##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2007
 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: 1-1872
 BOWATER INCORPORATED
 
 Delaware
    
    62-0721803(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 
 
  þ o
  þ o o
  o þ
  Class
    
    Outstanding at August 1, 2007Common Stock, $1.00 Par Value
    
    56,250,480 Shares




---



##### 



BOWATER INCORPORATED
INDEX
  
 Page NumberPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006
    
    
    3Consolidated Balance Sheets at June 30, 2007 and December 31, 2006
    
    
    4Consolidated Statements of Capital Accounts for the Six Months Ended June 30, 2007 and 2006
    
    
    5Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-18Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19-36Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37-38Item 4.
    
    Controls and Procedures
    
    
    38PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    38Item 6.
    
    Exhibits
    
    
    39SIGNATURES
    
    
    40Exhibit 4.1Exhibit 4.2Exhibit 10.1Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




---



##### Table of Contents



BOWATER INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions of US dollars except share and per-share amounts)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Sales
    
    $
    798.6
    
    
    $
    899.4
    
    
    $
    1,570.2
    
    
    $
    1,792.6Costs and expenses:Cost of sales, excluding depreciation, amortization and cost of
timber harvested
    
    
    639.5
    
    
    
    697.7
    
    
    
    1,240.0
    
    
    
    1,377.9Depreciation, amortization and cost of timber harvested
    
    
    79.7
    
    
    
    81.2
    
    
    
    159.6
    
    
    
    162.3Distribution costs
    
    
    82.8
    
    
    
    83.5
    
    
    
    158.1
    
    
    
    166.4Selling and administrative expense
    
    
    46.3
    
    
    
    41.3
    
    
    
    95.0
    
    
    
    79.3Net gain on disposition of assets
    
    
    (64.6
    )
    
    
    (71.7
    )
    
    
    (122.5
    )
    
    
    (100.5
    )Operating income
    
    
    14.9
    
    
    
    67.4
    
    
    
    40.0
    
    
    
    107.2Interest expense
    
    
    (47.3
    )
    
    
    (49.3
    )
    
    
    (94.6
    )
    
    
    (98.7
    )Other (expense) income, net
    
    
    (14.3
    )
    
    
    (1.7
    )
    
    
    (18.7
    )
    
    
    4.8(Loss) income before income taxes, minority interests, and
cumulative effect of accounting change
    
    
    (46.7
    )
    
    
    16.4
    
    
    
    (73.3
    )
    
    
    13.3Income tax provision
    
    
    (17.9
    )
    
    
    (26.3
    )
    
    
    (19.6
    )
    
    
    (39.4
    )Minority interests, net of tax
    
    
    2.0
    
    
    
    (0.7
    )
    
    
    (5.1
    )
    
    
    (0.7
    )Loss before cumulative effect of accounting change
    
    
    (62.6
    )
    
    
    (10.6
    )
    
    
    (98.0
    )
    
    
    (26.8
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.6
    )Net loss
    
    $
    (62.6
    )
    
    $
    (10.6
    )
    
    $
    (98.0
    )
    
    $
    (29.4
    )Loss per share:Basic loss per common share:Loss before cumulative effect of accounting change
    
    $
    (1.09
    )
    
    $
    (0.18
    )
    
    $
    (1.71
    )
    
    $
    (0.46
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.05
    )Net loss
    
    $
    (1.09
    )
    
    $
    (0.18
    )
    
    $
    (1.71
    )
    
    $
    (0.51
    )Diluted loss per common share:Loss before cumulative effect of accounting change
    
    $
    (1.09
    )
    
    $
    (0.18
    )
    
    $
    (1.71
    )
    
    $
    (0.46
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.05
    )Net loss
    
    $
    (1.09
    )
    
    $
    (0.18
    )
    
    $
    (1.71
    )
    
    $
    (0.51
    )Average number of shares outstanding (in millions):Basic and diluted
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.40
  3




---



##### Table of Contents



BOWATER INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions of US dollars except share and per-share amounts)
 June 30,
    
    December 31,2007
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    89.4
    
    
    $
    98.9Accounts receivable, net
    
    
    426.6
    
    
    
    444.5Inventories
    
    
    383.4
    
    
    
    349.8Timberlands held for sale
    
    
    4.2
    
    
    
    18.7Other current assets
    
    
    67.8
    
    
    
    47.1Total current assets
    
    
    971.4
    
    
    
    959.0Timber and timberlands
    
    
    58.3
    
    
    
    60.8Fixed assets, net
    
    
    2,782.0
    
    
    
    2,877.9Goodwill
    
    
    590.7
    
    
    
    590.2Other assets
    
    
    145.3
    
    
    
    158.0Total assets
    
    $
    4,547.7
    
    
    $
    4,645.9Liabilities and shareholders equityCurrent liabilities:Current installments of long-term debt
    
    $
    15.8
    
    
    $
    14.9Accounts payable and accrued liabilities
    
    
    418.4
    
    
    
    431.2Total current liabilities
    
    
    434.2
    
    
    
    446.1Long-term debt, net of current installments
    
    
    2,243.0
    
    
    
    2,251.6Pension and other postretirement benefits obligations
    
    
    648.9
    
    
    
    651.1Other long-term liabilities
    
    
    92.8
    
    
    
    92.5Deferred income taxes
    
    
    335.6
    
    
    
    313.0Minority interests in subsidiaries
    
    
    74.8
    
    
    
    59.0Commitments and contingenciesShareholders equity:Common stock, $1 par value. Authorized 100,000,000 shares; issued
67,847,110 and 67,585,104 shares at June 30, 2007 and December 31,
2006, respectively
    
    
    67.8
    
    
    
    67.6Exchangeable shares, no par value. Unlimited shares authorized; 1,202,154
and 1,423,830 shares outstanding at June 30, 2007 and December 31,
2006, respectively
    
    
    56.8
    
    
    
    67.6Additional paid-in capital
    
    
    1,648.0
    
    
    
    1,630.1Retained deficit
    
    
    (195.1
    )
    
    
    (76.0
    )Accumulated other comprehensive loss
    
    
    (373.4
    )
    
    
    (371.0
    )Treasury stock at cost, 11,598,105 and 11,600,717 shares at June 30,
2007 and December 31, 2006, respectively
    
    
    (485.7
    )
    
    
    (485.7
    )Total shareholders equity
    
    
    718.4
    
    
    
    832.6Total liabilities and shareholders equity
    
    $
    4,547.7
    
    
    $
    4,645.9
  4




---



##### Table of Contents



BOWATER INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY(Unaudited, in
millions of US dollars except share and per-share amounts)
 For the six months ended June 30, 2007
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon
    
    
    Exchangeable
    
    
    Paid In
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury
    
    
    ShareholdersStock
    
    
    Shares
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance at December 31, 2006
    
    $
    67.6
    
    
    $
    67.6
    
    
    $
    1,630.1
    
    
    $
    (76.0
    )
    
    $
    (371.0
    )
    
    $
    (485.7
    )
    
    $
    832.6Cumulative adjustment to retained deficit for the
adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    
    
    
    
    
    
    
    
    2.3Dividends on common stock ($0.40 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23.4
    )
    
    
    
    
    
    
    
    
    
    
    (23.4
    )Retraction of exchangeable shares (221,676 shares issued
and exchangeable shares retracted)
    
    
    0.2
    
    
    
    (10.8
    )
    
    
    10.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based compensation costs for equity awards
    
    
    
    
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.0Restricted stock units vested (40,330 shares, net of shares
forfeited for employee withholding taxes)
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Treasury stock used for dividend reinvestment plans and
to pay employee and director benefits (2,612 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98.0
    )
    
    
    
    
    
    
    
    
    
    
    (98.0
    )Change in unrealized prior service costs, net of tax of $1.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    (1.4
    )Change in actuarial gains and losses, net of tax of $4.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16.8
    
    
    
    
    
    
    
    16.8Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.6
    )
    
    
    
    
    
    
    (18.6
    )Change in unrealized gain on hedged transactions, net
of tax of $0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    0.8Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100.4
    )Balance at June 30, 2007
    
    $
    67.8
    
    
    $
    56.8
    
    
    $
    1,648.0
    
    
    $
    (195.1
    )
    
    $
    (373.4
    )
    
    $
    (485.7
    )
    
    $
    718.4
  AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon
    
    
    Exchangeable
    
    
    Paid In
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury
    
    
    ShareholdersStock
    
    
    Shares
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance at December 31, 2005
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    100.1
    
    
    $
    (156.0
    )
    
    $
    (485.8
    )
    
    $
    1,215.5Cumulative adjustment to retained earnings for adoption
of SAB 108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.6
    
    
    
    
    
    
    
    
    
    
    
    8.6Dividends on common stock ($0.40 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23.0
    )
    
    
    
    
    
    
    
    
    
    
    (23.0
    )Share-based compensation costs for equity awards
    
    
    
    
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.1Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29.4
    )
    
    
    
    
    
    
    
    
    
    
    (29.4
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.7
    )
    
    
    
    
    
    
    (4.7
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.8
    
    
    
    
    
    
    
    3.8Change in unrealized gain on hedged transactions, net
of tax of $9.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.4
    )
    
    
    
    
    
    
    (15.4
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45.7
    )Balance at June 30, 2006
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,623.7
    
    
    $
    56.3
    
    
    $
    (172.3
    )
    
    $
    (485.8
    )
    
    $
    1,157.5
  5




---



##### Table of Contents



BOWATER INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions of US dollars)
 Six Months Ended June 30,2007
    
    2006Cash flows from operating activities:Net loss
    
    $
    (98.0
    )
    
    $
    (29.4
    )Adjustments to reconcile net loss to net cash (used for)
provided by operating activities:Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    2.6Share-based compensation
    
    
    8.3
    
    
    
    (0.8
    )Depreciation, amortization and cost of timber harvested
    
    
    159.6
    
    
    
    162.3Deferred income taxes
    
    
    24.4
    
    
    
    28.5Minority interests, net of tax
    
    
    5.1
    
    
    
    0.7Net pension (contributions) benefit costs
    
    
    (11.1
    )
    
    
    (11.3
    )Net gain on disposition of assets
    
    
    (122.5
    )
    
    
    (100.5
    )Changes in working capital:Accounts receivable, net
    
    
    17.9
    
    
    
    (17.0
    )Inventories
    
    
    (33.6
    )
    
    
    8.7Income taxes receivable and payable
    
    
    0.1
    
    
    
    (2.0
    )Accounts payable and accrued liabilities
    
    
    (15.0
    )
    
    
    (11.1
    )Other, net
    
    
    9.0
    
    
    
    11.8Net cash (used for) provided by operating activities
    
    
    (55.8
    )
    
    
    42.5Cash flows from investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (51.1
    )
    
    
    (90.6
    )Dispositions of assets, including timber and timberlands
    
    
    147.4
    
    
    
    238.1Direct acquisition costs related to the proposed merger
with Abitibi-Consolidated Inc.
    
    
    (12.4
    )
    
    
    Net cash provided by investing activities
    
    
    83.9
    
    
    
    147.5Cash flows from financing activities:Cash dividends
    
    
    (22.9
    )
    
    
    (22.9
    )Short-term financing
    
    
    8.0
    
    
    
    289.9Short-term financing repayments
    
    
    (8.0
    )
    
    
    (351.5
    )Payments of long-term debt
    
    
    (14.7
    )
    
    
    (22.0
    )Net cash used for financing activities
    
    
    (37.6
    )
    
    
    (106.5
    )Net (decrease) increase in cash and cash equivalents
    
    
    (9.5
    )
    
    
    83.5Cash and cash equivalents:Beginning of period
    
    
    98.9
    
    
    
    30.1End of period
    
    $
    89.4
    
    
    $
    113.6Supplemental disclosures of cash flow information:Cash paid during the year for:Interest, including capitalized interest of $0.2 and $2.8
    
    $
    96.0
    
    
    $
    104.9Income taxes
    
    $
    1.0
    
    
    $
    7.2
  6




---



##### Table of Contents



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, also referred to as we or our). The consolidated balance sheet
as of June 30, 2007, and the related statements of operations, stockholders equity and cash
flows for the periods ended June 30, 2007 and 2006 are unaudited. In our opinion, all
adjustments (consisting of normal recurring adjustments) necessary for fair presentation of the
interim financial statements have been made. The results of the interim period ended June 30,
2007 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
and related notes and critical accounting estimates 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 2007 presentation. The reclassifications had no effect on total
shareholders equity or net loss.On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for the uncertainty in income taxes recognized by prescribing the threshold a tax
position is required to meet before being recognized in the financial statements. As a result
of the adoption, we recorded a $2.3 million credit to our opening retained deficit balance in
2007. The credit represents the cumulative effect of adoption on prior periods. For additional
information regarding this adjustment, refer to Note 8, Income Taxes.In December 2006, we adopted the provisions of Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). We elected, as allowed under SAB 108, to reflect the effect
of initially applying this guidance by adjusting the carrying amount of the impacted
liabilities as of the beginning of 2006 and recording an offsetting adjustment to the opening
balance of our retained earnings in 2006. We recorded a cumulative adjustment to increase our
retained earnings by $8.6 million for the adoption of SAB 108.2.
    
    Inventories
 June 30,
    
    December 31,(Unaudited, in millions)
    
    2007
    
    2006At lower of cost or market:Raw materials
    
    $
    66.0
    
    
    $
    87.7Work in process
    
    
    21.1
    
    
    
    20.1Finished goods
    
    
    172.9
    
    
    
    123.0Mill stores and other supplies
    
    
    136.8
    
    
    
    132.0396.8
    
    
    
    362.8Excess of current cost over LIFO inventory value
    
    
    (13.4
    )
    
    
    (13.0
    )$
    383.4
    
    
    $
    349.8
 7




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 3.
    
    Other (Expense) Income, NetOther (expense) income, net in the Consolidated Statements of Operations includes the
following:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Foreign exchange losses
    
    $
    (16.5
    )
    
    $
    (4.8
    )
    
    $
    (19.6
    )
    
    $
    (3.0
    )(Losses) earnings from equity method investments
    
    
    (0.9
    )
    
    
    1.9
    
    
    
    (2.7
    )
    
    
    4.2Interest income
    
    
    1.6
    
    
    
    1.0
    
    
    
    3.5
    
    
    
    2.1Miscellaneous income, net
    
    
    1.5
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    1.5$
    (14.3
    )
    
    $
    (1.7
    )
    
    $
    (18.7
    )
    
    $
    4.8
 4.
    
    Timberlands Held for SaleWe are currently marketing for sale approximately 16,000 acres of timberlands in the United
States and Canada. The sale of these timberlands is expected to be completed in 2007.
Timberlands held for sale are carried on our Consolidated Balance Sheets at cost as we expect
the proceeds of the timberland sales to exceed the individual carrying values of the
timberlands sold. Deferred income taxes include $1.0 million and $4.8 million at June 30, 2007
and December 31, 2006, respectively, of deferred tax assets associated with these timberlands
held for sale.During the three months ended June 30, 2007, we sold approximately 55,600 acres of timberlands
and other assets for proceeds of $82.8 million. During the six months ended June 30, 2007, we
sold approximately 107,800 acres of timberlands and other assets for proceeds of $147.4 millionDuring the three months ended June 30, 2006, we sold approximately 472,000 acres of
timberlands, our Baker Brook sawmill and other assets for proceeds of $201.3 million. During
the six months ended June 30, 2006, we sold approximately 496,800 acres of timberlands, our
Dégelis and Baker Brook sawmills and other assets for proceeds of approximately $238.1 million.5.
    
    Accumulated Other Comprehensive LossThe components of Accumulated other comprehensive loss in the Consolidated Balance Sheets are
as follows:
 June 30,
    
    December 31,(Unaudited, in millions)
    
    2007
    
    2006Unrealized prior service costs (1)
    
    $
    (24.6
    )
    
    $
    (23.2
    )Unrealized actuarial gains and losses (2)
    
    
    (342.1
    )
    
    
    (358.9
    )Unrealized transition obligation (3)
    
    
    (0.1
    )
    
    
    (0.1
    )Foreign currency translation (4)
    
    
    (6.6
    )
    
    
    12.0Unrealized gain on hedging transactions (5)
    
    
    
    
    
    
    (0.8
    )$
    (373.4
    )
    
    $
    (371.0
    )
 (1)
    
    Net of deferred tax benefit of $3.3 million and $1.5 million, respectively. Net of minority
interest of $2.3 million and $2.4 million, respectively.(2)
    
    Net of deferred tax benefit of $104.8
million and $109.6 million, respectively. Net of minority interest of $4.8 million and $5.2
million, respectively.(3)
    
    Net of deferred tax benefit of $0.1 million and $0.1 million,
respectively.(4)
    
    No tax effect is recorded for foreign currency translation since the foreign net
assets translated are deemed indefinitely invested. 8




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 (5)
    
    Net of a deferred tax benefit of $0.5 million for 2006. 6.
    
    Loss Per ShareThe information required to compute net loss per basic and diluted share is as follows:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Basic weighted-average number of common shares
outstanding
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4Effect of potentially dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted-average number of common shares
outstanding
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
 No adjustments to net loss are necessary to compute net loss per basic and diluted share. The
dilutive effect of potentially dilutive securities is calculated using the treasury stock
method. Options to purchase 4.8 million shares for both the three and six months ended June 30,
2007, and 5.1 million shares for both the three and six months ended June 30, 2006, were
excluded from the calculation of diluted loss per share as the impact would have been
anti-dilutive. In addition, 1.0 million restricted stock units for both the three and six
months ended June 30, 2007, and 0.8 million restricted stock units for both the three and six
months ended June 30, 2006 were excluded from the calculation of diluted loss per share for the
same reason.7.
    
    Pension and Postretirement ExpenseThe components of net periodic benefit costs relating to our pension and other postretirement
(OPEB) plans are as follows for the three and six months ended June 30, 2007 and 2006:Pension Plans:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Components of net periodic benefit cost:Service cost
    
    $
    9.2
    
    
    $
    11.0
    
    
    $
    18.3
    
    
    $
    21.9Interest cost
    
    
    31.6
    
    
    
    30.0
    
    
    
    61.9
    
    
    
    59.2Expected return on plan assets
    
    
    (33.4
    )
    
    
    (30.6
    )
    
    
    (65.5
    )
    
    
    (60.2
    )Amortization of prior service cost
    
    
    1.2
    
    
    
    1.4
    
    
    
    2.3
    
    
    
    2.8Amortization of net actuarial loss
    
    
    7.0
    
    
    
    8.8
    
    
    
    13.8
    
    
    
    17.7Special termination benefits
    
    
    4.0
    
    
    
    
    
    
    
    4.0
    
    
    
    Curtailment and settlement losses
    
    
    2.9
    
    
    
    
    
    
    
    7.4
    
    
    
    4.6Net periodic benefit cost
    
    $
    22.5
    
    
    $
    20.6
    
    
    $
    42.2
    
    
    $
    46.0
 9




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Components of net periodic benefit cost:Service cost
    
    $
    0.5
    
    
    $
    1.0
    
    
    $
    1.0
    
    
    $
    2.0Interest cost
    
    
    3.1
    
    
    
    4.0
    
    
    
    6.2
    
    
    
    8.0Amortization of prior service credit
    
    
    (2.8
    )
    
    
    (1.5
    )
    
    
    (5.6
    )
    
    
    (3.0
    )Amortization of net actuarial loss
    
    
    1.6
    
    
    
    2.0
    
    
    
    3.2
    
    
    
    4.0Curtailment and settlement gains
    
    
    (0.3
    )
    
    
    
    
    
    
    (3.5
    )
    
    
    (0.2
    )Net periodic benefit cost
    
    $
    2.1
    
    
    $
    5.5
    
    
    $
    1.3
    
    
    $
    10.8
 Since the measurement date of our pension and OPEB plans is 90 days prior to the start of our year,
curtailment gains and losses that arise during the year are recorded on a 90-day lag.In December 2006, January 2007 and March 2007, certain employees received lump-sum payouts from two
of our retirement pension plans. Accordingly, settlement losses of $1.1 million and $5.6 million
were included in the net periodic benefit cost of our pension plans during the three and six months
ended June 30, 2007, respectively.In February 2007, union members at our Thunder Bay, Ontario facility ratified a new labor
agreement. As a result of a mill-wide restructuring of this facility, 157 jobs are being
eliminated. A curtailment loss of approximately $1.8 million and the cost of special termination
benefits of $4.0 million were included in the net periodic benefit cost of our pension plans during
the three and six months ended June 30, 2007, and a curtailment gain of $0.3 million was included
in the net periodic benefit cost of our OPEB plans during the three and six months ended June 30,
2007 as a result of the employee reduction. This event will also result in a settlement loss at the
time the benefits are paid.In October 2006, Bowater approved changes to its other postretirement plan for its U.S. salaried
employees. Benefits for employees were either eliminated or reduced depending on whether the
employee met certain age and years of service criteria. A curtailment gain of $3.2 million was
included in the net periodic benefit cost of our OPEB plans during the six months ended June 30,
2007.The curtailment loss of $4.6 million and curtailment gain of $0.2 million included in net periodic
benefit cost for our pension and OPEB plans, respectively, during the six months ended June 30,
2006 is due to the reduction of employees at our Thunder Bay A kraft pulp mill.In May 2007, union members at our Gatineau, Quebec facility ratified a new labor agreement. As a
result of a mill-wide restructuring of this facility, 143 jobs are being eliminated. A curtailment
loss of approximately $1.7 million will be recorded in the third quarter of 2007 as a result of the
employee reduction.
 10




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 8.
    
    Income TaxesThe income tax provision attributable to loss before income taxes, minority interests and
cumulative effect of accounting change differs from the amounts computed by applying the United
States federal statutory income tax rate of 35% as a result of the following:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006(Loss) income before income taxes, minority
interests and cumulative effect of accounting
change
    
    $
    (46.7
    )
    
    $
    16.4
    
    
    $
    (73.3
    )
    
    $
    13.3Expected income tax benefit (provision)
    
    
    16.4
    
    
    
    (5.8
    )
    
    
    25.7
    
    
    
    (4.7
    )Increase (decrease) in income taxes resulting
from:Valuation allowance (1)
    
    
    (24.3
    )
    
    
    (42.1
    )
    
    
    (37.3
    )
    
    
    (55.6
    )Foreign exchange
    
    
    (16.5
    )
    
    
    (10.2
    )
    
    
    (17.3
    )
    
    
    (12.6
    )State income taxes, net of federal income
tax benefit
    
    
    (0.3
    )
    
    
    (1.1
    )
    
    
    (0.4
    )
    
    
    (1.9
    )Foreign taxes (2)
    
    
    6.9
    
    
    
    29.4
    
    
    
    11.3
    
    
    
    30.4Other, net
    
    
    (0.1
    )
    
    
    3.5
    
    
    
    (1.6
    )
    
    
    5.0Income tax provision
    
    $
    (17.9
    )
    
    $
    (26.3
    )
    
    $
    (19.6
    )
    
    $
    (39.4
    )
 
 (1)
    
    Income tax benefits generated on our Canadian operating losses were entirely offset by tax
charges to increase our valuation allowance related to these tax benefits.(2)
    
    Foreign taxes benefited by $4.4 million in the six months ended June 30, 2007 and $15.2
million in the three and six months ended June 30, 2006 due to capital gains treatment of
certain asset sales. We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of
FIN 48, we decreased our liability for unrecognized tax benefits by $2.3 million, which was
accounted for as a decrease to our January 1, 2007 retained deficit balance. Our liability for
unrecognized tax benefits as of January 1, 2007 is $28.3 million, which includes interest of
$0.6 million. We recognize interest and penalties accrued related to unrecognized tax benefits
as components of income tax expense. The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate is $23.1 million, which includes $0.6 million
of interest. If recognized, these items would impact the Consolidated Statements of Operations
and our effective tax rate. We anticipate that the total amount of unrecognized tax benefits
will decrease by approximately $7.0 million to $8.5 million during the next twelve months due
to certain U.S. statutes of limitations closing, primarily in the third quarter of 2007. The
approximately $7.0 million to $8.5 million of unrecognized tax benefits is attributable to
various U.S. income tax issues. We remain subject to income tax examination in Canada for tax
years 2002-2006, in Korea for tax years 2005-2006 and in the U.S. for tax years 2003-2006.9.
    
    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
exposures. We do not enter into contracts for speculative purposes; however, we do from time to time enter into commodity
and currency option contracts that are not accounted for as accounting hedges. Counterparty
risk is limited to institutions with long-term debt ratings of A or better for North American
financial institutions or ratings of AA or better for international institutions.
 11




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 For derivatives that qualify for hedge accounting (currently only the Canadian dollar forward
contracts), we designate the derivative as a cash flow hedge at the inception of the hedge. We
formally document all relationships between the hedging instruments and the hedged items, as well
as our risk-management objectives and strategies for undertaking the various hedge transactions. We
link all hedges that are designated as cash flow hedges to forecasted transactions. Under the terms
of our risk management policy, we may enter into derivative contracts to hedge forecasted
transactions for a period not to exceed 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 the hedged items. If it is determined that
a derivative is no longer highly effective as a hedge, we discontinue hedge accounting
prospectively.Canadian Dollar Forward ContractsWe pay a significant portion of the operating expenses of our Canadian mill sites in Canadian
dollars. To reduce our exposure to U.S. and Canadian dollar exchange rate fluctuations, we
periodically enter into and designate Canadian dollar forward contracts to hedge certain of the
forecasted Canadian dollar cash outflows at our Canadian mill operations, which we believe are
likely to occur. There were no hedging contracts outstanding at June 30, 2007. Hedge
ineffectiveness associated with our Canadian dollar forward contracts was not material for the
periods presented in our Consolidated Financial Statements.British Pound Sterling Forward ContractsWe have entered into sales agreements denominated in British pound sterling. Beginning in the first
quarter of 2007, we entered into currency forward contracts to partially limit our exposure to
British pound sterling-U.S. dollar exchange rate fluctuations. These currency forward contracts,
which do not currently meet the requirements for hedge accounting treatment, have been recorded at
fair value in the Consolidated Statement of Operations. As a result, approximately $0.8 million and
$0.7 million of pre-tax losses were recognized for the three and six months ended June 30, 2007,
respectively, for contracts that we entered into to economically hedge forecasted transactions
expected to occur through December 31, 2007.Natural Gas Swap AgreementsBeginning in the third quarter of 2006, we entered into natural gas swap agreements under our
natural gas hedging program for the purpose of reducing the risk inherent in fluctuating natural
gas prices. Our hedged natural gas costs are billed to us based on a publicly traded index plus a
fixed amount. The natural gas swap agreements allow us to minimize the effect of fluctuations in
those indices by contractually exchanging the publicly traded index upon which we are billed for a
fixed index of natural gas cost. The swap agreements, which do not currently meet the requirements
for hedge accounting treatment, have been recorded at fair value in the Consolidated Statement of
Operations. As a result, approximately $1.1 million of pre-tax losses and $0.1 million of pre-tax
gains were recognized for the three and six months ended June 30, 2007, respectively, for contracts
that we entered into in 2006 and 2007 to economically hedge forecasted transactions expected to
occur through July 2008.
 12




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Information regarding our outstanding British pound sterling and natural gas swap contracts
notional amount, fair market value, and range of exchange rates or natural gas price index prices
is summarized in the table below. The notional amount of these contracts represents the amount of
foreign currencies or natural gas to be purchased or sold at maturity and does not represent our
exposure on these contracts.
 Range OfUS$/CDN$ andUS$/GBPNotional
    
    
    
    
    
    Exchange Rates(Unaudited, in millions of U.S. dollars
    
    Amount of
    
    Asset /(Liability)
    
    and Natural Gasexcept rates and prices)
    
    Derivatives
    
    Fair Market Value
    
    Index PricesAs of June 30, 2007:Foreign Currency Exchange Agreements:British pound sterlingDue in 2007
    
    $
    40.3
    
    
    $
    (0.5
    )
    
    $
    1.9553  1.9992Natural Gas Swap Agreements:Due in 2007
    
    $
    6.1
    
    
    $
    (0.5
    )
    
    $
    6.15  9.53Due in 2008
    
    $
    1.4
    
    
    $
    0.1
    
    
    $
    6.99  9.87As of December 31, 2006:Foreign Currency Exchange Agreements:Canadian dollarDue in 2007
    
    $
    76.0
    
    
    $
    (0.4
    )
    
    $
    .8592  .8801Natural Gas Swap Agreements:Due in 2007
    
    $
    9.0
    
    
    $
    (1.1
    )
    
    $
    5.87  8.98
 The counterparties to our derivative financial instruments are substantial and creditworthy
multi-national financial institutions. The risk of counterparty nonperformance is considered to be
remote, and no individual financial institution holds more than 34% of our derivative financial
instruments.The components of the cash flow hedges included in Accumulated other comprehensive loss are as
follows:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006(Gains) losses reclassified to earnings on matured cash flow hedges
    
    $
    (0.2
    )
    
    $
    (11.6
    )
    
    $
    1.1
    
    
    $
    (29.2
    )Unrealized gains for change in value on
outstanding cash flow hedges
    
    
    
    
    
    
    3.6
    
    
    
    0.2
    
    
    
    4.4(0.2
    )
    
    
    (8.0
    )
    
    
    1.3
    
    
    
    (24.8
    )Income tax benefit
    
    
    0.1
    
    
    
    3.0
    
    
    
    (0.5
    )
    
    
    9.4Net (increase) decrease in Accumulated other
comprehensive loss
    
    $
    (0.1
    )
    
    $
    (5.0
    )
    
    $
    0.8
    
    
    $
    (15.4
    )
 10.
    
    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
 13




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 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.On September 30, 2005, the Ministry of Justice of the Province of Quebec (MOJ) cited one of our
subsidiaries, Bowater Canadian Forest Products, Inc. (BCFPI), in connection with effluent water
quality of the Dolbeau mill. BCFPI settled this citation on March 29, 2007, by agreeing to pay
a fine and costs totaling CDN$158,000. The Dolbeau mill has taken steps to improve its effluent
quality and has experienced only two other exceedences since January 1, 2005.On June 18, 2007, The Levin Group, L.P. filed a complaint against Bowater in the Supreme Court
of New York, New York County, asserting claims for breach of contract and related claims
relating to certain advisory services purported to have been provided by the plaintiff in
connection with the combination (See Note 14). The complaint seeks damages of no less than $70
million, related costs and such other relief as the court deems just and proper. The management
of Bowater believes this claim is entirely without merit and intends to contest this matter.There have been no material developments to those legal proceedings described in our Annual
Report on Form 10-K filed on March 13, 2007.11.
    
    Share-Based CompensationWe maintain incentive stock plans that provide for grants of stock options, equity
participation rights (EPRs) and restricted stock units to our directors, officers and key
employees. These plans are described more fully in our 2006 Annual Report on Form 10-K.Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R,
Share-based Payments and related interpretations (SFAS 123R). The adoption of SFAS 123R
resulted in a charge for the cumulative effect of accounting change of $2.6 million, net of
tax, (or $0.05 per share) that we recorded in the first quarter of 2006.The following table details the share-based compensation expense (excluding the cumulative
effect of accounting change) recorded in the Consolidated Statements of Operations by award:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Stock options
    
    $
    0.3
    
    
    $
    0.2
    
    
    $
    0.6
    
    
    $
    0.2Restricted stock units
    
    
    3.2
    
    
    
    1.9
    
    
    
    7.4
    
    
    
    1.9EPRs
    
    
    0.2
    
    
    
    (2.0
    )
    
    
    0.3
    
    
    
    (2.9
    )Stock-based compensation expense (income)
    
    $
    3.7
    
    
    $
    0.1
    
    
    $
    8.3
    
    
    $
    (0.8
    )
 The following table details the tax (benefit) provision by award:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Stock options
    
    $
    (0.1
    )
    
    $
    (0.1
    )
    
    $
    (0.3
    )
    
    $
    (0.1
    )Restricted stock units
    
    
    (0.9
    )
    
    
    (0.4
    )
    
    
    (2.0
    )
    
    
    (0.4
    )EPRs
    
    
    (0.1
    )
    
    
    0.5
    
    
    
    (0.1
    )
    
    
    0.7Tax (benefit) provision
    
    $
    (1.1
    )
    
    $
    
    
    
    $
    (2.4
    )
    
    $
    0.2
 Stock Options
 14




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 On January 30, 2007, we granted 72,146 stock options. The awards cliff vest after three years and
allow for accelerated vesting upon a grantees retirement. We have recognized compensation expense
based on the requisite service period, which is less than three years for certain employees who are
eligible for retirement as of the date of the grant or become eligible for retirement during the
vesting period. We issued 350,630 stock options in May 2006, which either cliff vest after 32
months (100,630 shares) or vest ratably over 36 months (250,000 shares).A summary of option activity under our stock plans as of and for the six months ended June 30, 2007
is presented below:
 WeightedWeighted
    
    Average
    
    AggregateNumber Of
    
    Average
    
    Remaining
    
    IntrinsicOptions
    
    Exercise
    
    Contractual
    
    Value(Unaudited)
    
    (000s)
    
    Price
    
    Life (years)
    
    ($000)Outstanding at December 31, 2006
    
    
    4,982
    
    
    $
    43.45Granted during the period
    
    
    72
    
    
    
    27.87Exercised during the period
    
    
    
    
    
    
    Canceled during the period
    
    
    (249
    )
    
    
    42.77Outstanding at June 30, 2007
    
    
    4,805
    
    
    $
    43.25
    
    
    
    4.7
    
    
    $
    Exercisable at June 30, 2007
    
    
    4,511
    
    
    $
    44.28
    
    
    
    4.4
    
    
    $
    
 In accordance with SFAS 123R, we estimated the fair value of each stock option granted during the
six months ended June 30, 2007 on the date of grant using a Black-Scholes option-pricing formula,
applying weighted-average assumptions which are consistent with the assumptions described in Note
21 Share-Based Compensation included in our most recent Annual Report on Form 10-K, and amortize
that value to expense over the options requisite service period using the straight-line
attribution approach. The weighted-average fair value of options granted during the six months
ended June 30, 2007 was $9.08.During the three and six months ended June 30, 2007 and 2006, all vested options had a strike price
greater than the closing price of our common stock (i.e., were out-of-the-money), and there were
no stock option exercises during those periods.As of June 30, 2007, there was $1.9 million of unrecognized compensation cost related to stock
option awards granted under our stock plans. The unrecognized cost is expected to be recognized
over a weighted-average period of 1.9 years.Restricted Stock UnitsOn January 30, 2007, we granted 327,945 restricted stock units (RSUs), all of which are
service-based awards. The awards cliff vest after three years and allow for accelerated vesting
upon a grantees retirement. We have recognized compensation expense based on the requisite service
period, which is less than three years for certain employees who are eligible for retirement as of
the date of the grant or will become eligible for retirement during the vesting period.On February 7, 2007, we granted 36,101 RSUs, all of which are performance-based awards. These
awards vest upon closing of the merger of Bowater and Abitibi-Consolidated Inc. (Abitibi), or
upon cancellation of the merger if the cancellation is due to a failure to receive regulatory
approval or Abitibis acts or failures to act. Accounting guidance dictates that, for purposes of
recognizing compensation expense for this type of award, the business combination is not considered
probable until the date the merger is consummated. As vesting of these awards is predicated upon
close of the merger or other events related to
the business combination, no compensation expense will be recorded for these awards until
consummation of the merger. In the event of the consummation of the merger, $1.0 million of
compensation expense will be immediately recognized. These awards are included in our outstanding
RSUs at the end of the period.
 15




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 On March 23, 2007, we granted 54,200 RSUs, all of which are performance-based awards. The vesting
of these awards is contingent upon the realization of certain synergies within two years of
consummation of the AbitbiBowater merger. The key terms and conditions of these RSUs have not been
finalized; therefore a grant date for FAS 123R purposes has not occurred. As such, no compensation
expense was recorded during the three and six months ended June 30, 2007, nor were these awards
included in our outstanding RSUs at the end of the period.On May 10, 2006, we issued four separate grants of restricted stock units totaling 775,529 shares,
of which 43,530 shares are performance-based awards. The performance-based awards cliff vest after
32 months. The remaining shares, which are service-based awards, cliff vest after 32 months
(178,342 shares), 20 months (503,657 shares) or 12 months (50,000 shares).A summary of the status of our restricted stock units as of and for the six months ended June 30,
2007, is presented below:
 Number
    
    Weighted AverageOf Units
    
    Fair Value at(Unaudited)
    
    (000s)
    
    Grant DateOutstanding at December 31, 2006
    
    
    665
    
    
    $
    26.11Granted during the period
    
    
    364
    
    
    
    27.85Vested during the period
    
    
    (54
    )
    
    
    26.35Forfeited during the period
    
    
    (14
    )
    
    
    26.64Outstanding at June 30, 2007
    
    
    961
    
    
    $
    26.75
 As of June 30, 2007, there was $11.4 million of unrecognized compensation cost related to
restricted stock units granted under our stock plans, excluding those granted on February 7, 2007
(discussed above). This unrecognized cost is expected to be recognized over a weighted-average
period of 1.2 years. The total fair value of restricted stock units vested during the first six
months of 2007 was $1.2 million.Equity Participation RightsEPRs confer the right to receive cash based on the appreciation of Bowaters common stock price,
but no right to acquire stock ownership. The rights have a vesting period of two years and, unless
terminated earlier in accordance with their terms, expire 10 years after the grant date. The base
price is the fair market value of our common stock on the day of grant. The rights may be redeemed
only for cash, and the amount paid to the employee at the time of exercise is the difference
between the base price and the average high/low of our common stock on the day of settlement. There
have been no grants of EPRs since January 2003.The EPR awards are classified as liability awards under SFAS 123R since the EPRs are cash settled.
In accordance with SFAS 123R, liability awards are remeasured at fair value at each reporting
period and the income or expense included in the consolidated statement of operations. As of June
30, 2007, the fair value of our EPRs liability is $0.9 million. The assumptions used to value the
liability are consistent with those used in the past. There have been no significant changes to the
number of EPRs outstanding or exercisable since December 31, 2006. Refer to our most recent Annual
Report on Form 10-K for additional details.
 16




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 12.
    
    Off-Balance Sheet Debt GuaranteesIn 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 Qualified
Special Purpose Entities (QSPEs). Bowater guarantees approximately $6.9 million of the investor
notes principal balance at June 30, 2007. 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 $29.9 million and obligations of approximately $26.3
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, neither of which has ever occurred.13.
    
    Segment InformationDuring the third quarter of 2006, we announced that we were realigning our organizational
structure to move from a divisional organization to a functional organization that supports and
focuses on our multi-product line manufacturing and sales across our mill base. As a result of
this organizational realignment, we now manage our business based on the products that we
manufacture and sell to external customers and, therefore, our reportable segments changed. Our
new reportable segments are coated papers, specialty papers, newsprint, market pulp, and
lumber. Prior year information has been recast to the current year presentation of our
reportable segments.None of the income or loss items following Operating income in our Consolidated Statements of
Operations are allocated to our segments, since those items are reviewed separately by
Bowaters management. For the same reason, impairments, employee termination costs, gains on
dispositions of assets and other discretionary charges or credits are not allocated to the
segments. Share-based compensation expense is, however, allocated to our segments. We also
allocated depreciation expense to our segments, although the related fixed assets are not
allocated to segment assets.The following tables summarize information about segment profit and loss for the three and six
months ended June 30, 2007 and 2006:
 Coated
    
    Specialty
    
    
    
    
    
    Market
    
    
    
    
    
    Corporate
    
    Consolidated(Unaudited, in millions)
    
    
    
    
    
    Papers
    
    Papers
    
    Newsprint
    
    Pulp
    
    Lumber
    
    and Other
    
    TotalSalesSecond quarter
    
    
    2007
    
    
    $
    129.5
    
    
    $
    151.3
    
    
    $
    313.0
    
    
    $
    137.7
    
    
    $
    64.1
    
    
    $
    3.0
    
    
    $
    798.6Second quarter
    
    
    2006
    
    
    
    156.2
    
    
    
    141.8
    
    
    
    367.3
    
    
    
    136.7
    
    
    
    94.0
    
    
    
    3.4
    
    
    
    899.4Year to date
    
    
    2007
    
    
    
    258.0
    
    
    
    292.5
    
    
    
    615.9
    
    
    
    270.8
    
    
    
    126.9
    
    
    
    6.1
    
    
    
    1,570.2Year to date
    
    
    2006
    
    
    
    309.1
    
    
    
    272.7
    
    
    
    740.8
    
    
    
    266.1
    
    
    
    190.5
    
    
    
    13.4
    
    
    
    1,792.6Operating income (loss)(1)Second quarter
    
    
    2007
    
    
    $
    4.6
    
    
    $
    (9.8
    )
    
    $
    (10.7
    )
    
    $
    17.3
    
    
    $
    (7.0
    )
    
    $
    20.5
    
    
    $
    14.9Second quarter
    
    
    2006
    
    
    
    23.0
    
    
    
    (17.2
    )
    
    
    18.4
    
    
    
    (1.6
    )
    
    
    (4.8
    )
    
    
    49.6
    
    
    
    67.4Year to date
    
    
    2007
    
    
    
    13.2
    
    
    
    (18.5
    )
    
    
    (14.8
    )
    
    
    36.0
    
    
    
    (20.6
    )
    
    
    44.7
    
    
    
    40.0Year to date
    
    
    2006
    
    
    
    44.7
    
    
    
    (25.4
    )
    
    
    36.2
    
    
    
    (1.3
    )
    
    
    (3.5
    )
    
    
    56.5
    
    
    
    107.2
 (1)
    
    Corporate and other operating loss includes net gains from dispositions of assets of $64.6
million and $71.7 million for the three months ended June 30, 2007 and 2006, respectively, and
$122.5 million and $100.5 million for the six months ended June 30, 2007 and 2006, respectively. 17




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 14.
    
    Combination with Abitibi-Consolidated Inc.In January 2007, Bowater and Abitibi announced a definitive agreement to combine in an
all-stock merger of equals (the combined company which has been formed in connection with the
combination is referred to herein as AbitibiBowater). In July 2007, we received final
regulatory approval from the Canadian government, and the shareholders of both Abitibi and
Bowater approved the combination. We are still awaiting approval from the antitrust division of
the U.S. Department of Justice. In connection with the review and approval of the transaction
by the Canadian government, AbitibiBowater agreed, among other things, for a period of three
years after closing, to maintain its headquarters in Montreal, Canada; to maintain at least
five Canadians on its Board of Directors; and to apply for listing of its common stock on the
Toronto Stock Exchange (TSX). The combination is expected to be completed in the third quarter
of 2007, subject to obtaining regulatory approval from the U.S. government and other customary
closing conditions. Abitibi and Bowater will continue to operate separately until the
transaction closes. In connection with this announced combination, we have approved a retention
and severance program for approximately 320 Bowater employees who may be impacted by the
pending combination with Abitibi. This program provides a retention bonus for employees who
remain with Bowater through the closing of the combination or its cancellation for any reason
and an additional retention bonus for employees who remain with Bowater for a transition period
following closing of the combination. The costs associated with these programs are expensed as
incurred. Also in connection with the combination, we have incurred $18.0 million in direct
acquisition costs as of June 30, 2007. These costs have been capitalized in our Consolidated
Balance Sheet based upon the assumption that Bowater is the acquirer in this combination
for accounting purposes.15.
    
    Subsequent EventIn order for us to maintain compliance with our U.S. and Canadian credit facilities subsequent
to the consummation of the proposed combination with Abitibi, it was necessary to amend those
facilities. The amendment was approved by our banks in July 2007 and will be entered into upon
consummation of the combination. The amendment permits a structure that allows AbitibiBowater,
which will become the parent corporation of Bowater upon consummation
of the merger, to become a
party to the credit facilities. All existing debt structures are expected to remain intact upon
consummation of the merger; however, restrictions on the amount of cash that can be transferred
from Bowater to AbitibiBowater are expected.
 18




---



##### Table of Contents



BOWATER INCORPORATED
 
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data
   Accounting Policies and Estimates
    Overview of Financial Performance
   19




---



##### Table of Contents



BOWATER INCORPORATED
   Business Strategy and Outlook
   20




---



##### Table of Contents



BOWATER INCORPORATED
  Business and Financial Review
 Consolidated Results of Operations
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(In millions)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSales
    
    $
    798.6
    
    
    $
    899.4
    
    
    $
    (100.8
    )
    
    $
    1,570.2
    
    
    $
    1,792.6
    
    
    $
    (222.4
    )Operating income
    
    
    14.9
    
    
    
    67.4
    
    
    
    (52.5
    )
    
    
    40.0
    
    
    
    107.2
    
    
    
    (67.2
    )Significant items that improved (lowered) operating income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (32.0
    )
    
    
    
    
    
    
    
    
    
    $
    (45.5
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    (68.8
    )
    
    
    
    
    
    
    
    
    
    
    (176.9
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    (100.8
    )
    
    
    
    
    
    
    
    
    
    
    (222.4
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    71.7
    
    
    
    
    
    
    
    
    
    
    
    155.4Employee termination costs
    
    
    
    
    
    
    
    
    
    
    (12.0
    )
    
    
    
    
    
    
    
    
    
    
    (14.8
    )Change in total manufacturing costs and depreciation,
amortization, and cost of timber harvested
    
    
    
    
    
    
    
    
    
    
    59.7
    
    
    
    
    
    
    
    
    
    
    
    140.6Distribution costs
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    8.3Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (5.0
    )
    
    
    
    
    
    
    
    
    
    
    (15.7
    )Gain on disposition of assets
    
    
    
    
    
    
    
    
    
    
    (7.1
    )
    
    
    
    
    
    
    
    
    
    
    22.0$
    (52.5
    )
    
    
    
    
    
    
    
    
    
    $
    (67.2
    )
 Three months ended June 30, 2007 versus June 30, 2006
 Sales
 21




---



##### Table of Contents



BOWATER INCORPORATED
 Operating income
 Product pricing
 Shipment volume
 Manufacturing costs
 Employee termination costs
 Selling and administrative expenses
 Gain on disposition of assets
 Six months ended June 30, 2007 versus June 30, 2006
 Sales
 Operating income
 Product pricing
 Shipment volume
 22




---



##### Table of Contents



BOWATER INCORPORATED
 Manufacturing costs
 Employee termination costs
 Distribution costs
 Selling and administrative expenses
 Gain on disposition of assets
 Segment Results of Operations
   23




---



##### Table of Contents



BOWATER INCORPORATED
 Coated Papers
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per short ton)
    
    $
    690
    
    
    $
    774
    
    
    $
    (84
    )
    
    $
    700
    
    
    $
    785
    
    
    $
    (85
    )Shipments (thousands of short tons)
    
    
    187.5
    
    
    
    201.8
    
    
    
    (14.3
    )
    
    
    368.6
    
    
    
    394.2
    
    
    
    (25.6
    )Downtime (thousands of short tons)
    
    
    13.7
    
    
    
    19.2
    
    
    
    (5.5
    )
    
    
    23.8
    
    
    
    36.0
    
    
    
    (12.2
    )Inventory at end of period (thousands of short tons)
    
    
    46.7
    
    
    
    50.0
    
    
    
    (3.3
    )
    
    
    46.7
    
    
    
    50.0
    
    
    
    (3.3
    )(In millions)Sales
    
    $
    129.5
    
    
    $
    156.2
    
    
    $
    (26.7
    )
    
    $
    258.0
    
    
    $
    309.1
    
    
    $
    (51.1
    )Segment income
    
    
    4.6
    
    
    
    23.0
    
    
    
    (18.4
    )
    
    
    13.2
    
    
    
    44.7
    
    
    
    (31.5
    )Significant items that improved
(lowered) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (15.1
    )
    
    
    
    
    
    
    
    
    
    $
    (29.9
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    (11.6
    )
    
    
    
    
    
    
    
    
    
    
    (21.2
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    (26.7
    )
    
    
    
    
    
    
    
    
    
    
    (51.1
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    7.3
    
    
    
    
    
    
    
    
    
    
    
    18.0Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    1.6$
    (18.4
    )
    
    
    
    
    
    
    
    
    
    $
    (31.5
    )
 24




---



##### Table of Contents



BOWATER INCORPORATED
 Three months ended June 30, 2007 versus June 30, 2006
    Coated Papers Third Party Data:
 Six months ended June 30, 2007 versus June 30, 2006
   25




---



##### Table of Contents



BOWATER INCORPORATED
 Specialty Papers
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per short ton)
    
    $
    653
    
    
    $
    666
    
    
    $
    (13
    )
    
    $
    653
    
    
    $
    661
    
    
    $
    (8
    )Shipments (thousands of short tons)
    
    
    231.9
    
    
    
    212.8
    
    
    
    19.1
    
    
    
    448.2
    
    
    
    412.6
    
    
    
    35.6Downtime (thousands of short tons)
    
    
    8.6
    
    
    
    1.4
    
    
    
    7.2
    
    
    
    14.4
    
    
    
    1.4
    
    
    
    13.0Inventory at end of period (thousands of short tons)
    
    
    70.4
    
    
    
    38.2
    
    
    
    32.2
    
    
    
    70.4
    
    
    
    38.2
    
    
    
    32.2(In millions)Sales
    
    $
    151.3
    
    
    $
    141.8
    
    
    $
    9.5
    
    
    $
    292.5
    
    
    $
    272.7
    
    
    $
    19.8Segment loss
    
    
    (9.8
    )
    
    
    (17.2
    )
    
    
    7.4
    
    
    
    (18.5
    )
    
    
    (25.4
    )
    
    
    6.9Significant items that improved (lowered) segment loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (4.4
    )
    
    
    
    
    
    
    
    
    
    $
    (5.1
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    13.9
    
    
    
    
    
    
    
    
    
    
    
    24.9Change in total sales
    
    
    
    
    
    
    
    
    
    
    9.5
    
    
    
    
    
    
    
    
    
    
    
    19.8Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    (10.4
    )Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    (3.7
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.2$
    7.4
    
    
    
    
    
    
    
    
    
    
    $
    6.9
 Three months ended June 30, 2007 versus June 30, 2006
   26




---



##### Table of Contents



BOWATER INCORPORATED
  Specialty Papers Third Party Data:
 Six months ended June 30, 2007 versus June 30, 2006
   Newsprint
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per metric ton)
    
    $
    605
    
    
    $
    640
    
    
    $
    (35
    )
    
    $
    612
    
    
    $
    631
    
    
    $
    (19
    )Shipments (thousands of metric tons)
    
    
    517.3
    
    
    
    574.0
    
    
    
    (56.7
    )
    
    
    1,007.2
    
    
    
    1,174.4
    
    
    
    (167.2
    )Downtime (thousands of metric tons)
    
    
    56.5
    
    
    
    64.2
    
    
    
    (7.7
    )
    
    
    119.5
    
    
    
    106.3
    
    
    
    13.2Inventory at end of period (thousands of metric tons)
    
    
    102.2
    
    
    
    63.7
    
    
    
    38.5
    
    
    
    102.2
    
    
    
    63.7
    
    
    
    38.5(In millions)Sales
    
    $
    313.0
    
    
    $
    367.3
    
    
    $
    (54.3
    )
    
    $
    615.9
    
    
    $
    740.8
    
    
    $
    (124.9
    )Segment (loss) income
    
    
    (10.7
    )
    
    
    18.4
    
    
    
    (29.1
    )
    
    
    (14.8
    )
    
    
    36.2
    
    
    
    (51.0
    )Significant items that improved (lowered)
segment (loss) income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (17.6
    )
    
    
    
    
    
    
    
    
    
    $
    (18.8
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    (36.7
    )
    
    
    
    
    
    
    
    
    
    
    (106.1
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    (54.3
    )
    
    
    
    
    
    
    
    
    
    
    (124.9
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    25.0
    
    
    
    
    
    
    
    
    
    
    
    69.1Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    2.3Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    2.5$
    (29.1
    )
    
    
    
    
    
    
    
    
    
    $
    (51.0
    )
 27




---



##### Table of Contents



BOWATER INCORPORATED
 Three months ended June 30, 2007 versus June 30, 2006
    Newsprint Third Party Data:
 Six months ended June 30, 2007 versus June 30, 2006
   28




---



##### Table of Contents



BOWATER INCORPORATED
 Market Pulp
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per metric ton)
    
    $
    648
    
    
    $
    564
    
    
    $
    84
    
    
    $
    638
    
    
    $
    544
    
    
    $
    94Shipments (thousands of metric tons)
    
    
    212.5
    
    
    
    242.3
    
    
    
    (29.8
    )
    
    
    424.2
    
    
    
    489.7
    
    
    
    (65.5
    )Downtime (thousands of metric tons)
    
    
    16.6
    
    
    
    14.6
    
    
    
    2.0
    
    
    
    23.1
    
    
    
    18.7
    
    
    
    4.4Inventory at end of period (thousands of metric tons)
    
    
    58.7
    
    
    
    70.5
    
    
    
    (11.8
    )
    
    
    58.7
    
    
    
    70.5
    
    
    
    (11.8
    )(In millions)Sales
    
    $
    137.7
    
    
    $
    136.7
    
    
    $
    1.0
    
    
    $
    270.8
    
    
    $
    266.1
    
    
    $
    4.7Segment income (loss)
    
    
    17.3
    
    
    
    (1.6
    )
    
    
    18.9
    
    
    
    36.0
    
    
    
    (1.3
    )
    
    
    37.3Significant items that improved (lowered) segment
income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    17.1
    
    
    
    
    
    
    
    
    
    
    $
    38.6Shipment volume
    
    
    
    
    
    
    
    
    
    
    (16.1
    )
    
    
    
    
    
    
    
    
    
    
    (33.9
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    4.7Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    18.8
    
    
    
    
    
    
    
    
    
    
    
    34.1Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    
    
    
    
    (1.1
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )$
    18.9
    
    
    
    
    
    
    
    
    
    
    $
    37.3
 Three months ended June 30, 2007 versus June 30, 2006
   Market Pulp Third Party Data:
 29




---



##### Table of Contents



BOWATER INCORPORATED
 Six months ended June 30, 2007 versus June 30, 2006
   Lumber
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per mbf)
    
    $
    283
    
    
    $
    334
    
    
    $
    (51
    )
    
    $
    278
    
    
    $
    343
    
    
    $
    (65
    )Shipments (millions of mbf)
    
    
    226.7
    
    
    
    281.1
    
    
    
    (54.4
    )
    
    
    456.5
    
    
    
    556.1
    
    
    
    (99.6
    )Downtime (millions of mbf)
    
    
    43.6
    
    
    
    54.0
    
    
    
    (10.4
    )
    
    
    68.6
    
    
    
    111.9
    
    
    
    (43.3
    )Inventory at end of period (millions of mbf)
    
    
    49.0
    
    
    
    48.9
    
    
    
    0.1
    
    
    
    49.0
    
    
    
    48.9
    
    
    
    0.1(In millions)Sales
    
    $
    64.1
    
    
    $
    94.0
    
    
    $
    (29.9
    )
    
    $
    126.9
    
    
    $
    190.5
    
    
    $
    (63.6
    )Segment loss
    
    
    (7.0
    )
    
    
    (4.8
    )
    
    
    (2.2
    )
    
    
    (20.6
    )
    
    
    (3.5
    )
    
    
    (17.1
    )Significant items that improved (lowered)
segment loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (12.5
    )
    
    
    
    
    
    
    
    
    
    $
    (30.8
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    (17.4
    )
    
    
    
    
    
    
    
    
    
    
    (32.8
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    (29.9
    )
    
    
    
    
    
    
    
    
    
    
    (63.6
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    21.4
    
    
    
    
    
    
    
    
    
    
    
    34.4Distribution costs
    
    
    
    
    
    
    
    
    
    
    5.7
    
    
    
    
    
    
    
    
    
    
    
    11.1Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    1.0$
    (2.2
    )
    
    
    
    
    
    
    
    
    
    $
    (17.1
    )
 Three months ended June 30, 2007 versus June 30, 2006
   30




---



##### Table of Contents



BOWATER INCORPORATED
  Lumber Third Party Data:
 Six months ended June 30, 2007 versus June 30, 2006
   Corporate and Other
  Three Months Ended June 30,
    
    Six Months Ended June 30,(In millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeCorporate and Other:Sales
    
    $
    3.0
    
    
    $
    3.4
    
    
    $
    (0.4
    )
    
    $
    6.1
    
    
    $
    13.4
    
    
    $
    (7.3
    )Operating (loss) income:Net gain on disposition of assets
    
    $
    64.6
    
    
    $
    71.7
    
    
    $
    (7.1
    )
    
    $
    122.5
    
    
    $
    100.5
    
    
    $
    22.0Employee termination costs
    
    
    (12.0
    )
    
    
    
    
    
    
    (12.0
    )
    
    
    (19.2
    )
    
    
    (4.4
    )
    
    
    (14.8
    )Corporate and other
    
    
    (32.1
    )
    
    
    (22.1
    )
    
    
    (10.0
    )
    
    
    (58.6
    )
    
    
    (39.6
    )
    
    
    (19.0
    )
 Net gain on disposition of assets :
 31




---



##### Table of Contents



BOWATER INCORPORATED
 Employee termination costs:
 Corporate and other
 Interest Expense
  Income Taxes
   Liquidity and Capital Resources
  32




---



##### Table of Contents



BOWATER INCORPORATED
 Cash (Used for) Provided by Operations
   Cash Provided by Investing Activities
  Cash Used for Financing Activities
  Short-term Financing
  WeightedAverageAmount
    
    Commitment
    
    Termination
    
    InterestShort-Term Bank Debt
    
    Commitment
    
    Outstanding
    
    Available(1)
    
    Date
    
    Rate(2)(in millions except for dates and interest rates)U.S. Credit Agreement
    
    $
    415.0
    
    
    $
    
    
    
    $
    347.0
    
    
    
    05/11
    
    
    
    8.75
    %Canadian Credit Agreement
    
    
    165.0
    
    
    
    
    
    
    
    129.2
    
    
    
    05/08
    
    
    
    n/a$
    580.0
    
    
    $
    
    
    
    $
    476.2
 (1)
    
    The commitment available under each of the revolving credit facilities is subject to collateral
requirements and covenant restrictions as described below and is reduced by outstanding letters of
credit of $68.0 million for the U.S. and $35.8 million for Canada. Commitment fees for unused
portions of the U.S. and Canadian facilities are 50 basis points and 25 basis points, respectively.(2)
    
    Borrowings under the revolving credit facilities incur interest based, at our option, on
specified market interest rates plus a margin. We had borrowings under our U.S. credit agreement
during the first six months of 2007.
 33




---



##### Table of Contents



BOWATER INCORPORATED
 These borrowings were fully repaid during the first six months of 2007. We had no outstanding
borrowings under our Canadian credit agreement during the first six months of 2007.
  i.
    
    a maximum ratio of senior secured indebtedness (including all advances and letters of credit
under the U.S. and Canadian facilities, and any other indebtedness secured by assets of
Bowater and its subsidiaries) to EBITDA (generally defined as net income, excluding
extraordinary, non-recurring or non-cash items and gains (or losses) on asset dispositions,
plus income taxes plus depreciation plus interest expense) of 1.25 to 1; andii.
    
    a minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset
dispositions) to interest expense of 2.00 to 1.
   Employees
      Exchange Rate Fluctuation Effect on Earnings
 34




---



##### Table of Contents



BOWATER INCORPORATED
 Canadian Dollar
  British Pound Sterling
  Exchange Rate Hedging Programs
 Canadian Dollars Forward Contracts
   British Pound Sterling Forward Contracts
   35




---



##### Table of Contents



BOWATER INCORPORATED
  Commodity Hedging Program
 Natural Gas Swap Agreements
  Recent Accounting Pronouncements
 Fair Value Measurements
   36




---



##### Table of Contents



BOWATER INCORPORATED
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk
  Interest Rate Risk
  Commodity Price Risk
  37




---



##### Table of Contents



BOWATER INCORPORATED
  
 Item 4. Controls and Procedures.
 (a)
    
    Evaluation of Disclosure Controls and Procedures:
  (b)
    
    Changes in Internal Control over Financial Reporting:
  
 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)
    
    On September 30, 2005, the Ministry of Justice of the Province of Quebec (MOJ) cited one of our
subsidiaries, Bowater Canadian Forest Products, Inc. (BCFPI), in connection with effluent water
quality of the Dolbeau mill. BCFPI settled this citation on March 29, 2007, by agreeing to pay a
fine and costs totaling CDN $158,000 (approximately US $136,000). The Dolbeau mill has taken steps
to improve its effluent quality and has experienced only two other exceedences since January 1,
2005.(c)
    
    On June 18, 2007, The Levin Group, L.P. filed a complaint against Bowater in the Supreme Court
of New York, New York County, asserting claims for breach of contract and related claims relating
to certain advisory services purported to have been provided by the plaintiff in connection with
the combination. The complaint seeks damages of no less than $70 million, related costs and such
other relief as the court deems just and proper. The management of Bowater believes this claim is
entirely without merit and intends to contest this matter vigorously.(d)
    
    There have been no other material developments to the legal proceedings described in our Annual
Report on Form 10-K filed on March 1, 2007.
 38




---



##### Table of Contents



BOWATER INCORPORATED
 
 Item 6.
Exhibits.
  Exhibit No.
    
    Description4.1
    
    First Amendment to the Credit
Agreement, dated July 20, 2007, by and among Bowater Canadian
Forest Products Inc., as Borrower; Bowater Incorporated, as U.S.
Borrower; Bowater Canadian Holdings Incorporated, as Parent Grantor;
several lenders and The Bank of Nova Scotia.4.2
    
    First Amendment to Credit
Agreement, dated July 20, 2007, by and among Bowater Incorporated, several lenders
and Wachovia Bank, National Association.10.1
    
    First Amendment dated May 11, 2007 to the Agreement between Bowater Incorporated and Arnold M.
Nemirow, dated May 10, 2006.12.1
    
    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.
 39




---



##### Table of Contents



BOWATER INCORPORATED
 
   BOWATER INCORPORATEDBy
    /s/ William G. HarveyWilliam G. HarveyExecutive Vice President and Chief Financial OfficerBy
    /s/ Joseph B. JohnsonJoseph B. JohnsonVice President and Controller  40




---



##### Table of Contents



BOWATER INCORPORATED
 INDEX
TO EXHIBITS
 Exhibit No.
    
    Description4.1
    
    First Amendment to the Credit
Agreement, dated July 20, 2007, by and among Bowater Canadian
Forest Products Inc., as Borrower; Bowater Incorporated, as U.S.
Borrower; Bowater Canadian Holdings Incorporated, as Parent Grantor;
several lenders and The Bank of Nova Scotia.4.2
    
    First Amendment to Credit
Agreement, dated July 20, 2007, by and among Bowater Incorporated, several lenders
and Wachovia Bank, National Association.10.1
    
    First Amendment dated May 11, 2007 to the Agreement between Bowater Incorporated and Arnold M.
Nemirow, dated May 10, 2006.12.1
    
    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.