the Securities and Exchange Commission. (b) Changes in Internal Control over Financial Reporting: In connection with the evaluation of internal control over financial reporting, there were no
changes during the period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. 32




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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 (a) Exhibits (numbered in accordance with Item 601 of Regulation S-K): Exhibit No.
    
    Description10.1
    
    Outside Directors Stock-Based Deferred Fee Plan, effective as of May 11, 2005.10.2
    
    Fourth Amendment dated as of March 23, 2005 to the Bowater Incorporated
Retirement Plan for Outside Directors as Amended and Restated February 26, 199910.3
    
    Amendment No. 1 dated as of April 4, 2005, between Bowater Incorporated and
Bowater Canadian Forest Products Inc. (as Borrowers) and JPMorgan Chase Bank, The Bank
of Nova Scotia and certain lenders.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.
 (b) Reports on Form 8-K: On March 24, 2005, the Company furnished a report on Form 8-K announcing its adoption of an
Outside Directors Stock-Based Deferred Fee Plan, under Item 1. On January 27, 2005, the Company furnished a report on Form 8-K announcing its earnings for
the fourth quarter of 2004 and for the year ended December 31, 2004, under items 2 and 9. On January 18, 2005, the Company furnished a report on Form 8-K announcing the date for
release of fourth quarter and full-year 2004 financial results, under items 2 and 9. 33




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BOWATER INCORPORATED AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned thereunto duly authorized. BOWATER INCORPORATEDBy
    
    /s/ William G. HarveyWilliam G. HarveySenior Vice President and Chief Financial OfficerBy
    
    /s/ Michael F. NocitoMichael F. NocitoVice President and ControllerDated: May 9, 2005
 34




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INDEX TO EXHIBITS Exhibit No.
    
    Description10.1
    
    Outside Directors Stock-Based Deferred Fee Plan, effective as of May 11, 2005.10.2
    
    Fourth Amendment dated as of March 23, 2005 to the Bowater Incorporated
Retirement Plan for Outside Directors as Amended and Restated February 26, 199910.3
    
    Amendment No. 1 dated as of April 4, 2005, between Bowater Incorporated and
Bowater Canadian Forest Products Inc. (as Borrowers) and JPMorgan Chase Bank, The Bank
of Nova Scotia and certain lenders.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.