##### 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
September 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 November 1, 2007Common Stock, $1.00 Par Value
    
    56,302,409 Shares




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##### 



BOWATER INCORPORATED
I N D E X
 Page NumberPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
    
    
    3Consolidated Balance Sheets at September 30, 2007 and December 31, 2006
    
    
    4Consolidated Statements of Stockholders Equity for the Nine Months Ended September 30, 2007 and 2006
    
    
    5Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7          21Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22          40Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    41         42Item 4. Controls and Procedures
    
    
    42PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    43Item 6. Exhibits
    
    
    44SIGNATURES
    
    
    45Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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BOWATER INCORPORATED
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited, in millions of US dollars except share and per-share amounts)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Sales
    
    $
    814.7
    
    
    $
    875.9
    
    
    $
    2,384.9
    
    
    $
    2,668.5Costs and expenses:Cost of sales, excluding depreciation, amortization and cost
of timber harvested
    
    
    672.3
    
    
    
    650.7
    
    
    
    1,912.3
    
    
    
    2,028.6Depreciation, amortization and cost of timber harvested
    
    
    79.5
    
    
    
    80.8
    
    
    
    239.1
    
    
    
    243.1Distribution costs
    
    
    83.9
    
    
    
    83.4
    
    
    
    242.0
    
    
    
    249.8Selling and administrative expense
    
    
    49.8
    
    
    
    47.9
    
    
    
    144.8
    
    
    
    127.2Arbitration
award
    
    
    28.4
    
    
    
    
    
    
    
    28.4
    
    
    
    Impairment and other related charges
    
    
    
    
    
    
    246.4
    
    
    
    
    
    
    
    246.4Net gain on disposition of assets
    
    
    (17.1
    )
    
    
    (54.0
    )
    
    
    (139.6
    )
    
    
    (154.5
    )Operating loss
    
    
    (82.1
    )
    
    
    (179.3
    )
    
    
    (42.1
    )
    
    
    (72.1
    )Interest expense
    
    
    (47.3
    )
    
    
    (50.8
    )
    
    
    (141.9
    )
    
    
    (149.5
    )Other (expense) income, net
    
    
    (16.1
    )
    
    
    4.9
    
    
    
    (34.8
    )
    
    
    9.7Loss before income taxes, minority interests, and cumulative
effect of accounting change
    
    
    (145.5
    )
    
    
    (225.2
    )
    
    
    (218.8
    )
    
    
    (211.9
    )Income tax benefit (provision)
    
    
    0.4
    
    
    
    9.9
    
    
    
    (19.2
    )
    
    
    (29.5
    )Minority interests, net of tax
    
    
    3.0
    
    
    
    (0.8
    )
    
    
    (2.1
    )
    
    
    (1.5
    )Loss before cumulative effect of accounting change
    
    
    (142.1
    )
    
    
    (216.1
    )
    
    
    (240.1
    )
    
    
    (242.9
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.6
    )Net loss
    
    $
    (142.1
    )
    
    $
    (216.1
    )
    
    $
    (240.1
    )
    
    $
    (245.5
    )Loss per share:Basic loss per common share:Loss before cumulative effect of accounting change
    
    $
    (2.47
    )
    
    $
    (3.76
    )
    
    $
    (4.18
    )
    
    $
    (4.23
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.05
    )Net loss
    
    $
    (2.47
    )
    
    $
    (3.76
    )
    
    $
    (4.18
    )
    
    $
    (4.28
    )Diluted loss per common share:Loss before cumulative effect of accounting change
    
    $
    (2.47
    )
    
    $
    (3.76
    )
    
    $
    (4.18
    )
    
    $
    (4.23
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.05
    )Net loss
    
    $
    (2.47
    )
    
    $
    (3.76
    )
    
    $
    (4.18
    )
    
    $
    (4.28
    )Average number of shares outstanding (in millions):Basic and diluted
    
    
    57.5
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.60
    
    
    $
    0.60
  3




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BOWATER INCORPORATED
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited, in millions of US dollars except share and per-share amounts)
 September 30,
    
    December 31,2007
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    83.9
    
    
    $
    98.9Accounts receivable, net
    
    
    456.7
    
    
    
    444.5Inventories
    
    
    366.8
    
    
    
    349.8Timberlands held for sale
    
    
    4.8
    
    
    
    18.7Other current assets
    
    
    68.5
    
    
    
    47.1Total current assets
    
    
    980.7
    
    
    
    959.0Timber and timberlands
    
    
    58.8
    
    
    
    60.8Fixed assets, net
    
    
    2,737.3
    
    
    
    2,877.9Goodwill
    
    
    590.7
    
    
    
    590.2Other assets
    
    
    142.6
    
    
    
    158.0Total assets
    
    $
    4,510.1
    
    
    $
    4,645.9Liabilities and shareholders equityCurrent liabilities:Current installments of long-term debt
    
    $
    21.7
    
    
    $
    14.9Short-term bank debt
    
    
    72.0
    
    
    
    Accounts payable and accrued liabilities
    
    
    466.1
    
    
    
    431.2Total current liabilities
    
    
    559.8
    
    
    
    446.1Long-term debt, net of current installments
    
    
    2,243.9
    
    
    
    2,251.6Pension and other postretirement benefits obligations
    
    
    641.1
    
    
    
    651.1Other long-term liabilities
    
    
    72.1
    
    
    
    92.5Deferred income taxes
    
    
    349.3
    
    
    
    313.0Minority interests in subsidiaries
    
    
    77.7
    
    
    
    59.0Commitments and contingenciesShareholders equity:Common stock, $1 par value. Authorized
100,000,000 shares; issued 67,852,878 and
67,585,104 shares at September 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 September 30, 2007 and December
31, 2006, respectively
    
    
    56.8
    
    
    
    67.6Additional paid-in capital
    
    
    1,650.5
    
    
    
    1,630.1Retained deficit
    
    
    (348.8
    )
    
    
    (76.0
    )Accumulated other comprehensive loss
    
    
    (374.4
    )
    
    
    (371.0
    )Treasury stock at cost, 11,597,419 and 11,600,717
shares at September 30, 2007 and December 31, 2006,
respectively
    
    
    (485.7
    )
    
    
    (485.7
    )Total shareholders equity
    
    
    566.2
    
    
    
    832.6Total liabilities and shareholders equity
    
    $
    4,510.1
    
    
    $
    4,645.9
  4




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BOWATER INCORPORATED
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (Unaudited, in millions of US dollars except share and per-share amounts)
 For the nine months ended September 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 ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35.0
    )
    
    
    
    
    
    
    
    
    
    
    (35.0
    )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
    
    
    
    
    
    
    
    
    
    
    10.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.6Restricted stock units vested (46,098 shares,
net of shares forfeited for employee
withholding taxes)
    
    
    
    
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Treasury stock used for dividend reinvestment
plans and to pay employee and director benefits
(3,298 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (240.1
    )
    
    
    
    
    
    
    
    
    
    
    (240.1
    )Change in unrealized prior service costs,
net of tax of $2.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.2
    )
    
    
    
    
    
    
    (2.2
    )Change in actuarial gains and losses, net of
tax of $6.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28.7
    
    
    
    
    
    
    
    28.7Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30.7
    )
    
    
    
    
    
    
    (30.7
    )Change in unrealized gain on hedged
transactions, net of tax of $0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    0.8Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (243.5
    )Balance at September 30, 2007
    
    $
    67.8
    
    
    $
    56.8
    
    
    $
    1,650.5
    
    
    $
    (348.8
    )
    
    $
    (374.4
    )
    
    $
    (485.7
    )
    
    $
    566.2
  AccumulatedAdditional
    
    Retained
    
    Other
    
    
    
    
    
    TotalCommon
    
    Exchangeable
    
    Paid In
    
    Earnings
    
    Comprehensive
    
    Treasury
    
    ShareholdersStock
    
    Shares
    
    Capital
    
    (Deficit)
    
    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 ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34.7
    )
    
    
    
    
    
    
    
    
    
    
    (34.7
    )Retraction of exchangeable shares (315 shares
issued and exchangeable shares retracted)
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Share-based compensation costs for equity awards
    
    
    
    
    
    
    
    
    
    
    5.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.1Treasury stock used for dividend reinvestment
plans and to pay employee and director benefits
(3,473 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (245.5
    )
    
    
    
    
    
    
    
    
    
    
    (245.5
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.1
    )
    
    
    
    
    
    
    (5.1
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    4.0Change in unrealized gain on hedged
transactions, net of tax of $11.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.2
    )
    
    
    
    
    
    
    (18.2
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (264.8
    )Balance at September 30, 2006
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,626.8
    
    
    $
    (171.5
    )
    
    $
    (175.3
    )
    
    $
    (485.8
    )
    
    $
    929.8
  5




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##### Table of Contents



BOWATER INCORPORATED
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions of US dollars)
 Nine Months EndedSeptember 30,2007
    
    2006Cash flows from operating activities:Net loss
    
    $
    (240.1
    )
    
    $
    (245.5
    )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
    
    
    10.1
    
    
    
    1.8Depreciation, amortization and cost of timber harvested
    
    
    239.1
    
    
    
    243.1Impairment and other related charges
    
    
    
    
    
    
    246.4Deferred income taxes
    
    
    31.4
    
    
    
    21.6Minority interests, net of tax
    
    
    2.1
    
    
    
    1.5Net pension (contributions) benefit costs
    
    
    (26.6
    )
    
    
    (25.9
    )Net gain on disposition of assets
    
    
    (139.6
    )
    
    
    (154.5
    )Changes in working capital:Accounts receivable, net
    
    
    (12.1
    )
    
    
    (51.4
    )Inventories
    
    
    (17.0
    )
    
    
    6.8Income taxes receivable and payable
    
    
    0.1
    
    
    
    11.2Accounts payable and accrued liabilities
    
    
    34.6
    
    
    
    21.2Other, net
    
    
    4.1
    
    
    
    (10.6
    )Net cash (used for) provided by operating activities
    
    
    (113.9
    )
    
    
    68.3Cash flows from investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (72.6
    )
    
    
    (138.0
    )Dispositions of assets, including timber and timberlands
    
    
    166.6
    
    
    
    296.5Direct acquisition costs related to the merger with Abitibi-Consolidated Inc.
    
    
    (17.2
    )
    
    
    Net cash provided by investing activities
    
    
    76.8
    
    
    
    158.5Cash flows from financing activities:Cash dividends
    
    
    (34.9
    )
    
    
    (34.7
    )Short-term financing
    
    
    80.0
    
    
    
    370.9Short-term financing repayments
    
    
    (8.0
    )
    
    
    (432.5
    )Repurchase of long-term debt
    
    
    
    
    
    
    (17.5
    )Payments of long-term debt
    
    
    (15.0
    )
    
    
    (22.3
    )Net cash provided by (used for) financing activities
    
    
    22.1
    
    
    
    (136.1
    )Net (decrease) increase in cash and cash equivalents
    
    
    (15.0
    )
    
    
    90.7Cash and cash equivalents:Beginning of period
    
    
    98.9
    
    
    
    30.1End of period
    
    $
    83.9
    
    
    $
    120.8Supplemental disclosures of cash flow information:Cash paid during the year for:Interest, including capitalized interest of $0.3 and $2.8, respectively
    
    $
    119.9
    
    
    $
    129.6Income taxes
    
    $
    
    
    
    $
    6.8
  6




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##### 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 September 30, 2007, and the related statements of operations, stockholders equity and
cash flows for the periods ended September 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 September
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 notes to the consolidated financial statements
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 9, 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
 September
    
    December 31,(Unaudited, in millions)
    
    30,2007
    
    2006At lower of cost or market:Raw materials
    
    $
    57.3
    
    
    $
    87.7Work in process
    
    
    18.0
    
    
    
    20.1Finished goods
    
    
    155.9
    
    
    
    123.0Mill stores and other supplies
    
    
    149.0
    
    
    
    132.0380.2
    
    
    
    362.8Excess of current cost over LIFO inventory value
    
    
    (13.4
    )
    
    
    (13.0
    )$
    366.8
    
    
    $
    349.8
 7




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##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 3.
    
    Timberlands Held for SaleWe are currently marketing for sale approximately 17,600 acres of timberlands in the United
States and Canada. The sale of these timberlands is expected to be completed in 2007 and 2008.
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. Included in deferred income taxes are $1.1 million and $4.8 million at September 30, 2007
and December 31, 2006, respectively, of deferred tax liabilities associated with these
timberlands held for sale.During the three months ended September 30, 2007, we sold approximately 11,400 acres of
timberlands and other assets for proceeds of approximately $19.2 million. During the nine
months ended September 30, 2007, we sold approximately 119,200 acres of timberlands and other
assets for proceeds of approximately $166.6 million.During the three months ended September 30, 2006, we sold approximately 23,000 acres of
timberlands and other assets for proceeds of approximately $58.4 million. During the nine
months ended September 30, 2006, we sold approximately 519,000 acres of timberlands, our Dégelis
and Baker Brook sawmills and other assets for proceeds of approximately $296.5 million.4.
    
    Accumulated Other Comprehensive LossThe components of Accumulated other comprehensive loss in the Consolidated Balance Sheets are
as follows:
 September 30,
    
    December 31,(Unaudited, in millions)
    
    2007
    
    2006Unrealized prior service costs (1)
    
    $
    (25.4
    )
    
    $
    (23.2
    )Unrealized actuarial gains and losses (2)
    
    
    (330.2
    )
    
    
    (358.9
    )Unrealized transition obligation(3)
    
    
    (0.1
    )
    
    
    (0.1
    )Foreign currency translation (4)
    
    
    (18.7
    )
    
    
    12.0Unrealized loss on hedging transactions (5)
    
    
    
    
    
    
    (0.8
    )$
    (374.4
    )
    
    $
    (371.0
    )
 
 (1)
    
    Net of deferred tax benefit of $4.2 million and $1.5 million, respectively. Net of
minority interest of $2.4 million and $2.4 million, respectively.(2)
    
    Net of deferred tax benefit of $103.1 million and $109.6 million, respectively. Net of
minority interest of $5.2 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.(5)
    
    Net of a deferred tax benefit of $0.5 million for 2006. 8




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 5.
    
    Loss Per ShareThe information required to compute net loss per basic and diluted share is as follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Basic weighted-average number of common
shares outstanding
    
    
    57.5
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4Effect of potentially dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted-average number of common
shares outstanding
    
    
    57.5
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
  6.
    
    Other (Expense) Income, NetOther (expense) income, net in the Consolidated Statements of Operations includes the
following:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Foreign exchange (losses) gains
    
    $
    (17.4
    )
    
    $
    0.7
    
    
    $
    (37.0
    )
    
    $
    (2.3
    )(Losses) earnings from equity method investments
    
    
    (1.9
    )
    
    
    1.0
    
    
    
    (4.6
    )
    
    
    5.2Interest income
    
    
    2.2
    
    
    
    2.0
    
    
    
    5.7
    
    
    
    4.1Charges for repurchase of debt (Note 11)
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )Miscellaneous income, net
    
    
    1.0
    
    
    
    1.7
    
    
    
    1.1
    
    
    
    3.2$
    (16.1
    )
    
    $
    4.9
    
    
    $
    (34.8
    )
    
    $
    9.7
 7.
    
    Impairment and Other Related ChargesGoodwill ImpairmentDuring the third quarter of 2006, we realigned 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 and goodwill reporting
units changed. Prior to the reallocation of goodwill to our new reporting units, we performed
an interim test for impairment. As a result of this review, we recorded a charge of $200.0
million attributable to an impairment of goodwill at our Thunder Bay facility. Additional
information regarding this impairment charge can be found in our Annual Report on Form 10-K
filed on March 13, 2007.
 9




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Asset ImpairmentBased on the continued decline of North American newsprint consumption through the third quarter
of 2006, we could no longer foresee the restart of paper machine No. 3 at our Thunder Bay
facility, which had been idled since 2003. Accordingly, we recorded a non-cash asset impairment
charge of $18.9 million in the third quarter of 2006 to write down the carrying value of the
machine to its estimated fair value, which was determined using the discounted cash flow method.During the third quarter of 2006, we decided to close our Benton Harbor operation. This close
resulted in a review of the facilitys long-lived assets for impairment. As a result, we
recorded a non-cash asset impairment charge of $23.5 million. An additional $4.0 million was
also recorded for lease costs, contract termination costs and severance. Inventory write-downs
totaling $0.4 million were recorded in cost of sales.8.
    
    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 nine months ended September 30, 2007 and 2006:Pension Plans:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Components of net periodic benefit cost:Service cost
    
    $
    9.1
    
    
    $
    10.5
    
    
    $
    27.4
    
    
    $
    32.4Interest cost
    
    
    32.8
    
    
    
    29.9
    
    
    
    94.7
    
    
    
    89.1Expected return on plan assets
    
    
    (35.1
    )
    
    
    (30.8
    )
    
    
    (100.6
    )
    
    
    (91.0
    )Amortization of prior service cost
    
    
    1.2
    
    
    
    1.3
    
    
    
    3.5
    
    
    
    4.1Amortization of net actuarial loss
    
    
    6.8
    
    
    
    8.0
    
    
    
    20.6
    
    
    
    25.7Special termination benefits
    
    
    2.7
    
    
    
    
    
    
    
    6.7
    
    
    
    Curtailment and settlement losses, net
    
    
    5.1
    
    
    
    8.8
    
    
    
    12.5
    
    
    
    13.4Net periodic benefit cost
    
    $
    22.6
    
    
    $
    27.7
    
    
    $
    64.8
    
    
    $
    73.7
 OPEB Plans:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Components of net periodic benefit cost:Service cost
    
    $
    0.5
    
    
    $
    1.1
    
    
    $
    1.7
    
    
    $
    3.1Interest cost
    
    
    3.2
    
    
    
    3.9
    
    
    
    9.3
    
    
    
    11.9Amortization of prior service credit
    
    
    (2.8
    )
    
    
    (1.5
    )
    
    
    (8.5
    )
    
    
    (4.5
    )Amortization of net actuarial loss
    
    
    1.6
    
    
    
    2.1
    
    
    
    4.8
    
    
    
    6.1Curtailment and settlement gains
    
    
    
    
    
    
    (5.5
    )
    
    
    (3.5
    )
    
    
    (5.7
    )Net periodic benefit cost
    
    $
    2.5
    
    
    $
    0.1
    
    
    $
    3.8
    
    
    $
    10.9
  10




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Events Impacting Net Periodic Benefit Cost for the Three and Nine Months Ended September
30, 2007
      Events Impacting Net Periodic Benefit Cost for the Three and Nine Months Ended September
30, 2006
     11




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  9.
    
    Income TaxesThe income tax benefit/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
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Loss before income taxes, minority
interests and cumulative effect of
accounting change
    
    $
    (145.5
    )
    
    $
    (225.2
    )
    
    $
    (218.8
    )
    
    $
    (211.9
    )Expected income tax benefit
    
    
    50.9
    
    
    
    78.9
    
    
    
    76.6
    
    
    
    74.2Increase (decrease) in income taxes
resulting from:Valuation allowance (1)
    
    
    (34.1
    )
    
    
    (18.2
    )
    
    
    (71.4
    )
    
    
    (73.8
    )Tax reserves (2)
    
    
    5.3
    
    
    
    17.5
    
    
    
    5.3
    
    
    
    17.5Goodwill (3)
    
    
    
    
    
    
    (78.6
    )
    
    
    
    
    
    
    (78.6
    )Foreign exchange
    
    
    (16.3
    )
    
    
    7.7
    
    
    
    (33.6
    )
    
    
    (13.6
    )State income taxes, net of
federal income tax benefit
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (2.1
    )Foreign taxes (4)
    
    
    (2.1
    )
    
    
    (7.2
    )
    
    
    8.7
    
    
    
    39.6Other, net
    
    
    (3.8
    )
    
    
    10.0
    
    
    
    (4.9
    )
    
    
    7.3Income tax benefit (provision)
    
    $
    0.4
    
    
    $
    9.9
    
    
    $
    (19.2
    )
    
    $
    (29.5
    )
 
 (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)
    
    Tax reserves of $5.3 million and $17.5 million were reversed during the three and
nine months ended September 30, 2007 and the three and nine months ended September 30,
2006, respectively, as the statute of limitations associated with those tax matters had
expired.(3)
    
    We recorded a goodwill impairment charge of $200.0 million during the three and nine
months ended September 30, 2006. No tax benefit is provided by this charge.(4)
    
    Foreign taxes benefited by $0.3 million and $4.7 million in the three and nine months
ended September 30, 2007 and $15.2 million in the nine months ended September 30, 2006 due
to capital gains treatment of certain asset sales.  12




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  10.
    
    Financial InstrumentsBowater utilizes certain derivative instruments to enhance its ability to manage risk relating
to cash flow exposure. Derivative instruments are entered into for periods consistent with
related underlying cash flow exposures and do not constitute positions independent of those
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.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 September 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 $0.2 million and $0.9 million of pre-tax losses were recognized for the three and
nine months ended September 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 $0.6 million and $0.5 million
of pre-tax losses were recognized for the three and nine months ended September 30, 2007,
respectively, for contracts that we entered into in 2006 and 2007 to economically hedge
forecasted transactions expected to occur through September 2008.
 13




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  RangeOfUSD/CAD andUSD/GBPNotional
    
    
    
    
    
    Exchange Rates(Unaudited, in millions of U.S. dollars
    
    Amountof
    
    Asset /(Liability)
    
    and Natural Gasexcept rates and prices)
    
    Derivatives
    
    Fair Market Value
    
    Index PricesAs of September 30, 2007:Foreign Currency Exchange Agreements:British pound sterlingDue in 2007
    
    $
    20.1
    
    
    $
    (0.7
    )
    
    $
    1.9553  1.9976Natural Gas Swap Agreements:Due in 2007
    
    $
    4.7
    
    
    $
    (0.7
    )
    
    $
    6.34  9.53Due in 2008
    
    $
    4.5
    
    
    $
    (0.1
    )
    
    $
    6.34  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
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006(Gains) losses reclassified
to earnings on matured cash
flow hedges
    
    $
    
    
    
    $
    (5.0
    )
    
    $
    1.1
    
    
    $
    (34.2
    )Unrealized gains for change
in value on outstanding cash
flow hedges
    
    
    
    
    
    
    0.5
    
    
    
    0.2
    
    
    
    4.9
    
    
    
    (4.5
    )
    
    
    1.3
    
    
    
    (29.3
    )Income tax benefit (provision)
    
    
    
    
    
    
    1.7
    
    
    
    (0.5
    )
    
    
    11.1Net (increase) decrease in
Accumulated other
comprehensive loss
    
    $
    
    
    
    $
    (2.8
    )
    
    $
    0.8
    
    
    $
    (18.2
    )
 14




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 11.
    
    Long-term and Short-term DebtIn order for Bowater to maintain compliance with our U.S. and Canadian credit facilities
subsequent to the consummation of the combination with Abitibi-Consolidated Inc. (Abitibi)
(See Note 16), these facilities were amended in July 2007. The amendment permits a structure
that allows AbitibiBowater to become a party to the credit facilities. All existing debt
structures remain intact subsequent to consummation of the merger; however, there are
restrictions on the amount of cash that can be transferred from Bowater to AbitibiBowater.On November 2, 2007, we obtained an amendment to our US and Canadian credit facilities allowing
us to adjust 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) for non-recurring gains or losses without limitation. In addition, the
minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset
dispositions) to interest expense was lowered from 2.00 to 1 to 1.50 to 1 effective October 1,
2007, increasing gradually back up to 2.00 to 1 by October 1, 2008.During August 2006, we repurchased approximately $15.6 million of our $250 million
floating rate notes due March 15, 2010 for total cash consideration of approximately $15.8
million or a 1.4% premium over face value. During September 2006, we repurchased
approximately $1.9 million of our $250 million 9% notes due August 1, 2009 for total cash
consideration of approximately $2.0 million or a 3.7% premium over face value. In
conjunction with these transactions, we recorded charges of approximately $0.5 million for
premiums, fees and unamortized deferred financing fees. These charges for the early
extinguishment of debt are included in Other (expense) income, net on the accompanying
Consolidated Statement of Operations.12.
    
    Commitments and ContingenciesBowater is involved in various legal proceedings relating to contracts, commercial disputes,
taxes, environmental issues, employment and workers compensation claims and other matters. We
periodically review the status of these proceedings with both inside and outside counsel. We
believe that the ultimate disposition of these matters will not have a material adverse effect
on our financial condition, but it could have a material adverse effect on the results of
operations in a given quarter or the year.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 with Abitibi. 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 AbitibiBowater believes this claim is entirely without merit and intends to contest this
matter.On September 7, 2007, BCFPI received a decision in an arbitration related to the 1998 sale to
Weyerhaeuser Company (Weyerhaeuser) of Bowaters former pulp and paper facility in Dryden,
Ontario. As reported in our Annual Report on Form 10-K, BCFPI and Weyerhaeuser had been
arbitrating a claim regarding the cost of certain environmental matters related to the mill. The
arbitrators awarded Weyerhaeuser approximately $42.9 million (CDN $44.0 million), including
interest. As a result of the arbitrators decision, which is binding upon Bowater and not
subject to appeal, we recorded a pre-tax charge of $28.4 million (CDN $29.1 million) during the
three and nine months ended September 30, 2007. We had previously established a reserve of
approximately $14.5 million (CDN $14.9 million) in
connection with these environmental matters at
the time of the sale.There have been no other material developments to those legal proceedings described in our
Annual Report on Form 10-K filed on March 13, 2007.
 15




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 13.
    
    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.
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Stock options
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.8
    
    
    $
    0.4Restricted stock units
    
    
    2.4
    
    
    
    2.9
    
    
    
    9.8
    
    
    
    4.8EPRs
    
    
    (0.8
    )
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (3.4
    )Stock-based compensation expense
    
    $
    1.8
    
    
    $
    2.6
    
    
    $
    10.1
    
    
    $
    1.8
 16




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 The following table details the tax (benefit) provision by award:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2007
    
    2006
    
    2007
    
    2006Stock options
    
    $
    (0.1
    )
    
    $
    
    
    
    $
    (0.4
    )
    
    $
    (0.1
    )Restricted stock units
    
    
    (0.6
    )
    
    
    (0.7
    )
    
    
    (2.6
    )
    
    
    (1.1
    )EPRs
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.8Tax benefit
    
    $
    (0.5
    )
    
    $
    (0.6
    )
    
    $
    (2.9
    )
    
    $
    (0.4
    )
 Stock OptionsOn September 26, 2007, the terms of all outstanding stock options granted in 2006 (315,848 stock
options) were modified to allow for accelerated vesting in full upon a grantees involuntary
termination without cause. The modification was treated as a cancellation of the 2006 awards
and a new grant of the modified awards. We have reversed cumulative compensation expense
recognized through the date of the modification for those stock option grants for which future
vesting was considered improbable under the original terms of the grant, but considered probable
under the modified terms (Type III Modifications). Subsequent to the date of modification, we
began recognizing compensation expense associated with the 24,850 stock options identified as
Type III Modifications over the requisite service periods (based on the expected vesting date
for each applicable grantee). Most of the modified stock options (290,998 stock options) were
granted to employees who will continue to be employed by Bowater subsequent to the combination
with Abitibi. Future vesting of those stock options was considered probable under the original
terms of the grant and is still considered probable under the modified terms (Type I
Modification). As such, the original compensation expense will continue to be recognized over
the requisite service period, which did not change as a result of the modification. The
modification resulted in a net decrease of $0.1 million of compensation expense recognized
during the three and nine months ended September 30, 2007.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 nine months ended September
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
    
    
    (255
    )
    
    
    42.72Outstanding at September 30, 2007
    
    
    4,799
    
    
    $
    43.25
    
    
    
    4.4
    
    
    $
    Exercisable at September 30, 2007
    
    
    4,505
    
    
    $
    44.29
    
    
    
    4.1
    
    
    $
    
 17




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##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 In accordance with SFAS 123R, we estimated the fair value of each stock option granted during
the nine months ended September 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 nine months ended September 30, 2007 was $9.08.During the three and nine months ended September 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 September 30, 2007, there was $1.6 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 1.6 years.Restricted Stock UnitsOn September 26, 2007, the terms of all outstanding
performance-based and service-based restricted stock units (RSUs)
granted in 2006 except the awards granted on May 10, 2006 that cliff vest over 20 months were
modified (205,707 RSUs) to allow for accelerated vesting in full upon a grantees involuntary
termination without cause and to remove any performance conditions from the awards. The
modification was treated as a cancellation of the 2006 awards and a new grant of the modified
awards. We have reversed cumulative compensation expense recognized through the date of
modification for those RSUs identified as Type III Modifications. Subsequent to the date of
modification, we began recognizing compensation expense associated with the 64,929 RSUs
identified as Type III Modifications over the requisite service periods (based on the expected
vesting date for each applicable grantee). Most of the modified RSUs (140,778 RSUs) were
granted to employees who will continue to be employed by Bowater subsequent to the combination
with Abitibi. As such, those RSUs are Type I Modifications, and the original compensation
expense will continue to be recognized over the original requisite service period. The
modification resulted in a net decrease of $0.4 million of compensation expense recognized
during the three and nine months ended September 30, 2007.On January 30, 2007, we granted 327,945 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 vested upon closing of the merger of Bowater and Abitibi. Accounting guidance dictates
that, for purposes of recognizing compensation expense for this type of award, the business
combination with Abitibi was not considered probable until the date the merger was
consummated. As vesting of these awards was predicated upon close of the merger, which occurred
on October 29, 2007, no compensation expense was recorded for these awards in the three and nine
months ended September 30, 2007. As a result of the consummation of the merger, compensation
expense of $1.0 million was recognized on October 29, 2007 and will be reflected in our results
for the year ended December 31, 2007. These awards are included in our outstanding RSUs at the
end of the period.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 merger of Bowater and Abitibi. 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 nine months ended September 30,
2007, nor were these awards included in our outstanding RSUs at the end of the period.On June 27, 2007, we granted 1,897 RSUs, all of which are service-based awards that cliff vest
after three years.
 18




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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 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 nine months ended
September 30, 2007, is presented below:
 Weighted AverageFair Value atNumber Of Units
    
    Modification or(Unaudited)
    
    (000s)
    
    Grant DateOutstanding at December 31, 2006
    
    
    665
    
    
    $
    24.92Granted during the period
    
    
    366
    
    
    
    27.84Vested during the period
    
    
    (64
    )
    
    
    26.38Canceled during the period
    
    
    (13
    )
    
    
    26.83Outstanding at September 30, 2007
    
    
    954
    
    
    $
    25.92
 As of September 30, 2007, there was $8.8 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 one year. The total fair value of restricted stock units vested
during the first nine months of 2007 was $1.4 million.Equity Participation RightsEPRs confer the right to receive cash based on the appreciation of Bowaters (and subsequent to
the merger, AbitibiBowater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 (adjusted by the Bowater exchange ratio of 0.52 on October
29, 2007). 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 September 30, 2007, the fair value of our EPRs liability is $0.1 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.14.
    
    Off-Balance Sheet Debt GuaranteesIn connection with our 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 $6.6 million of the investor notes
principal balance at September 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 $30.4 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.
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BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 15.
    
    Segment InformationWe manage our business based on the products that we manufacture and sell to external customers.
Our reportable segments are coated papers, specialty papers, newsprint, market pulp, and
lumber.None of the income or loss items following Operating loss 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 allocate
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 nine
months ended September 30, 2007 and 2006:
 Coated
    
    Specialty
    
    
    
    
    
    Market
    
    
    
    
    
    Corporate
    
    Consolidated(Unaudited, in millions)
    
    
    
    
    
    Papers
    
    Papers
    
    Newsprint
    
    Pulp
    
    Lumber
    
    and Other
    
    TotalSalesThird quarter
    
    
    2007
    
    
    $
    152.4
    
    
    $
    141.3
    
    
    $
    295.8
    
    
    $
    159.7
    
    
    $
    62.3
    
    
    $
    3.2
    
    
    $
    814.7Third quarter
    
    
    2006
    
    
    
    154.4
    
    
    
    153.9
    
    
    
    349.1
    
    
    
    144.2
    
    
    
    71.1
    
    
    
    3.2
    
    
    
    875.9Year to date
    
    
    2007
    
    
    
    410.3
    
    
    
    433.9
    
    
    
    911.7
    
    
    
    430.5
    
    
    
    189.1
    
    
    
    9.4
    
    
    
    2,384.9Year to date
    
    
    2006
    
    
    
    463.5
    
    
    
    426.6
    
    
    
    1,089.9
    
    
    
    410.3
    
    
    
    261.6
    
    
    
    16.6
    
    
    
    2,668.5Operating income (loss)(1)Third quarter
    
    
    2007
    
    
    $
    13.1
    
    
    $
    (19.8
    )
    
    $
    (39.5
    )
    
    $
    29.3
    
    
    $
    (10.6
    )
    
    $
    (54.6
    )
    
    $
    (82.1
    )Third quarter
    
    
    2006
    
    
    
    15.6
    
    
    
    (1.4
    )
    
    
    30.9
    
    
    
    17.4
    
    
    
    (17.4
    )
    
    
    (224.4
    )
    
    
    (179.3
    )Year to date
    
    
    2007
    
    
    
    26.6
    
    
    
    (39.6
    )
    
    
    (55.2
    )
    
    
    66.5
    
    
    
    (31.7
    )
    
    
    (8.7
    )
    
    
    (42.1
    )Year to date
    
    
    2006
    
    
    
    60.3
    
    
    
    (26.8
    )
    
    
    67.1
    
    
    
    16.1
    
    
    
    (20.9
    )
    
    
    (167.9
    )
    
    
    (72.1
    )
 (1)
    
    Corporate and other operating loss includes net gains from dispositions of assets of
$17.1 million and $54.0 million for the three months ended September 30, 2007 and 2006,
respectively, and $139.6 million and $154.5 million for the nine months ended September 30,
2007 and 2006, respectively. Corporate and other operating loss
includes an arbitration award of $28.4 million for the three and nine months ended September 30, 2007.
Corporate and other operating loss also includes asset impairment and other related charges
of $46.8 million and goodwill impairment of $200.0 million for the three and nine months
ended September 30, 2006. 16.
    
    Combination with Abitibi-Consolidated Inc.On October 29, 2007, Bowater and Abitibi combined in an all-stock merger of equals (the
combined company, which was formed in connection with the combination, is AbitibiBowater Inc.).
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).
In connection with the review and approval of the transaction by the U.S. Department of Justice,
AbitibiBowater agreed, among other things, to divest one newsprint mill, Abitibis mill in
Snowflake, Arizona. Abitibi and Bowater continued to operate separately until October 29, 2007.
 20




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##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 On October 29, 2007, each share of Bowater common stock issued and outstanding was exchanged for
0.52 of a share of AbitibiBowater common stock and an amendment to the articles of Bowater
Canada was filed so that each Bowater exchangeable share issued and outstanding will be
exchanged into 0.52 of a Bowater Canada exchangeable share, which will be exchangeable for
shares of AbitibiBowater common stock. Bowaters treasury stock was canceled. Bowaters
outstanding stock options, RSUs and EPRs, whether vested or unvested, were converted into stock
options, RSUs and EPRs with respect to AbitibiBowaters common stock at an exchange ratio of
0.52. Similarly, the exercise price of the converted stock options or base prices of the EPRs
were adjusted by dividing the price by the Bowater exchange ratio of 0.52.In connection with this combination, we approved a retention and severance program for
approximately 320 Bowater employees who could possibly be impacted by the combination with
Abitibi. This program provides a retention bonus for employees who remain with Bowater through
the closing of the combination and an additional retention bonus for employees who remain with
Bowater for a transition period following the closing of the combination. The costs associated
with these programs are expensed as incurred. Also in connection with the combination, we have
capitalized $17.5 million of direct acquisition costs in our
Consolidated Balance Sheet as of September 30, 2007 as Bowater
is the accounting acquirer of Abitibi.  Subsequent to the merger, AbitibiBowater is considered to be a continuation of Bowater
for accounting purposes and therefore will become the accounting acquirer of Abitibi.
 21




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##### 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
   22




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BOWATER INCORPORATED
   Business Strategy and Outlook
   23




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BOWATER INCORPORATED
   Business and Financial Review
 Consolidated Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeSales
    
    $
    814.7
    
    
    $
    875.9
    
    
    $
    (61.2
    )
    
    $
    2,384.9
    
    
    $
    2,668.5
    
    
    $
    (283.6
    )Operating loss
    
    
    (82.1
    )
    
    
    (179.3
    )
    
    
    97.2
    
    
    
    (42.1
    )
    
    
    (72.1
    )
    
    
    30.0Significant items that impacted operating loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (30.4
    )
    
    
    
    
    
    
    
    
    
    $
    (75.9
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    (30.8
    )
    
    
    
    
    
    
    
    
    
    
    (207.7
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    (61.2
    )
    
    
    
    
    
    
    
    
    
    
    (283.6
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (14.1
    )
    
    
    
    
    
    
    
    
    
    
    135.5Employee termination costs  manufacturing
    
    
    
    
    
    
    
    
    
    
    (6.2
    )
    
    
    
    
    
    
    
    
    
    
    (15.2
    )Change in total manufacturing costs
and depreciation, amortization,
and cost of timber
harvested
    
    
    
    
    
    
    
    
    
    
    (20.3
    )
    
    
    
    
    
    
    
    
    
    
    120.3Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    7.8Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (6.9
    )
    
    
    
    
    
    
    
    
    
    
    (16.8
    )Employee termination costs  selling
and administrative
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Arbitration
award
    
    
    
    
    
    
    
    
    
    
    (28.4
    )
    
    
    
    
    
    
    
    
    
    
    (28.4
    )Impairment and other related charges
    
    
    
    
    
    
    
    
    
    
    246.4
    
    
    
    
    
    
    
    
    
    
    
    246.4Gain on disposition of assets
    
    
    
    
    
    
    
    
    
    
    (36.9
    )
    
    
    
    
    
    
    
    
    
    $
    (14.9
    )$
    97.2
    
    
    
    
    
    
    
    
    
    
    $
    30.0
 Three months ended September 30, 2007 versus September 30, 2006
 Sales
 24




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BOWATER INCORPORATED
 Operating loss
 Impairment and other related charges
  Product pricing
 Shipment volume
 Manufacturing costs
 Employee termination costs
 Selling and administrative expenses
 Arbitration
award
 Gain on disposition of assets
 Nine months ended September 30, 2007 versus September 30, 2006
 Sales
 Operating loss
 Impairment and other related charges
 25




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##### Table of Contents



BOWATER INCORPORATED
   Product pricing
 Shipment volume
 Manufacturing costs
 Employee termination costs
 Distribution costs
 Selling and administrative expenses
 Arbitration
award
 Gain on disposition of assets
 Segment Results of Operations
  26




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BOWATER INCORPORATED
 Coated Papers
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per short ton)
    
    $
    711
    
    
    $
    762
    
    
    $
    (51
    )
    
    $
    704
    
    
    $
    777
    
    
    $
    (73
    )Shipments (thousands of short tons)
    
    
    214.2
    
    
    
    202.6
    
    
    
    11.6
    
    
    
    582.8
    
    
    
    596.8
    
    
    
    (14.0
    )Downtime (thousands of short tons)
    
    
    4.5
    
    
    
    10.1
    
    
    
    (5.6
    )
    
    
    28.3
    
    
    
    46.1
    
    
    
    (17.8
    )Inventory at end of period (thousands of short tons)
    
    
    32.6
    
    
    
    40.0
    
    
    
    (7.4
    )
    
    
    32.6
    
    
    
    40.0
    
    
    
    (7.4
    )(In millions)Sales
    
    $
    152.4
    
    
    $
    154.4
    
    
    $
    (2.0
    )
    
    $
    410.3
    
    
    $
    463.5
    
    
    $
    (53.2
    )Segment income
    
    
    13.1
    
    
    
    15.6
    
    
    
    (2.5
    )
    
    
    26.6
    
    
    
    60.3
    
    
    
    (33.7
    )Significant items that impact segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (10.7
    )
    
    
    
    
    
    
    
    
    
    $
    (40.9
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    8.7
    
    
    
    
    
    
    
    
    
    
    
    (12.3
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    (53.2
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    17.7Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    2.0$
    (2.5
    )
    
    
    
    
    
    
    
    
    
    $
    (33.7
    )
 Three months ended September 30, 2007 versus September 30, 2006
    27




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BOWATER INCORPORATED
 Nine months ended September 30, 2007 versus September 30, 2006
   Coated Papers Third Party Data:
 Specialty Papers
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per short ton)
    
    $
    658
    
    
    $
    679
    
    
    $
    (21
    )
    
    $
    654
    
    
    $
    667
    
    
    $
    (13
    )Shipments (thousands of short tons)
    
    
    214.9
    
    
    
    226.8
    
    
    
    (11.9
    )
    
    
    663.1
    
    
    
    639.4
    
    
    
    23.7Downtime (thousands of short tons)
    
    
    36.5
    
    
    
    3.0
    
    
    
    33.5
    
    
    
    50.9
    
    
    
    5.0
    
    
    
    45.9Inventory at end of period (thousands of short tons)
    
    
    67.6
    
    
    
    52.7
    
    
    
    14.9
    
    
    
    67.6
    
    
    
    52.7
    
    
    
    14.9(In millions)Sales
    
    $
    141.3
    
    
    $
    153.9
    
    
    $
    (12.6
    )
    
    $
    433.9
    
    
    $
    426.6
    
    
    $
    7.3Segment loss
    
    
    (19.8
    )
    
    
    (1.4
    )
    
    
    (18.4
    )
    
    
    (39.6
    )
    
    
    (26.8
    )
    
    
    (12.8
    )Significant items that
impact segment loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (6.4
    )
    
    
    
    
    
    
    
    
    
    $
    (11.7
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    (6.2
    )
    
    
    
    
    
    
    
    
    
    
    19.0Change in total sales
    
    
    
    
    
    
    
    
    
    
    (12.6
    )
    
    
    
    
    
    
    
    
    
    
    7.3Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (6.6
    )
    
    
    
    
    
    
    
    
    
    
    (17.9
    )Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (3.9
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.7$
    (18.4
    )
    
    
    
    
    
    
    
    
    
    $
    (12.8
    )
 28




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BOWATER INCORPORATED
 Three months ended September 30, 2007 versus September 30, 2006
   Nine months ended September 30, 2007 versus September 30, 2006
    Specialty Papers Third Party Data:
 29




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##### Table of Contents



BOWATER INCORPORATED
 Newsprint
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per metric ton)
    
    $
    586
    
    
    $
    643
    
    
    $
    (57
    )
    
    $
    603
    
    
    $
    635
    
    
    $
    (32
    )Shipments (thousands of metric tons)
    
    
    504.7
    
    
    
    542.5
    
    
    
    (37.8
    )
    
    
    1,511.9
    
    
    
    1,716.9
    
    
    
    (205.0
    )Downtime (thousands of metric tons)
    
    
    66.8
    
    
    
    27.2
    
    
    
    39.6
    
    
    
    186.3
    
    
    
    61.5
    
    
    
    124.8Inventory at end of period (thousands of metric tons)
    
    
    104.1
    
    
    
    77.5
    
    
    
    26.6
    
    
    
    104.1
    
    
    
    77.5
    
    
    
    26.6(In millions)Sales
    
    $
    295.8
    
    
    $
    349.1
    
    
    $
    (53.3
    )
    
    $
    911.7
    
    
    $
    1,089.9
    
    
    $
    (178.2
    )Segment (loss) income
    
    
    (39.5
    )
    
    
    30.9
    
    
    
    (70.4
    )
    
    
    (55.2
    )
    
    
    67.1
    
    
    
    (122.3
    )Significant items that
impact segment (loss) income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (28.9
    )
    
    
    
    
    
    
    
    
    
    $
    (47.5
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    (24.4
    )
    
    
    
    
    
    
    
    
    
    
    (130.7
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    (53.3
    )
    
    
    
    
    
    
    
    
    
    
    (178.2
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (15.3
    )
    
    
    
    
    
    
    
    
    
    
    53.3Distribution costs
    
    
    
    
    
    
    
    
    
    
    (3.0
    )
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    3.3$
    (70.4
    )
    
    
    
    
    
    
    
    
    
    $
    (122.3
    )
 Three months ended September 30, 2007 versus September 30, 2006
   30




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BOWATER INCORPORATED
 Nine months ended September 30, 2007 versus September 30, 2006
    Newsprint Third Party Data:
 31




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BOWATER INCORPORATED
 Market Pulp
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per metric ton)
    
    $
    672
    
    
    $
    601
    
    
    $
    71
    
    
    $
    650
    
    
    $
    562
    
    
    $
    88Shipments (thousands of metric tons)
    
    
    237.7
    
    
    
    239.8
    
    
    
    (2.1
    )
    
    
    661.9
    
    
    
    729.5
    
    
    
    (67.6
    )Downtime (thousands of metric tons)
    
    
    8.9
    
    
    
    3.4
    
    
    
    5.5
    
    
    
    32.0
    
    
    
    22.1
    
    
    
    9.9Inventory at end of period (thousands of metric tons)
    
    
    51.4
    
    
    
    59.1
    
    
    
    (7.7
    )
    
    
    51.4
    
    
    
    59.1
    
    
    
    (7.7
    )(In millions)Sales
    
    $
    159.7
    
    
    $
    144.2
    
    
    $
    15.5
    
    
    $
    430.5
    
    
    $
    410.3
    
    
    $
    20.2Segment income
    
    
    29.3
    
    
    
    17.4
    
    
    
    11.9
    
    
    
    66.5
    
    
    
    16.1
    
    
    
    50.4Significant items that
impact segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    16.1
    
    
    
    
    
    
    
    
    
    
    $
    54.7Shipment volume
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (34.5
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    15.5
    
    
    
    
    
    
    
    
    
    
    
    20.2Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    
    
    
    
    34.1Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    (3.0
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.9
    )$
    11.9
    
    
    
    
    
    
    
    
    
    
    $
    50.4
 Three months ended September 30, 2007 versus September 30, 2006
   Nine months ended September 30, 2007 versus September 30, 2006
  32




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BOWATER INCORPORATED
  Market Pulp Third Party Data:
 Lumber
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeAverage price (per mbf)
    
    $
    302
    
    
    $
    297
    
    
    $
    5
    
    
    $
    285
    
    
    $
    329
    
    
    $
    (44
    )Shipments (millions of mbf)
    
    
    206.5
    
    
    
    239.4
    
    
    
    (32.9
    )
    
    
    663.0
    
    
    
    795.5
    
    
    
    (132.5
    )Downtime (millions of mbf)
    
    
    75.8
    
    
    
    69.4
    
    
    
    6.4
    
    
    
    144.4
    
    
    
    181.3
    
    
    
    (36.9
    )Inventory at end of period (millions of mbf)
    
    
    43.4
    
    
    
    54.4
    
    
    
    (11.0
    )
    
    
    43.4
    
    
    
    54.4
    
    
    
    (11.0
    )(In millions)Sales
    
    $
    62.3
    
    
    $
    71.1
    
    
    $
    (8.8
    )
    
    $
    189.1
    
    
    $
    261.6
    
    
    $
    (72.5
    )Segment loss
    
    
    (10.6
    )
    
    
    (17.4
    )
    
    
    6.8
    
    
    
    (31.7
    )
    
    
    (20.9
    )
    
    
    (10.8
    )Significant items that
impact segment loss:Product pricing
    
    
    
    
    
    
    
    
    
    $
    0.5
    
    
    
    
    
    
    
    
    
    
    $
    (29.8
    )Shipment volume
    
    
    
    
    
    
    
    
    
    
    (9.3
    )
    
    
    
    
    
    
    
    
    
    
    (42.7
    )Change in total sales
    
    
    
    
    
    
    
    
    
    
    (8.8
    )
    
    
    
    
    
    
    
    
    
    
    (72.5
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    11.1
    
    
    
    
    
    
    
    
    
    
    
    45.4Distribution costs
    
    
    
    
    
    
    
    
    
    
    4.4
    
    
    
    
    
    
    
    
    
    
    
    15.6Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.7$
    6.8
    
    
    
    
    
    
    
    
    
    
    $
    (10.8
    )
 Three months ended September 30, 2007 versus September 30, 2006
   33




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BOWATER INCORPORATED
 Nine months ended September 30, 2007 versus September 30, 2006
   Lumber Third Party Data:
 Corporate and Other
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeSales
    
    $
    3.2
    
    
    $
    3.2
    
    
    $
    
    
    
    $
    9.4
    
    
    $
    16.6
    
    
    $
    (7.2
    )Operating (loss) income:Arbitration
award
    
    $
    (28.4
    )
    
    $
    
    
    
    $
    (28.4
    )
    
    $
    (28.4
    )
    
    $
    
    
    
    $
    (28.4
    )Net gain on disposition of assets
    
    
    17.1
    
    
    
    54.0
    
    
    
    (36.9
    )
    
    
    139.6
    
    
    
    154.5
    
    
    
    (14.9
    )Impairment and other related charges
    
    
    
    
    
    
    (246.4
    )
    
    
    246.4
    
    
    
    
    
    
    
    (246.4
    )
    
    
    246.4Employee termination costs
    
    
    (8.1
    )
    
    
    (6.9
    )
    
    
    (1.2
    )
    
    
    (27.3
    )
    
    
    (11.3
    )
    
    
    (16.0
    )Corporate and other
    
    
    (35.2
    )
    
    
    (25.1
    )
    
    
    (10.1
    )
    
    
    (92.6
    )
    
    
    (64.7
    )
    
    
    (27.9
    )
 Arbitration
award
 Net gain on disposition of assets :
 34




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BOWATER INCORPORATED
 Impairment and other related charges
 Employee termination costs
 Corporate and other
 Interest Expense
  Income Taxes
  35




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BOWATER INCORPORATED
  Liquidity and Capital Resources
  Cash (Used for) Provided by Operations
   Cash Provided by Investing Activities
  36




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BOWATER INCORPORATED
 Cash Providd by (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
    
    
    $
    72.0
    
    
    $
    275.0
    
    
    05/11
    
    
    7.8
    %Canadian Credit Agreement
    
    
    165.0
    
    
    
    
    
    
    
    131.5
    
    
    05/08
    
    
    n/a$
    580.0
    
    
    $
    72.0
    
    
    $
    406.5
 
 (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 $33.5 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 no borrowings under our Canadian Credit
Agreement during the first nine 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.
    37




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BOWATER INCORPORATED
    Employees
           38




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BOWATER INCORPORATED
 Exchange Rate Fluctuation Effect on Earnings
 Canadian Dollar
  British Pound Sterling
  Exchange Rate Hedging Programs
 Canadian Dollars Forward Contracts
   39




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BOWATER INCORPORATED
 British Pound Sterling Forward Contracts
   Commodity Hedging Program
 Natural Gas Swap Agreements
  Recent Accounting Pronouncements
 Fair Value Measurements
   40




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BOWATER INCORPORATED
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk
  Interest Rate Risk
  41




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BOWATER INCORPORATED
 Commodity Price Risk
  
 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 with Abitibi. 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.
 42




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BOWATER INCORPORATED
 (d)
    
    On September 7, 2007, Bowater Canadian Forest Products Inc., a subsidiary of Bowater,
received a decision from an arbitration related to the 1998 sale to Weyerhaeuser of Bowaters
former pulp and paper facility in Dryden, Ontario. As reported in our most recent Annual
Report on Form 10-K, Bowater and Weyerhaeuser had been arbitrating a claim regarding the cost
of certain environmental matters related to the mill. The arbitrators in the matter awarded
Weyerhaeuser approximately $42.9 million. This decision resulted in a pre-tax charge of $28.4
million in the third quarter of 2007. We had previously established a reserve of
approximately $14.5 million in connection with these
environmental matters at the time of the
sale.
 (e)
    
    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.
 
 Item 4. Submission of Matters to a Vote of Security Holders.
  (a)
    
    Our stockholders approved and adopted the combination agreement by and among Bowater Inc.,
Abitibi-Consolidated Inc., Alpha-Bravo Holdings Inc. (which has since been renamed
AbitibiBowater Inc.), Alpha-Bravo Merger Sub Inc. and Bowater Canada Inc., and the merger
contemplated by such combination agreement, with 40,557,251 votes for, 95,100 votes against
and 3,732.839 abstentions.
 (b)
    
    The following persons were elected as directors of Bowater in Class II, to serve until the
2010 Annual Meeting of Stockholders or until their successors are elected and qualified:
 Nominee
    
    Votes For
    
    Votes WithheldArthur R. Sawchuk
    
    
    44,529,416
    
    
    
    4,997,719Richard B. Evans
    
    
    44,533,239
    
    
    
    4,993,896Gordon D. Giffin
    
    
    48,539,595
    
    
    
    987,540
 The terms of the directors in Class III will continue until the 2008 Annual Meeting of
Stockholders, and the terms of the directors in Class I will continue until the 2009 Annual
Meeting of Stockholders. The names of the Class I and Class III directors are included in, and
are incorporated by reference to, the definitive proxy statement for our 2007 Annual Meeting of
Stockholders, which was filed with the SEC on June 25, 2007.
 (c)
    
    Our stockholders ratified the appointment of KPMG LLP as the independent registered public
accounting firm for the 2007 fiscal year with 49,428,650 votes for,
54,679 votes against and
43,806 abstentions.
 43




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BOWATER INCORPORATED
 
 Item 6. Exhibits.
  Exhibit No.
    
    Description31.1
    
    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.
 44




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BOWATER INCORPORATED
 
   BOWATER INCORPORATEDBy       /s/ William G. HarveyWilliam G. HarveyExecutive Vice President and Chief
Financial Officer By       /s/ Joseph B. JohnsonJoseph B. JohnsonVice President and Controller  45




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BOWATER INCORPORATED
 
 INDEX TO EXHIBITS
 Exhibit No.
    
    Description31.1
    
    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.