##### 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, 2008
 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: 001-08712
 BOWATER
INCORPORATED
 
 Delaware
    
    62-0721803(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 
  
  o þ
  Large accelerated filer oAccelerated filer oNon-accelerated filer þ(Do not check if a smaller reporting company)Smaller reporting company o o þ
  Bowater Incorporated meets the conditions set forth in, and is filing this form with the reduced
disclosure format prescribed by, General Instructions H (1)(a) and (b) of Form 10-Q.




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BOWATER INCORPORATED
TABLE OF CONTENTS
 Page NumberPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2008 and 2007
    
    
    1Condensed Consolidated Balance Sheets at June 30, 2008 and December 31, 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2008 and 2007
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Forward-Looking Statements
    
    
    12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 4T. Controls and Procedures
    
    
    17PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20Exhibit 31.1Exhibit 31.2




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BOWATER INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Sales
    
    $
    844
    
    
    $
    798
    
    
    $
    1,670
    
    
    $
    1,570Costs and expenses:Cost of sales, excluding depreciation, amortization
and cost of timber harvested
    
    
    656
    
    
    
    639
    
    
    
    1,292
    
    
    
    1,240Depreciation, amortization and cost of timber harvested
    
    
    65
    
    
    
    80
    
    
    
    143
    
    
    
    160Distribution costs
    
    
    77
    
    
    
    83
    
    
    
    160
    
    
    
    158Selling and administrative expenses
    
    
    31
    
    
    
    46
    
    
    
    78
    
    
    
    95Closure costs and related charges
    
    
    5
    
    
    
    
    
    
    
    13
    
    
    
    Net gain on disposition of assets
    
    
    (17
    )
    
    
    (65
    )
    
    
    (40
    )
    
    
    (123
    )Operating income
    
    
    27
    
    
    
    15
    
    
    
    24
    
    
    
    40Equity in loss of Abitibi-Consolidated Inc.
    
    
    (33
    )
    
    
    
    
    
    
    (68
    )
    
    
    Interest income
    
    
    12
    
    
    
    2
    
    
    
    14
    
    
    
    4Interest expense
    
    
    (52
    )
    
    
    (48
    )
    
    
    (103
    )
    
    
    (95
    )Other income (expense), net
    
    
    (3
    )
    
    
    (15
    )
    
    
    4
    
    
    
    (22
    )Loss before income taxes and minority interests
    
    
    (49
    )
    
    
    (46
    )
    
    
    (129
    )
    
    
    (73
    )Income tax provision
    
    
    (13
    )
    
    
    (19
    )
    
    
    (17
    )
    
    
    (20
    )Minority interests, net of tax
    
    
    (1
    )
    
    
    2
    
    
    
    1
    
    
    
    (5
    )Net loss
    
    $
    (63
    )
    
    $
    (63
    )
    
    $
    (145
    )
    
    $
    (98
    )
  1




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BOWATER INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions)
 June 30,
    
    December 31,2008
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    91
    
    
    $
    63Accounts receivable, net
    
    
    432
    
    
    
    462Accounts
receivable from affiliates
    
    
    91
    
    
    
    Inventories, net
    
    
    325
    
    
    
    377Assets held for sale
    
    
    178
    
    
    
    6Other current assets
    
    
    53
    
    
    
    53Total current assets
    
    
    1,170
    
    
    
    961Fixed assets, net
    
    
    1,863
    
    
    
    2,584Goodwill
    
    
    407
    
    
    
    591Investment in Abitibi-Consolidated Inc.
    
    
    176
    
    
    
    237Other assets
    
    
    253
    
    
    
    246Total assets
    
    $
    3,869
    
    
    $
    4,619Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    396
    
    
    $
    464Short-term bank debt
    
    
    305
    
    
    
    205Current installments of long-term debt
    
    
    13
    
    
    
    21Liabilities
associated with assets held for sale
    
    
    12
    
    
    
    Total current liabilities
    
    
    726
    
    
    
    690Long-term debt, net of current installments
    
    
    2,220
    
    
    
    2,242Other long-term liabilities
    
    
    506
    
    
    
    421Deferred income taxes
    
    
    248
    
    
    
    365Minority interests in subsidiaries
    
    
    77
    
    
    
    80Commitments and contingenciesShareholders equity:Common stock, $1 par value. 56.3 shares at June
30, 2008 and December 31, 2007
    
    
    56
    
    
    
    56Exchangeable shares, no par value. 4.9 shares at
June 30, 2008 and 5.1 shares at December 31, 2007
    
    
    241
    
    
    
    276Additional paid-in capital
    
    
    1,334
    
    
    
    1,207Note
receivable from AbitibiBowater Inc.
    
    
    (650
    )
    
    
    Deficit
    
    
    (759
    )
    
    
    (600
    )Accumulated other comprehensive loss
    
    
    (130
    )
    
    
    (118
    )Total shareholders equity
    
    
    92
    
    
    
    821Total liabilities and shareholders equity
    
    $
    3,869
    
    
    $
    4,619
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BOWATER INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 Six Months EndedJune 30,2008
    
    2007Net cash used for operating activities
    
    $

    (63
    )
    
    $
    (56
    )Cash flows from investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (29
    )
    
    
    (51
    )Dispositions of assets, including timber and timberlands
    
    
    50
    
    
    
    147Direct acquisition costs related to the merger with
Abitibi-Consolidated Inc.
    
    
    
    
    
    
    (12
    )Net cash provided by investing activities
    
    
    21
    
    
    
    84Cash flows from financing activities:Cash dividends
    
    
    
    
    
    
    (23
    )Short-term financing, net
    
    
    101
    
    
    
    Payments of long-term debt
    
    
    (20
    )
    
    
    (15
    )Payments of credit facility fees
    
    
    (11
    )
    
    
    Net cash provided by (used for) financing activities
    
    
    70
    
    
    
    (38
    )Net increase (decrease) in cash and cash equivalents
    
    
    28
    
    
    
    (10
    )Cash and cash equivalents:Beginning of year
    
    
    63
    
    
    
    99End of period
    
    $
    91
    
    
    $
    89
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BOWATER INCORPORATED
Notes to Unaudited Condensed Consolidated Financial Statements
 1.
    
    Organization and Basis of PresentationBasis of PresentationThe accompanying condensed consolidated financial statements include the accounts of Bowater
Incorporated and its subsidiaries (Bowater, also referred to as the Company, we or our). On
October 29, 2007, we combined with Abitibi-Consolidated Inc. (Abitibi) in a merger of equals
(the Combination). As a result of the Combination, we and Abitibi each became a wholly-owned
subsidiary of AbitibiBowater Inc. (AbitibiBowater) and we became an 18% shareholder of
Abitibi. The accompanying condensed consolidated financial statements are unaudited and have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC). Accordingly, certain information and disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In our opinion, these condensed
consolidated financial statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results of our operations for the periods
presented. The results of the interim period ended June 30, 2008 are not necessarily indicative
of the results to be expected for the full year. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2007, filed on April 14, 2008. Certain
prior-year amounts in the unaudited condensed consolidated financial
statements have been reclassified to conform to the 2008 presentation.Note Contribution and Spin-off During the Second Quarter of 2008On May 15, 2008, we transferred the ownership interest we held in our wholly-owned subsidiary
Bowater Newsprint South LLC (Newsprint South) to AbitibiBowater (the Spin-off). Newsprint
South, now a direct and wholly-owned subsidiary of AbitibiBowater, owns and operates the Coosa
Pines, Alabama and Grenada, Mississippi mills, as well as the Westover, Alabama sawmill. The
Spin-off was completed to fulfill the requirement of our bank lenders, under our U.S. and Canadian
credit facilities, that we transfer the Coosa Pines and Grenada mills to AbitibiBowater.
We charged the distribution of our $569 million investment in
Newsprint South to additional paid-in-capital. (See Note 6, Note Contribution and Spin-off
During the Second Quarter of 2008).On May 12, 2008, AbitibiBowater
contributed to Bowater, as additional paid-in-capital, a 12.5% promissory note in
the amount of $650 million due June 30, 2013, executed by AbitibiBowater in favor of Bowater.
Interest on the note is due semi-annually and is recorded in interest income on our Consolidated
Statements of Operations. This note is guaranteed by Newsprint South
and certain of its subsidiaries. Since the note receivable is
due from our parent, AbitibiBowater, it has been classified as a
separate caption in
shareholders equity. Subsequent repayments of the note by
AbitibiBowater will result in a reduction of the note, which will
result in an increase in shareholders equity.As a result of the Spin-off, the unaudited condensed consolidated financial statements included herein do not
reflect the financial position or results of operations of our former Coosa Pines, Grenada and
Westover mills after May 15, 2008.
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BOWATER INCORPORATED
Notes to Unaudited Condensed Consolidated Financial Statements
 Impact of Recently Adopted Accounting PronouncementIn September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (SFAS 158). SFAS 158s measurement date provisions
are effective for fiscal years ending after December 15, 2008.
Prior to the adoption of SFAS 158, a measurement date of September
30, 2007 was used for all of our plans. SFAS 158 requires us to use a December 31 measurement
date. We have elected to use the 15-month transition method to determine the amount of the
adjustment to our opening deficit balance and opening accumulated other comprehensive
loss balance on January 1, 2008. The adjustment increased our opening deficit by $6
million, net of taxes of $2 million, and increased our opening accumulated other comprehensive
loss by $11 million, net of taxes of $1 million. The increase to our accumulated other
comprehensive loss primarily represents the additional net actuarial
loss that arose from settlement and curtailment events in the fourth
quarter of 2007.New Accounting PronouncementsIn March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS 161). This Statement changes the disclosure requirements for
derivative instruments and hedging activities, requiring us to provide enhanced disclosures
about (a) how and why we use derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities and (c) how derivative instruments and related hedged items affect our
financial position, financial performance and cash flows. SFAS 161 is effective for fiscal
years beginning after November 15, 2008. We do not expect the adoption of this accounting
guidance to impact our results of operations or financial position.In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP FAS 142-3). This Staff Position amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible
Assets. This new guidance also provides additional disclosure requirements related to
recognized intangible assets. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. We do not expect the adoption of this
accounting guidance to impact our results of operations or financial position.In May 2008, the FASB issued Statement No. 162, Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States. SFAS 162 is effective 60 days following the
Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. We do not expect the adoption of this accounting guidance to
impact our results of operations or financial position.In June 2008, the EITF reached a consensus in Issue No. 08-3, Accounting by Lessees for
Nonrefundable Maintenance Deposits (EITF 08-3). This issue addresses the accounting for
nonrefundable maintenance deposits paid by the lessee to the lessor. EITF 08-3 is effective for
fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.
Earlier application is not permitted. We have not determined the impact of adoption of this
accounting guidance on our results of operations or financial position.
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BOWATER INCORPORATED
Notes to Unaudited Condensed Consolidated Financial Statements
 2.
    
    Inventories, Net
 June 30,
    
    December 31,(Unaudited, in millions)
    
    2008
    
    2007At lower of cost or market:Raw materials and work in process
    
    $
    54
    
    
    $
    77Finished goods
    
    
    128
    
    
    
    143Mill stores and other supplies
    
    
    157
    
    
    
    171339
    
    
    
    391Excess of current cost over LIFO inventory value
    
    
    (14
    )
    
    
    (14
    )$
    325
    
    
    $
    377
 3.
    
    Short-Term DebtAs of June 30, 2008, available borrowings under our bank credit facilities were as follows:
 Amount
    
    Commitment
    
    Termination
    
    Weighted Average(Unaudited, in millions)
    
    Commitment
    
    Outstanding
    
    Available(1)
    
    Date
    
    Interest Rate(2)U.S. credit facility
    
    $
    415
    
    
    $
    270
    
    
    $
    60
    
    
    
    05/11
    
    
    
    6.3
    %Canadian credit facility
    
    
    144
    
    
    
    35
    
    
    
    76
    
    
    
    06/09
    
    
    
    6.5
    %$
    559
    
    
    $
    305
    
    
    $
    136
 (1)
    
    The commitment available under each of these revolving bank credit facilities
is subject to collateral requirements and covenant restrictions as
described below, and in our Annual Report on Form 10-K for the year ended December 31, 2007, filed on April
14, 2008, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008,
filed on May 15, 2008, and is reduced by outstanding letters of credit of $70 million
for the U.S. credit facility and $32 million for the Canadian
credit facility. Commitment fees for unused portions of our U.S. and
Canadian credit facilities are 50 and 25 basis points, respectively.(2)
    
    Borrowings under the bank credit facilities incur interest based, at our option,
on specified market interest rates plus a margin.
 Bowaters U.S. credit agreement is guaranteed by certain
of the U.S. wholly-owned subsidiaries of Bowater and
Newsprint South, and is secured by (i) liens on the inventory, accounts receivable and deposit
accounts of Bowater, Newsprint South and their
subsidiaries that are guarantors (ii) pledges of 65% of the stock of certain of our
foreign subsidiaries, (iii) pledges of the stock of our U.S. subsidiaries that do not own
mills or converting facilities and (iv) pledges of the stock of the
subsidiaries of Newsprint South. Availability under the U.S. credit facility is limited to 75%
of the net consolidated book value of the accounts receivable and inventory, excluding Bowater
Canadian Forest Products Inc. (BCFPI) and its subsidiaries.BCFPIs Canadian credit agreement is secured by liens on the inventory, accounts receivable
and deposit accounts of BCFPI and is guaranteed by Bowater, Newsprint South and certain of their wholly-owned
subsidiaries and certain Canadian subsidiaries of BCFPI. Availability under the Canadian credit facility is limited to
60% of the net book value of the accounts receivable and inventory of BCFPI and its
subsidiaries.Amendments to Bank Credit FacilitiesFor a more complete discussion of our U.S. credit facility, our Canadian credit facility, as
well as certain amendments to our bank credit facilities entered into on November 2, 2007,
February 25, 2008 and March 31, 2008, reference is made to our Annual Report on Form 10-K for
the year ended December 31, 2007, filed on April 14, 2008,
and for additional amendments to these credit
facilities entered into on April 30, 2008, reference is made to our Quarterly Report on Form
10-Q for the quarter ended March 31, 2008, filed on May 15, 2008.
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BOWATER INCORPORATED
Notes to Unaudited Condensed Consolidated Financial Statements
 During the second quarter of 2008, AbitibiBowater, Bowater and certain subsidiaries and
affiliates of Bowater entered into further amendments to our U.S. and Canadian credit facilities
which required the spin-off of Newsprint South to AbitibiBowater by
Bowater to grant the lenders first-ranking mortgages on our former Coosa Pines and Grenada
mill assets under the U.S. and Canadian credit
agreements and imposed additional reporting obligations on Bowater. The Canadian credit
facility was further amended principally to (i) extend the maturity date of the Canadian credit
facility from May 28, 2008 to June 5, 2009, (ii) impose additional reporting obligations on
BCFPI and implement more extensive eligibility criteria for the assets that may be used in
determining the borrowing base under our Canadian credit facility (thereby reducing the funds
available under our Canadian credit facility) and (iii) reduce the aggregate commitment for all
of the lenders party to our Canadian credit facility from $165 million to $144 million.During the first six months of 2008, we incurred fees of $11 million associated with the
amendments to our bank credit facilities, which are being amortized to interest expense over the
term of the facilities.Our U.S. credit facility permits us to send distributions to AbitibiBowater to service interest
on its convertible debt provided that no default exists under the facility at the time of such
payment and we are in pro forma compliance with the facilitys financial covenants at the time
of such payment. The lenders under our credit facilities have implemented a more traditional,
more restrictive borrowing base, using more extensive eligibility criteria and imposing
additional reporting obligations. We are not obligated to comply with the additional
requirements regarding reporting or the more restrictive borrowing base until November 15,
2008.In addition, we may make dividends and distributions to
AbitibiBowater sufficient to pay (1) taxes attributable to us and our subsidiaries, and (2) up
to $10 million more than 50% of certain AbitibiBowaters annual overhead expenses, such as
accounting and auditing costs, director fees, director and officer insurance premiums, franchise
taxes, transfer agent fees, and legal and other expenses connected to AbitibiBowaters status as
a public company. Overhead expenses do not include management fees, salaries, bonuses, or debt
service.On August 7, 2008, we amended our U.S. and Canadian credit facilities to, among other things,
reduce the required interest coverage ratio for the fiscal quarter ending June 30, 2008. These
amendments were effective as of June 29, 2008. Without these amendments, we would have been in
violation of the interest coverage ratio covenants under our credit facilities for the second
quarter.4.
    
    Accumulated Other Comprehensive LossThe components of Accumulated other comprehensive loss in the Condensed Consolidated Balance
Sheets are as follows:
 June 30,
    
    December 31,(Unaudited, in millions)
    
    2008
    
    2007Unamortized prior service costs (1)
    
    $
    1
    
    
    $
    Unamortized actuarial losses (2)
    
    
    (150
    )
    
    
    (135
    )Foreign currency translation (3)
    
    
    20
    
    
    
    19Unrecognized loss on hedging transactions (4)
    
    
    (1
    )
    
    
    (2
    )$
    (130
    )
    
    $
    (118
    )
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BOWATER INCORPORATED
Notes to Unaudited Condensed Consolidated Financial Statements
 (1)
    
    Net of deferred tax provision of $14 million at June 30, 2008 and $13 million at
December 31, 2007. Net of minority interest of $2 million as of June 30, 2008 and
December 31, 2007.(2)
    
    Net of deferred tax benefit of $69 million and $67 million at June 30, 2008 and
December 31, 2007, respectively.(3)
    
    No tax effect is recorded for foreign currency translation since the foreign net assets
translated are deemed indefinitely invested.(4)
    
    Net of deferred tax benefit of $1 million as of June 30, 2008 and December 31, 2007.
 Our comprehensive loss, which includes our net loss and the changes in our accumulated other
comprehensive loss, is $63 million and $146 million for the three and six months ended June
30, 2008, respectively, and $69 million and $100 million for the three and six months ended
June 30, 2007, respectively.5.
    
    Pension and Other Postretirement ExpenseThe components of net periodic benefit costs relating to our pension and other postretirement
benefit plans (OPEB plans) (prior to the charges to
Newsprint South  see Note 7, Transactions with
Related Parties) are as follows for the three and six months ended June 30, 2008 and
2007:Pension Plans:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2008
    
    2007
    
    2008
    
    2007Components of net periodic benefit cost:Service cost
    
    $
    7
    
    
    $
    9
    
    
    $
    13
    
    
    $
    18Interest cost
    
    
    34
    
    
    
    32
    
    
    
    69
    
    
    
    62Expected return on plan assets
    
    
    (39
    )
    
    
    (33
    )
    
    
    (79
    )
    
    
    (65
    )Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    2Recognized net actuarial loss
    
    
    2
    
    
    
    7
    
    
    
    4
    
    
    
    14Special termination benefits
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Curtailments and settlements
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    7Net periodic benefit cost
    
    $
    5
    
    
    $
    22
    
    
    $
    9
    
    
    $
    42
 OPEB Plans:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2008
    
    2007
    
    2008
    
    2007Components of net periodic benefit cost:Service cost
    
    $
    1
    
    
    $
    1
    
    
    $
    1
    
    
    $
    1Interest cost
    
    
    4
    
    
    
    3
    
    
    
    7
    
    
    
    6Amortization of prior service credit
    
    
    (3
    )
    
    
    (3
    )
    
    
    (6
    )
    
    
    (6
    )Recognized net actuarial loss
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3Curtailments and settlements
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    (3
    )Net periodic benefit cost
    
    $
    4
    
    
    $
    2
    
    
    $
    6
    
    
    $
    1
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BOWATER INCORPORATED
Notes to Unaudited Condensed Consolidated Financial Statements
 Events Impacting Net Periodic Benefit Cost for the Three and Six Months Ended June 30, 2008
 
 In June 2008, the cumulative number of employees terminated as a result of the Combination
became significant, triggering a curtailment. As a result, a curtailment loss of $1 million is
included in the net periodic benefit cost of our OPEB plans during the three and six months
ended June 30, 2008.Events Impacting Net Periodic Benefit Cost for the Three and Six Months Ended June 30, 2007In 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 million and
$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, as a result of a mill-wide restructuring of our Thunder Bay, Ontario facility,
157 jobs were eliminated. As a result, a curtailment loss of $1 million and special termination
benefits of $4 million were included in the net periodic benefit cost of our pension plans
during the three and six months ended June 30, 2007. This event also resulted in a settlement
loss at the time the benefits were paid.In October 2006, we approved changes to our OPEB plan for our 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. As a result, a curtailment gain of $3
million was included in the net periodic benefit cost of our OPEB plans during the six
months ended June 30, 2007.6.
    
    Note Contribution and Spin-off During the Second Quarter of 2008On May 12, 2008, AbitibiBowater contributed
to Bowater, as additional paid-in-capital, a 12.5% promissory note in the amount of
$650 million due June 30, 2013, executed by AbitibiBowater in favor of Bowater. Interest on the
note is due semi-annually and is recorded in interest income on our Consolidated Statements of
Operations. This note is guaranteed by Newsprint South and certain of its
subsidiaries. Since the note receivable is due from our
parent, AbitibiBowater, it has been classified as a separate caption
in shareholders equity. Subsequent repayments of the note by
AbitibiBowater will result in a reduction of the note, which will
result in an increase in shareholders equity. Prior to May 15, 2008,
Newsprint South was a wholly-owned subsidiary of Bowater. Subsequently on May 15, 2008, Newsprint
South became a direct subsidiary of AbitibiBowater as a result of the Spin-off (see Note 1,
Organization and Basis of Presentation).The impact on the additional paid-in-capital
account in shareholders equity, resulting from the note
contributed and investment distributed in the Spin-off, was as follows:
 (Unaudited,
in millions)Note contributedNote receivable  AbitibiBowater
    
    $
    650Total note contributed
    
    
    650Investment
distributedCurrent assets
    
    
    68Fixed assets
    
    
    503Goodwill
    
    
    184Current liabilities
    
    
    (47
    )Long-term debt
    
    
    (5
    )Other long-term
liabilities
    
    
    (3
    )Deferred taxes
    
    
    (131
    )Bowaters investment in Newsprint South
    
    
    569Net increase
in additional paid-in-capital account in shareholders equity
    
    $
    81
 Review of Long-lived Assets (Including Goodwill)
 We considered the Spin-off a triggering event requiring review of Newsprint Souths long-lived
assets for recoverability. The cash flows of the Grenada paper mill, the Coosa Pines paper mill
and the Westover sawmill are each at the lowest level for which we are able to identify separate
cash flows that are largely independent of cash flows associated with other assets groups.
Reference is made to our Annual Report on Form 10-K for the year ended December 31, 2007, filed
April 14, 2008, for details about assumptions used in the testing of our long-lived assets for
impairment. Our testing indicated that the long-lived assets of Newsprint South are recoverable,
and that no impairment existed immediately before the Spin-off. The
asset impairment was based on a comparison of the book values of
Newsprint South to the fair value of the Newsprint South assets
transferred. This asset impairment analysis also included an
allocation of goodwill as discussed below.The Spin-off was also considered a triggering event requiring review of our goodwill to determine
if an impairment test was needed immediately before the Spin-off (i.e., whether we considered it
likely that the fair value of our goodwill was impaired). We have two reporting units with
goodwill allocated to them: the Newsprint reporting unit and the Specialty Papers reporting unit.
Our Grenada paper mill and a portion of our Coosa Pines paper mill were components of the Newsprint
reporting unit. The Westover sawmill was not a component of a reporting unit with allocated
goodwill. Upon review of the facts, we concluded that it was not likely that the fair value of our
Newsprint reporting unit had fallen below its carrying value just prior to the Spin-off; thus, no
test for impairment was performed.Since the Spin-off comprised a portion of a reporting unit that constitutes a business, a portion
of the goodwill in the Newsprint reporting unit was allocated to the components that were included
in the Spin-off based on the fair value of the newsprint operations of the Grenada and Coosa Pines
paper mills relative to the fair value of the other components of the Newsprint reporting unit that
will remain with Bowater. The allocation of goodwill to the components included in the Spin-off is
as follows:
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BOWATER INCORPORATED
Notes to Unaudited Condensed Consolidated Financial Statements
 (Unaudited, in millions)
    
    Allocation ofGoodwill as ofComponents of Newsprint Reporting Unit
    
    May 15, 2008Components included in the Spin-off
    
    $
    184Other components that will remain with Bowater
    
    
    342$
    526
 Immediately after the Spin-off, we evaluated our Newsprint reporting unit, consisting of the
remaining components, for impairment. Reference is made to our Annual Report on Form 10-K for the
year ended December 31, 2007, filed April 14, 2008, for details about assumptions used in the
testing of our goodwill for impairment. No significant changes to those assumptions were needed
for this interim test. Our test indicated that there was no impairment of the $342 million
remaining goodwill immediately following the Spin-off.7.
    
    Transactions with Related PartiesOn January 1, 2008, we began providing certain corporate administrative services on behalf of
AbitibiBowater and certain of its subsidiaries (referred to as Affiliates) including legal,
finance, tax, risk management, IT, executive management, payroll and employee benefits. As such,
we have charged a portion of our general and administrative expenses to our Affiliates and recorded this
charge as a reduction of our costs, based on specific identification or on an appropriate
allocation key (e.g., sales, purchases, headcount, etc.) determined by the type of expense or
department. During the three and six months ended June 30, 2008,
we charged our Affiliates
approximately $4 million and $7 million, respectively, for certain corporate administrative
expenses that we incurred on their behalf, net of expenses our
Affiliates incurred on our behalf.We maintain a centralized domestic sales force. We buy products from our Affiliates at the same
price we sell those products to third party customers. In order to compensate us for these
services, we charge our Affiliates and our subsidiaries a service fee equal to 120% of our selling
costs based on the value of the products acquired from them. The fees charged to our wholly-owned
subsidiaries are eliminated in consolidation. During the three and six months ended June 30, 2008,
we charged our Affiliates $2 million and $3 million,
respectively, for these services.Since the Spin-off, from May 15, 2008 through June 30, 2008, goods in the amount of $72 million
were purchased from Newsprint South, now an Affiliate. Additionally, during the six months ended
June 30, 2008, we sold $14 million of wood products to, and
purchased $13 million of recycled
fiber from, our Abitibi Affiliates at market prices. These transactions were made in the normal
course of business and have been recorded at the exchanged amounts.We sponsor a number of defined benefit pension plans and other postretirement benefit plans
covering our employees and employees of Newsprint South. Since the Spin-off, we have charged
Newsprint South for pension and other postretirement benefit costs based on an actuarial
determination of the current service cost associated with its employees. This charge of less than
$1 million for both the three and six months ended June 30, 2008 is recorded as a reduction to our
pension benefit costs.We maintain a number of share-based compensation programs that provided for grants of stock
options, restricted stock units and deferred stock units to our directors, officers and certain key
employees (as well as certain key employees of Newsprint South). After the Combination with
Abitibi, any new grants of share-based awards are made through AbitibiBowaters plans. Since
the Spin-off, we have charged Newsprint South for share-based compensation based on the fair value
of the unvested awards granted to its employees. This charge of less
than $1 million for both the three
and six months ended June 30, 2008 is recorded as a reduction to our share-based compensation
costs.For the three months ended June 30, 2008, we
recorded $11 million of interest income on the note receivable
from AbitibiBowater.8.
    
    Commitments and ContingenciesWe are 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.
Although the final outcome of any of these matters is subject to many variables and cannot be
predicted with any degree of certainty, we establish reserves for a matter when we believe an
adverse outcome is probable and the amount can be reasonably estimated. We believe that the
ultimate disposition of these matters will not have a material adverse effect on our financial
condition, but it could have a material adverse effect on 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 for the year ended December 31, 2007, filed on April 14, 2008, as updated in our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed on May 15, 2008.9.
    
    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 $5 million of the investor
notes principal balance at June 30, 2008. This guarantee is proportionately reduced by annual
principal repayments on the investor notes (annual minimum repayments of $2 million) through
2008. The remaining investor notes principal amount is to be repaid in 2009. Timber Note
Holdings LLC has assets of approximately $24 million and obligations of approximately $22
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.On April 1, 2008, AbitibiBowater consummated a private sale of $350 million of 8% convertible
notes due April 15, 2013 (the Convertible Notes) to Fairfax Financial Holdings Limited and certain of its designated subsidiaries. The Convertible Notes bear interest at a rate of 8%
per annum (10% per annum if payment of
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BOWATER INCORPORATED
Notes to Unaudited Condensed Consolidated Financial Statements
 interest is made through the issuance of additional
convertible notes as pay in kind). We provided a full and unconditional guarantee of the
payment of principal and interest on the Convertible Notes. Our guarantee ranks equally in
right of payment with all of our existing and future senior indebtedness.10.
    
    Segment InformationWe manage our business based on the products that we manufacture and sell to external customers.
Our reportable segments are newsprint, coated papers, specialty papers, market pulp and lumber.None of the income or loss items following
Operating income (loss) in our Condensed
Consolidated Statements of Operations are allocated to our segments, since those items are
reviewed separately by 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 allocate depreciation expense to our segments, although the related fixed
assets are not allocated to segment assets.Only assets which are identifiable by segment and reviewed by our management are allocated to
segment assets. Allocated assets include goodwill and finished goods inventory. All other assets
are not identifiable by segment and are included in Corporate and Other.The following tables summarize information about segment sales and operating income (loss) for
the three and six months ended June 30, 2008 and 2007:
 Coated
    
    Specialty
    
    Market
    
    
    
    
    
    Corporate
    
    Consolidated(Unaudited, in millions)
    
    
    
    
    
    Newsprint
    
    Papers
    
    Papers
    
    Pulp
    
    Lumber
    
    and Other
    
    TotalSalesSecond Quarter
    
    
    2008
    
    
    $
    303
    
    
    $
    167
    
    
    $
    166
    
    
    $
    153
    
    
    $
    54
    
    
    $
    1
    
    
    $
    844Second Quarter
    
    
    2007
    
    
    
    313
    
    
    
    129
    
    
    
    151
    
    
    
    138
    
    
    
    64
    
    
    
    3
    
    
    
    798Year to date
    
    
    2008
    
    
    
    606
    
    
    
    336
    
    
    
    320
    
    
    
    304
    
    
    
    103
    
    
    
    1
    
    
    
    1,670Year to date
    
    
    2007
    
    
    
    616
    
    
    
    258
    
    
    
    292
    
    
    
    271
    
    
    
    127
    
    
    
    6
    
    
    
    1,570Operating income (loss)(1)Second Quarter
    
    
    2008
    
    
    $
    (4
    )
    
    $
    35
    
    
    $
    (5
    )
    
    $
    19
    
    
    $
    (3
    )
    
    $
    (15
    )
    
    $
    27Second Quarter
    
    
    2007
    
    
    
    (11
    )
    
    
    4
    
    
    
    (11
    )
    
    
    18
    
    
    
    (7
    )
    
    
    22
    
    
    
    15Year to date
    
    
    2008
    
    
    
    (28
    )
    
    
    69
    
    
    
    (5
    )
    
    
    49
    
    
    
    (21
    )
    
    
    (40
    )
    
    
    24Year to date
    
    
    2007
    
    
    
    (16
    )
    
    
    13
    
    
    
    (19
    )
    
    
    37
    
    
    
    (21
    )
    
    
    46
    
    
    
    40
 (1)
    
    Corporate and Other operating income (loss) includes a net gain from
disposition of assets of $17 million and $65 million for the three months ended
June 30, 2008 and 2007, respectively, and $40 million and $123 million for the six
months ended June 30, 2008 and 2007, respectively, and closure
costs and related charges of $5 million and $13 million for the
three and six months ended June 30, 2008, respectively.
 The following table summarizes information about segment assets as of June 30, 2008 and December
31, 2007:
 June 30,
    
    
    December 31,(Unaudited, in millions)
    
    2008
    
    
    2007Newsprint
    
    $
    384
    
    
    $
    587Coated papers
    
    
    26
    
    
    
    15Specialty papers
    
    
    96
    
    
    
    99Market pulp
    
    
    19
    
    
    
    21Lumber
    
    
    10
    
    
    
    14Corporate and other
    
    
    3,334
    
    
    
    3,883$
    3,869
    
    
    $
    4,619
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BOWATER INCORPORATED
 
 FORWARD-LOOKING STATEMENTS
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Note Contribution and Spin-off During the Second Quarter of 2008
  12




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BOWATER INCORPORATED
   13




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BOWATER INCORPORATED
 Business and Financial Review
 Six Months Ended June 30,(Unaudited, in millions)
    
    2008
    
    
    2007
    
    
    ChangeSales
    
    $
    1,670
    
    
    $
    1,570
    
    
    $
    100Operating income
    
    
    24
    
    
    
    40
    
    
    
    (16
    )Net loss
    
    
    (145
    )
    
    
    (98
    )
    
    
    (47
    )Significant items that improved (lowered) operating income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    392Shipment volume
    
    
    
    
    
    
    
    
    
    
    (292
    )Change in sales
    
    
    
    
    
    
    
    
    
    
    100Change in cost of sales and
depreciation, amortization and
cost of timber harvested
    
    
    
    
    
    
    
    
    
    
    (35
    )Change in distribution costs
    
    
    
    
    
    
    
    
    
    
    (2
    )Change in selling and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    17Change in closure costs and
related charges
    
    
    
    
    
    
    
    
    
    
    (13
    )Change in net gain on disposition
of assets
    
    
    
    
    
    
    
    
    
    
    (83
    )Change in operating income
    
    
    
    
    
    
    
    
    
    
    (16
    )Other significant items that improved (lowered) net income:Change in interest expense
    
    
    
    
    
    
    
    
    
    
    (8
    )Change in interest income
    
    
    
    
    
    
    
    
    
    
    10Change in equity in loss of Abitibi
    
    
    
    
    
    
    
    
    
    
    (68
    )Change in other income (expense)
    
    
    
    
    
    
    
    
    
    
    26Change in income tax provision
    
    
    
    
    
    
    
    
    
    
    3Change in minority interests, net
of tax
    
    
    
    
    
    
    
    
    
    
    6Change in net loss
    
    
    
    
    
    
    
    
    
    $
    (47
    )
 Six months ended June 30, 2008 versus June 30, 2007
 Sales
  Operating income
  Manufacturing Costs
  14




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BOWATER INCORPORATED
  Distribution costs
  Net gain on disposition of assets
  Net loss
       15




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BOWATER INCORPORATED
 Liquidity
        16




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BOWATER INCORPORATED
 
 Item 4T.
    
    Controls and Procedures.
     17




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BOWATER INCORPORATED
 
 PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
   
 Item 1A.
    
    Risk Factors.
  18




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BOWATER INCORPORATED
 
 Item 6.
    
    Exhibits.
 Exhibit No.
    
    Description10.1
    
    8% Senior Convertible Notes due 2013 Indenture, dated April 1, 2008, by and among
AbitibiBowater Inc., Bowater Incorporated and The Bank of New York Trust Company, N.A.
(incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K dated
April 1, 2008, SEC File No. 001-08712).10.2
    
    Fifth Amendment, dated as of April 30, 2008, to the Credit Agreement dated as of May 31, 2006
by and among Bowater Incorporated, certain subsidiaries of Bowater party thereto,
AbitibiBowater Inc., the Lenders and the Canadian Lenders party thereto and Wachovia Bank,
National Association, as administrative agent for the Lenders party thereto (incorporated by
reference from Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008 filed on May 15, 2008, SEC File No. 001-08712).10.3
    
    Fifth Amendment, dated as of April 30, 2008, to the Credit Agreement dated as of May 31, 2006
by and among Bowater Canadian Forest Products Inc., Bowater Incorporated, certain subsidiaries
and affiliates of Bowater party thereto, AbitibiBowater Inc., the Lenders and the U.S. Lenders
party thereto and The Bank of Nova Scotia, as administrative agent for the Lenders party
thereto (incorporated by reference from Exhibit 10.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2008 filed on May 15, 2008, SEC File No. 001-08712).10.4
    
    Seventh Amendment, dated as of June 6, 2008, to the Credit Agreement dated as of May 31, 2006
by and among Bowater Canadian Forest Products Inc., Bowater Incorporated, certain subsidiaries
and affiliates of Bowater party thereto, AbitibiBowater Inc., the Lenders and the U.S. Lenders
party thereto and The Bank of Nova Scotia, as administrative agent for the Lenders party
thereto (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form
8-K dated June 6, 2008, SEC File No. 001-08712).10.5
    
    Seventh Amendment, dated as of August 7, 2008, to the Credit Agreement dated as of May 31,
2006 by and among Bowater Incorporated, certain subsidiaries of Bowater party thereto,
AbitibiBowater Inc., the Lenders and the Canadian Lenders party thereto and Wachovia Bank,
National Association, as administrative agent for the Lenders party thereto (incorporated by
reference from Exhibit 10.17 to AbitibiBowater Inc.s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008 filed on August 11, 2008, SEC File No. 001-33776).10.6
    
    Ninth Amendment, dated as of August 7, 2008, to the Credit Agreement dated as of May 31, 2006
by and among Bowater Canadian Forest Products Inc., Bowater Incorporated, certain subsidiaries
and affiliates of Bowater party thereto, AbitibiBowater Inc., the Lenders and the U.S. Lenders
party thereto and The Bank of Nova Scotia, as administrative agent for the Lenders party
thereto (incorporated by reference from Exhibit 10.18 to AbitibiBowater Inc.s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008 filed on August 11, 2008, SEC File No.
001-33776).31.1
    
    Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Vice President and
Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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BOWATER INCORPORATED
 
   BOWATER INCORPORATEDBy
    /s/ William G. HarveyWilliam G. HarveyDirector, Vice President and TreasurerBy
    /s/ Joseph B. JohnsonJoseph B. JohnsonVice President and Controller  20




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BOWATER INCORPORATED
 INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    8% Senior Convertible Notes due 2013 Indenture, dated April 1, 2008, by and among
AbitibiBowater Inc., Bowater Incorporated and The Bank of New York Trust Company, N.A.
(incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K dated
April 1, 2008, SEC File No. 001-08712).10.2
    
    Fifth Amendment, dated as of April 30, 2008, to the Credit Agreement dated as of May 31, 2006
by and among Bowater Incorporated, certain subsidiaries of Bowater party thereto,
AbitibiBowater Inc., the Lenders and the Canadian Lenders party thereto and Wachovia Bank,
National Association, as administrative agent for the Lenders party thereto (incorporated by
reference from Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008 filed on May 15, 2008, SEC File No. 001-08712).10.3
    
    Fifth Amendment, dated as of April 30, 2008, to the Credit Agreement dated as of May 31, 2006
by and among Bowater Canadian Forest Products Inc., Bowater Incorporated, certain subsidiaries
and affiliates of Bowater party thereto, AbitibiBowater Inc., the Lenders and the U.S. Lenders
party thereto and The Bank of Nova Scotia, as administrative agent for the Lenders party
thereto (incorporated by reference from Exhibit 10.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2008 filed on May 15, 2008, SEC File No. 001-08712).10.4
    
    Seventh Amendment, dated as of June 6, 2008, to the Credit Agreement dated as of May 31, 2006
by and among Bowater Canadian Forest Products Inc., Bowater Incorporated, certain subsidiaries
and affiliates of Bowater party thereto, AbitibiBowater Inc., the Lenders and the U.S. Lenders
party thereto and The Bank of Nova Scotia, as administrative agent for the Lenders party
thereto (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form
8-K dated June 6, 2008, SEC File No. 001-08712).10.5
    
    Seventh Amendment, dated as of August 7, 2008, to the Credit Agreement dated as of May 31,
2006 by and among Bowater Incorporated, certain subsidiaries of Bowater party thereto,
AbitibiBowater Inc., the Lenders and the Canadian Lenders party thereto and Wachovia Bank,
National Association, as administrative agent for the Lenders party thereto (incorporated by
reference from Exhibit 10.17 to AbitibiBowater Inc.s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008 filed on August 11, 2008, SEC File No. 001-33776).10.6
    
    Ninth Amendment, dated as of August 7, 2008, to the Credit Agreement dated as of May 31, 2006
by and among Bowater Canadian Forest Products Inc., Bowater Incorporated, certain subsidiaries
and affiliates of Bowater party thereto, AbitibiBowater Inc., the Lenders and the U.S. Lenders
party thereto and The Bank of Nova Scotia, as administrative agent for the Lenders party
thereto (incorporated by reference from Exhibit 10.18 to AbitibiBowater Inc.s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008 filed on August 11, 2008, SEC File No.
001-33776).31.1
    
    Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Vice President and
Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.