##### 



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 1934FOR THE QUARTERLY PERIOD ENDED
March 31, 2006.
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934FOR 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 May 1, 2006Common Stock, $1.00 Par Value
    
    55,925,192 Shares




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##### 



BOWATER INCORPORATED
I N D E X
 Page NumberPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Statement of Operations for the Three Months Ended March 31, 2006 and 2005
    
    
    3Consolidated Balance Sheet at March 31, 2006 and December 31, 2005
    
    
    4Consolidated
Statement of Capital Accounts for the Three Months Ended
March 31, 2006 and 2005
    
    
    5Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    717Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    1832Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35




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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
 
 (Unaudited, in millions of US dollars except per-share amounts)
 Three Months EndedMarch 31,2006
    
    
    2005Sales
    
    $
    893.2
    
    
    $
    837.0Cost of sales
    
    
    680.2
    
    
    
    607.6Depreciation, amortization and cost of timber harvested
    
    
    81.1
    
    
    
    81.8Distribution expenses
    
    
    82.9
    
    
    
    82.9Selling and administrative expenses
    
    
    38.0
    
    
    
    38.9Net gain on sale of assets
    
    
    28.8
    
    
    
    11.0Operating income
    
    
    39.8
    
    
    
    36.8Interest expense
    
    
    49.4
    
    
    
    50.2Other income
    
    
    (6.5
    )
    
    
    (5.3
    )Loss before income taxes, minority interest and cumulative effect of
accounting change
    
    
    (3.1
    )
    
    
    (8.1
    )Income tax provision (benefit)
    
    
    13.1
    
    
    
    (7.8
    )Minority interest, net of taxes
    
    
    
    
    
    
    (1.2
    )Income (loss) before cumulative effect of accounting change
    
    
    (16.2
    )
    
    
    0.9Cumulative effect of accounting change, net of taxes
    
    
    (2.6
    )
    
    
    Net income (loss)
    
    $
    (18.8
    )
    
    $
    0.9Income (loss) per share:Basic income (loss) per common share:Income (loss) before cumulative effect of accounting change
    
    $
    (0.28
    )
    
    $
    0.02Cumulative effect of accounting change, net of taxes
    
    
    (0.05
    )
    
    
    Net income (loss)
    
    $
    (0.33
    )
    
    $
    0.02Diluted income (loss) per potential common share:Income (loss) before cumulative effect of accounting change
    
    $
    (0.28
    )
    
    $
    0.02Cumulative effect of accounting change, net of taxes
    
    
    (0.05
    )
    
    
    Net income (loss)
    
    $
    (0.33
    )
    
    $
    0.02Average number of shares outstanding (in millions):Basic
    
    
    57.4
    
    
    
    57.3Diluted
    
    
    57.4
    
    
    
    57.4Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
  3




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##### 



BOWATER INCORPORATED
 
 CONSOLIDATED BALANCE SHEET
 (Unaudited, in millions of US dollars except per-share amounts)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    22.6
    
    
    $
    30.1Accounts receivable, net
    
    
    436.1
    
    
    
    410.1Inventories
    
    
    376.0
    
    
    
    365.8Timberlands held for sale
    
    
    136.4
    
    
    
    123.1Unrealized gain on hedged transactions
    
    
    13.2
    
    
    
    30.0Other current assets
    
    
    22.7
    
    
    
    31.2Total current assets
    
    
    1,007.0
    
    
    
    990.3Timber and timberlands
    
    
    76.9
    
    
    
    85.4Fixed assets, net
    
    
    3,004.2
    
    
    
    3,049.1Goodwill
    
    
    794.1
    
    
    
    794.1Other assets
    
    
    228.1
    
    
    
    233.5Total assets
    
    $
    5,110.3
    
    
    $
    5,152.4LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    15.2
    
    
    $
    22.2Short-term bank debt
    
    
    48.0
    
    
    
    55.0Accounts payable and accrued liabilities
    
    
    504.0
    
    
    
    487.3Dividends payable
    
    
    11.2
    
    
    
    11.2Total current liabilities
    
    
    578.4
    
    
    
    575.7Long-term debt
    
    
    2,394.8
    
    
    
    2,400.0Pension, other postretirement benefits and other long-term liabilities
    
    
    577.4
    
    
    
    572.9Deferred income taxes
    
    
    326.1
    
    
    
    329.4Minority interest
    
    
    58.9
    
    
    
    58.9Shareholders equity:Common Stock, $1 par value. Authorized 100,000,000 shares; issued
67,528,383 and 67,529,294 shares at March 31, 2006 and
December 31, 2005, respectively
    
    
    67.5
    
    
    
    67.5Exchangeable Shares, no par value. Unlimited shares authorized;
1,434,445 outstanding at both March 31, 2006 and December 31, 2005
    
    
    68.1
    
    
    
    68.1Additional paid-in capital
    
    
    1,621.6
    
    
    
    1,621.6Retained earnings
    
    
    69.8
    
    
    
    100.1Accumulated other comprehensive loss
    
    
    (166.5
    )
    
    
    (156.0
    )Treasury stock at cost, 11,603,260 and 11,605,074 shares at March 31,
2006 and December 31, 2005, respectively
    
    
    (485.8
    )
    
    
    (485.8
    )Total shareholders equity
    
    
    1,174.7
    
    
    
    1,215.5Total liabilities and shareholders equity
    
    $
    5,110.3
    
    
    $
    5,152.4
  4




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##### 



BOWATER INCORPORATED
 
 CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
 (Unaudited, in millions of US dollars except per-share amounts)
 FOR THE THREE MONTHS ENDED MARCH 31, 2006
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon
    
    
    Exchangeable
    
    
    Paid In
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury
    
    
    ShareholdersStock
    
    
    Shares
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance at December 31, 2005
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    100.1
    
    
    $
    (156.0
    )
    
    $
    (485.8
    )
    
    $
    1,215.5Dividends on Common Stock ($0.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.5
    )
    
    
    
    
    
    
    
    
    
    
    (11.5
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.8
    )
    
    
    
    
    
    
    
    
    
    
    (18.8
    )Minimum pension liability, net of
tax ($0.1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Change in unrealized gain on
hedged transactions, net of tax
($6.4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10.4
    )
    
    
    
    
    
    
    (10.4
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29.3
    )Balance at March 31, 2006
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    69.8
    
    
    $
    (166.5
    )
    
    $
    (485.8
    )
    
    $
    1,174.7
  AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Exchangeable
    
    
    Paid In
    
    
    Retained
    
    
    Unearned
    
    
    Comprehensive
    
    
    ShareholdersStock
    
    
    Shares
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    Loss
    
    
    Treasury Stock
    
    
    EquityBalance at December 31, 2004
    
    $
    67.4
    
    
    $
    69.7
    
    
    $
    1,618.3
    
    
    $
    266.5
    
    
    $
    (0.1
    )
    
    $
    (28.6
    )
    
    $
    (485.9
    )
    
    $
    1,507.3Dividends on Common Stock ($0.20
per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.5
    )Retraction of exchangeable shares
(21,913 shares issued and exchangeable
shares retracted)
    
    
    
    
    
    
    (1.1
    )
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised (69,000
shares)
    
    
    0.1
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.9Tax benefit on exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Amortization of unearned
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Restricted stock cancellation
(10,203 shares)
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Comprehensive loss:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9Minimum pension liability,
net of tax $0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (0.6
    )Change in unrealized gain on hedged
transactions, net of tax ($15.8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25.8
    )
    
    
    
    
    
    
    (25.8
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25.2
    )Balance at March 31, 2005
    
    $
    67.5
    
    
    $
    68.6
    
    
    $
    1,621.2
    
    
    $
    255.9
    
    
    $
    
    
    
    $
    (54.7
    )
    
    $
    (485.9
    )
    
    $
    1,472.6
  5




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##### 



BOWATER INCORPORATED
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (Unaudited, in millions of US dollars except per-share amounts)
 Three Months EndedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (18.8
    )
    
    $
    0.9Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Cumulative effect of accounting change, net of taxes
    
    
    2.6
    
    
    
    Stock based compensation
    
    
    (0.9
    )
    
    
    Amortization of unearned compensation
    
    
    
    
    
    
    0.1Depreciation, amortization and cost of timber harvested
    
    
    81.1
    
    
    
    81.8Deferred income taxes
    
    
    4.6
    
    
    
    (10.5
    )Minority interest
    
    
    
    
    
    
    (1.2
    )Net gain on sale of assets
    
    
    (28.8
    )
    
    
    (11.0
    )Changes in working capital:Accounts receivable, net
    
    
    (26.0
    )
    
    
    (24.4
    )Inventories
    
    
    (11.6
    )
    
    
    (25.6
    )Income taxes receivable
    
    
    
    
    
    
    7.3Income taxes payable
    
    
    7.3
    
    
    
    Accounts payable and accrued liabilities
    
    
    6.9
    
    
    
    7.8Other, net
    
    
    5.6
    
    
    
    (5.3
    )Net cash provided by operating activities
    
    
    22.0
    
    
    
    19.9Cash flows from investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (37.5
    )
    
    
    (25.1
    )Dispositions of fixed assets, timber and timberlands
    
    
    36.8
    
    
    
    12.4Net cash used for investing activities
    
    
    (0.7
    )
    
    
    (12.7
    )Cash flows from financing activities:Cash dividends, including minority interests
    
    
    (11.5
    )
    
    
    (11.4
    )Short-term financing
    
    
    201.7
    
    
    
    225.0Short-term financing repayments
    
    
    (209.0
    )
    
    
    (202.0
    )Payments of long-term debt
    
    
    (10.0
    )
    
    
    (3.1
    )Stock options exercised
    
    
    
    
    
    
    1.9Net cash from (used for) financing activities
    
    
    (28.8
    )
    
    
    10.4Net increase (decrease) in cash and cash equivalents
    
    
    (7.5
    )
    
    
    17.6Cash and cash equivalents:Beginning of year
    
    
    30.1
    
    
    
    29.7End of period
    
    $
    22.6
    
    
    $
    47.3Supplemental disclosures of cash flow information:Cash paid during the year for:Interest, including capitalized interest of $1.3 and $0.1
    
    $
    26.0
    
    
    $
    27.5Income taxes
    
    $
    1.6
    
    
    $
    
  6




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##### 



BOWATER INCORPORATED
 
 Notes to Consolidated Financial Statements  Unaudited
 1.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying consolidated financial statements include the accounts of Bowater Incorporated
and subsidiaries (Bowater). The consolidated balance sheet as of March 31, 2006, and the
related statements of operations, capital accounts and cash flows for the periods ended March
31, 2006 and 2005 are unaudited. In our opinion, all adjustments (consisting of normal
recurring adjustments) necessary for fair presentation of the interim financial statements have
been made. The results of the interim period ended March 31, 2006, are not necessarily
indicative of the results to be expected for the full year. These financial statements should be
read in conjunction with the consolidated financial statements, critical accounting policies,
significant accounting policies and the notes to the consolidated financial statements included
in our most recent Annual Report on Form 10-K. Certain prior-year amounts in the financial
statements and the notes have been reclassified to conform to the
2006 presentation. In the first quarter of 2006, the Company
adjusted the amount of goodwill allocated to the timberlands held
for sale. As a result, goodwill allocated to timberlands held for
sale decreased by $12.7 million and goodwill increased by the same
amount compared to the amounts previously reported in the Companys 2005
consolidated financial statements and related notes. The
reclassifications had no effect on total shareholders equity or net income (loss).2.
    
    Stock Based CompensationPrior to January 2006, Bowater accounted for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting
for Stock Issued to Employees. Under APB No. 25, compensation expense for employee stock
options was generally not recognized if the exercise price of the option equaled or exceeded the
fair value of the underlying stock on the date of grant.In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, which requires the
measurement of all employee share-based payments to employees, including grants of employee
stock options, using a fair-value-based method and the recording of such expense in the
consolidated statements of operations. Bowater adopted SFAS 123R effective January 1, 2006 and
elected the modified prospective transition method. Therefore prior periods have not been
restated to reflect the impact of SFAS 123R. Under SFAS 123R, using the modified prospective
method, compensation expense is recognized for all share-based awards granted prior to, but not
yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123 and compensation expense is recognized for all
share-based awards granted on or after January 1, 2006 in accordance with the provisions of SFAS
123R.The following table represents the pro forma effect on net loss and loss per share for the three
months ended March 31, 2005, had we applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation. Disclosures for the period ending March 31,
2006 are not presented because the amounts are included in the consolidated statement of
operations.
 Three Months EndedMarch 31,(Unaudited, in millions, except per-share amounts)
    
    2005Net income as reported:
    
    $
    0.9Add:Stock-based compensation expense included in net income, net of related tax effects
    
    
    Deduct:Stock-based compensation expense determined under fair value based methods, net of related tax effects
    
    
    (1.5
    )Pro forma net loss
    
    $
    (0.6
    )Income (loss) per share:Basic, as reported
    
    $
    0.02Basic, pro forma
    
    
    (0.01
    )Diluted, as reported
    
    $
    0.02Diluted, pro forma
    
    
    (0.01
    )
 7




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  Three MonthsEndedMarch 31,2005Assumptions:Dividend yield
    
    
    2.2
    %Expected volatility
    
    
    29.0
    %Risk-free interest rate
    
    
    4.0
    %Expected option lives in years
    
    
    7.2Weighted average fair value of each option
    
    $
    11.19
 Stock Options
    8




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  Number Of Shares
    
    
    Weighted Average
    
    
    Aggregate(Unaudited)
    
    (000s)
    
    
    Exercise Price
    
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    5,067
    
    
    $
    44
    
    
    $
    Granted during the period
    
    
    
    
    
    
    
    
    
    
    Exercised during the period
    
    
    
    
    
    
    
    
    
    
    Canceled during the period
    
    
    (216
    )
    
    
    36
    
    
    
    Outstanding at March 31, 2006
    
    
    4,851
    
    
    $
    45
    
    
    $
    Exercisable at March 31, 2006
    
    
    4,851
    
    
    $
    45
    
    
    $
    
 (Unaudited)
    
    Options Outstanding and
Exercisable at March 31, 2006WeightedWeighted
    
    
    AverageNumber of
    
    
    Average
    
    
    RemainingShares
    
    
    Exercise
    
    
    ContractualRange of Exercise Prices
    
    (000s)
    
    
    Price
    
    
    Life (years)$31 to $40
    
    
    757
    
    
    $
    37
    
    
    
    8.8$41 to $50
    
    
    3,492
    
    
    
    45
    
    
    
    5.4$51 to $60
    
    
    602
    
    
    
    52
    
    
    
    4.84,851
    
    
    $
    45
    
    
    
    5.8
 Mid-Term Incentive Plan
     9




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  Equity Participation Rights (EPR)
    Weighted
    
    
    WeightedNumber of
    
    
    Average
    
    
    Average
    
    
    AggregateRights
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsic(Unaudited)
    
    (000s)
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at beginning of period
    
    
    2,173
    
    
    $
    48
    
    
    
    4.40
    
    
    $
    Granted during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Settled during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled during the period
    
    
    (82
    )
    
    
    39
    
    
    
    0.04
    
    
    
    Outstanding at end of period
    
    
    2,091
    
    
    $
    48
    
    
    
    4.20
    
    
    $
    Exercisable at end of period
    
    
    2,091
    
    
    $
    48
    
    
    
    4.20
    
    
    $
    
  10




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  March 31,
    
    
    January 1,(Unaudited)
    
    2006
    
    
    2006Assumptions:Dividend yield
    
    
    2.70
    %
    
    
    2.60
    %Expected volatility
    
    
    30.0-32.0
    %
    
    
    30.0-33.0
    %Weighted
average expected volatility
    
    
    30.3
    %
    
    
    30.1
    %Risk-free interest rate
    
    
    4.60-4.80
    %
    
    
    4.10-4.40
    %Expected EPR life in years
    
    
    0.80-3.30
    
    
    
    0.04-3.60Weighted
average fair value
of EPRs
    
    $
    1.40
    
    
    $
    1.70Fair value
range of each EPR grant
    
    $
    0.50-3.60
    
    
    $
    0.01-4.60
 3. Inventories
 March 31,
    
    
    December 31,(Unaudited, in millions)
    
    2006
    
    
    2005At lower of cost or market:Raw materials
    
    $
    94.5
    
    
    $
    100.4Work in process
    
    
    29.3
    
    
    
    30.5Finished goods
    
    
    147.5
    
    
    
    131.8Mill stores and other supplies
    
    
    116.5
    
    
    
    114.9387.8
    
    
    
    377.6Excess of current cost over LIFO inventory value
    
    
    (11.8
    )
    
    
    (11.8
    )$
    376.0
    
    
    $
    365.8
 4.
    
    Other IncomeOther income in the Consolidated Statement of Operations includes the following:
 Three Months Ended March 31,(Unaudited, in millions)
    
    2006
    
    
    2005Foreign exchange gain
    
    $
    (1.8
    )
    
    $
    (1.5
    )Interest income
    
    
    (1.1
    )
    
    
    (1.1
    )Income from joint venture
    
    
    (2.3
    )
    
    
    (0.7
    )Miscellaneous income
    
    
    (1.3
    )
    
    
    (2.0
    )$
    (6.5
    )
    
    $
    (5.3
    )
 5.
    
    Timberlands Held for SaleBowater is currently marketing for sale approximately 153,000 acres of timberlands in the United
States and approximately 381,000 acres of timberlands in Canada. We expect sales to be
completed in 2006. The $136.4 million of timberlands held for sale on the Consolidated Balance
Sheet includes the carrying value of the U.S. timberlands, all of the timberlands of one of our
Canadian woodlands operations and approximately $12.6 million related to our Baker Brook
sawmill, which was sold in April 2006. See Note 14 Subsequent Events for additional
information. The Canadian woodlands operating unit includes
approximately $25.2 million of
goodwill. We expect the proceeds of the timberland sales to exceed the carrying value, plus the
goodwill. Liabilities associated with the timberlands held for sale of approximately $23.6
million are included in accounts payable and accrued liabilities. Approximately $34.5 million
and $101.9 million of the timberlands held for sale are included in the Newsprint Division and
the Canadian Forest Products Division, respectively.
 11




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 6.
    
    Accumulated Other Comprehensive LossThe components of Accumulated other comprehensive loss in the Consolidated Balance Sheet are
as follows:
 March 31,
    
    December 31,(Unaudited, in millions)
    
    2006
    
    2005Pension
plan additional minimum liabilities (1) (2)
    
    $
    (186.2
    )
    
    $
    (186.1
    )Foreign currency translation (3)
    
    
    11.5
    
    
    
    11.5Unrealized gain on hedging transactions (4)
    
    
    8.2
    
    
    
    18.6$
    (166.5
    )
    
    $
    (156.0
    )
 
 (1)
    Net of deferred tax benefit of $66.9 million and $66.8 million, respectively.(2)
    Net of minority interest.(3)
    No tax effect is recorded for foreign currency translation since the foreign net assets
translated are deemed permanently invested.(4)
    Net of deferred tax expense of $5.0 million and $11.4 million, respectively. 7.
    
    Income (Loss) Per ShareBasic and diluted income (loss) per share are based on net income (loss) and do not include any
impact from Other comprehensive loss.
 Three months endedMarch 31,(Unaudited, in millions, except per-share amounts)
    
    2006
    
    
    2005Basic computation:Basic income (loss) available to common shareholders
    
    $
    (18.8
    )
    
    $
    0.9Basic weighted average shares outstanding
    
    
    57.4
    
    
    
    57.3Basic income (loss) per common share
    
    $
    (0.33
    )
    
    $
    0.02Diluted computation:Diluted income (loss) available to common shareholders
    
    $
    (18.8
    )
    
    $
    0.9Basic weighted average shares outstanding
    
    
    57.4
    
    
    
    57.3Effect of dilutive securities:Options
    
    
    
    
    
    
    0.1Diluted weighted average shares outstanding
    
    
    57.4
    
    
    
    57.4Diluted income (loss) per potential common share
    
    $
    (0.33
    )
    
    $
    0.02
 The dilutive effect of options outstanding is calculated using the treasury stock method.
Options for approximately 4.9 million and 4.2 million shares outstanding at March 31, 2006, and
2005, respectively, were excluded in the calculation of diluted earnings per share as the impact
would have been anti-dilutive.
 12




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 8.
    
    Pension and Postretirement ExpenseThe components of net periodic benefit costs relating to Bowaters pension and other
postretirement plans are as follows for the three months ended March 31, 2006 and 2005:Pension Plans:
 Three Months EndedMarch 31,(Unaudited, in millions)
    
    2006
    
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    10.9
    
    
    $
    9.2Interest cost
    
    
    29.2
    
    
    
    28.7Expected return on plan assets
    
    
    (29.6
    )
    
    
    (28.3
    )Amortization of prior service cost
    
    
    1.4
    
    
    
    0.5Curtailment
    
    
    4.6
    
    
    
    Recognized net actuarial loss
    
    
    8.9
    
    
    
    4.0Net periodic benefit cost
    
    $
    25.4
    
    
    $
    14.1
  Three Months EndedMarch 31,(Unaudited, in millions)
    
    2006
    
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    1.0
    
    
    $
    1.1Interest cost
    
    
    4.0
    
    
    
    4.4Amortization of prior service cost
    
    
    (1.5
    )
    
    
    (1.3
    )Curtailment
    
    
    (0.2
    )
    
    
    Recognized net actuarial loss
    
    
    2.0
    
    
    
    2.1Net periodic benefit cost
    
    $
    5.3
    
    
    $
    6.3
  13




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 9.
    
    Income TaxesThe provision for income tax expense (benefit) attributable to loss before income taxes,
minority interest 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 EndedMarch 31,(Unaudited, in millions)
    
    2006
    
    
    2005Loss before income taxes, minority interest and cumulative effect
of accounting change
    
    $
    (3.1
    )
    
    $
    (8.1
    )Expected income tax benefit
    
    
    (1.1
    )
    
    
    (2.9
    )Increase (decrease) in income taxes resulting from:Valuation allowance (1)
    
    
    13.5
    
    
    
    Foreign exchange
    
    
    3.0
    
    
    
    (3.1
    )State income taxes, net of federal income tax benefit
    
    
    1.7
    
    
    
    0.7Foreign taxes
    
    
    (0.7
    )
    
    
    (2.3
    )Medicare subsidy
    
    
    (0.4
    )
    
    
    (0.4
    )Other, net
    
    
    (2.9
    )
    
    
    0.2Income tax expense (benefit)
    
    $
    13.1
    
    
    $
    (7.8
    )
 
 (1)
    During the first quarter of 2006, income tax benefits of approximately
$13.5 million generated on our current quarter Canadian operating losses were entirely
offset by tax charges to increase our valuation allowance related to these tax benefits. 10.
    
    Commitments and ContingenciesBowater is involved in various legal proceedings relating to contracts, commercial disputes,
taxes, environmental issues, employment and workers compensation claims and other matters. We
periodically review the status of 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 April 26, 2006, we received a notice of violation from the U.S. Environmental Protection
Agency (EPA) alleging four violations of the Clean Air Act (CAA) at our Calhoun mill. We
have strong arguments that the Calhoun mill did not violate the CAA and will enter into
discussions with the EPA in June 2006.There have been no material developments to those legal proceedings described in our annual
report on Form 10-K filed on March 13, 2006.11.
    
    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.We pay a significant portion of the operating expenses of our Canadian mill sites in Canadian
dollars. To reduce our exposure to United States and Canadian dollar exchange rate
fluctuations, we enter into and designate Canadian dollar forward contracts to hedge certain of
our forecasted Canadian dollar cash outflows at the Canadian mill operations. On the date in
which the derivative contract is entered we designate the derivative as a cash flow hedge.
 14




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  Three Months EndedMarch 31,(Unaudited, in millions)
    
    2006
    
    
    2005Gains reclassified on matured cash flow hedges
    
    $
    (17.6
    )
    
    $
    (34.6
    )Unrealized (gains) losses for change in value on
outstanding cash flow hedges
    
    
    0.8
    
    
    
    (7.0
    )(16.8
    )
    
    
    (41.6
    )Income tax benefit
    
    
    6.4
    
    
    
    15.8Net decrease in Accumulated other comprehensive loss
    
    $
    (10.4
    )
    
    $
    (25.8
    )
    Notional
    
    
    Net Asset
    
    
    Range OfMarch 31, 2006
    
    Amount of
    
    
    Carrying
    
    
    Fair
    
    
    U.S.$/CDN$(Unaudited, in millions of U.S. dollars)
    
    Derivatives
    
    
    Amount
    
    
    Market Value
    
    
    Exchange RatesForeign Currency Exchange AgreementsBuy Currency:Canadian dollarDue in 2006
    
    $
    75.0
    
    
    $
    13.2
    
    
    $
    13.2
    
    
    
    .7499 -.7124
  15




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 12.
    
    Off-Balance Sheet Debt GuaranteesIn connection with Bowaters 1999 land sale and note monetization, we guarantee 25% of the
outstanding investor notes principal balance of Timber Note Holdings LLC, one of our Qualified
Special Purpose Entities (QSPEs). Bowater guarantees approximately $8.6 million of the investor
notes principal balance at March 31, 2006. 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 $40.7 million and obligations of approximately $34.7
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.13.
    
    Segment InformationBelow is a description of the types of products and services from which each reportable segment
derives its revenues:Bowater is organized into four divisions: the Newsprint Division, the Coated and Specialty
Papers Division, the Canadian Forest Products Division, and the Pulp Division. Except for the
Pulp Division, each division is responsible for the sales and marketing of distinct product
lines and the operation of certain manufacturing sites. The Pulp Division is primarily a
marketing and distribution division whose administrative expenses are included in Corporate &
Other Eliminations. Therefore, the other three divisions are our reportable segments.newsprint divisionThe Newsprint Division operates six manufacturing sites (including Ponderay Newsprint Company,
an unconsolidated partnership) in the United States, Canada and South Korea. The principal
product at these manufacturing sites is newsprint, but several of the sites also produce market
and fluff pulp and uncoated specialty papers. This division has primary responsibility for the
domestic and international marketing and sales of newsprint. The division also manages 0.9
million acres of owned or leased timberland in the United States and the Canadian province of
Nova Scotia on which we have cutting rights.coated and specialty papers divisionThe Coated and Specialty Papers Division operates a manufacturing site that produces coated
papers and market pulp and two satellite coating facilities, all three located in the United
States. This division also operates a manufacturing site in Canada, which produces newsprint,
specialty papers and market pulp. This division has primary responsibility for the marketing
and sales of the full spectrum of coated and uncoated specialty papers manufactured by Bowater.
The division also manages 8.4 million acres of Crown-owned land in the Canadian province of
Ontario on which we have cutting rights.canadian forest products divisionThe Canadian Forest Products Division operates four paper manufacturing sites in Canada. The
division manages 0.2 million acres of owned or leased timberland and approximately 19.7 million
acres of Crown-owned land in the Canadian provinces of Quebec and New Brunswick on which we have
cutting rights. The division also operates ten sawmills, supplies wood to four paper mills and
five sawmills, and is responsible for the marketing and sales of its timber and lumber
production.pulp divisionThe Pulp Division markets and distributes market pulp produced by other divisions. Financial
results for the production and sale of market pulp are included in the Newsprint Division or the
Coated and Specialty Papers Division, depending upon which site manufactures the product. The
Pulp Divisions selling and administrative expenses are included in Corporate and Other
Eliminations. Accordingly, no separate results are reported for this division.
 16




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Factors management used to identify our segments:
    Coatedand
    
    
    Canadian
    
    
    Net GainThree Months Ended
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    on Assets
    
    
    Corporate/March 31, 2006
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    and Land
    
    
    Other(Unaudited, in millions)
    
    Division
    
    
    Division
    
    
    Division
    
    
    Sales
    
    
    Eliminations
    
    
    TotalSales- external customers
    
    $
    329.1
    
    
    $
    282.6
    
    
    $
    285.5
    
    
    $
    
    
    
    $
    (4.0
    )
    
    $
    893.2Segment income (loss)
    
    
    15.8
    
    
    
    3.4
    
    
    
    (5.4
    )
    
    
    28.8
    
    
    
    (2.8
    )
    
    
    39.8Total assets at 3/31/06
    
    
    2,041.1
    
    
    
    1,281.6
    
    
    
    1,356.8
    
    
    
    
    
    
    
    430.8
    
    
    
    5,110.3
 Coatedand
    
    
    Canadian
    
    
    Net GainThree Months Ended
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    on Assets
    
    
    Corporate/March 31, 2005
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    and Land
    
    
    Other(Unaudited, in millions)
    
    Division
    
    
    Division
    
    
    Division
    
    
    Sales
    
    
    Eliminations
    
    
    TotalSales- external customers
    
    $
    309.3
    
    
    $
    275.5
    
    
    $
    257.4
    
    
    $
    
    
    
    $
    (5.2
    )
    
    $
    837.0Segment income
    
    
    10.5
    
    
    
    1.6
    
    
    
    1.8
    
    
    
    11.0
    
    
    
    11.9
    
    
    
    36.8Total assets at 3/31/05
    
    
    2,049.8
    
    
    
    1,355.8
    
    
    
    1,389.7
    
    
    
    
    
    
    
    615.0
    
    
    
    5,410.3
 14.
    
    Subsequent Event:On April 21, 2006, Bowater completed the sale of the Baker Brook sawmill and approximately
225,000 acres of timberland in Canada for combined proceeds of approximately $70 million. We
expect the proceeds to exceed the carrying value of the assets. The carrying value of the
assets are classified as timberlands held for sale in the Consolidated Balance Sheet at March
31, 2006 (see Note 5).
 17




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Organization
  Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data
   Accounting Policies and Estimates
    Overview of Financial Performance
  18




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Outlook
       19




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Consolidated Results of Operations
 Three Months EndedMarch 31,(In millions)
    
    2006
    
    
    2005
    
    
    ChangeSales
    
    $
    893.2
    
    
    $
    837.0
    
    
    $
    56.2Operating income
    
    
    39.8
    
    
    
    36.8
    
    
    
    3.0Significant items that increased
(decreased) operating income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    48.6Distribution costs
    
    
    
    
    
    
    
    
    
    
    0.7Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (65.0
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.9Net gain on fixed assets and land sales
    
    
    
    
    
    
    
    
    
    
    17.8$
    3.0
 Three months ended March 31, 2006 versus March 31, 2005
 Sales
 Operating income
 Product pricing
 Manufacturing costs
 Net gain on fixed assets and land sales
 20




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Division/Segments and Product Line Information
  Coated &
    
    
    Canadian(In
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    
    
    
    
    Corporatemillions)
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    Pulp
    
    
    and OtherProduct Line
    
    Division
    
    
    Division
    
    
    Division
    
    
    Division
    
    
    Eliminations
    
    
    TotalCoated
    
    $
    
    
    
    $
    152.9
    *
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    152.9Specialties
    
    
    52.6
    
    
    
    3.5
    *
    
    
    75.0
    
    
    
    
    
    
    
    (0.2
    )
    
    
    130.9Newsprint
    
    
    224.4
    *
    
    
    41.5
    
    
    
    107.8
    
    
    
    
    
    
    
    (0.2
    )
    
    
    373.5Pulp
    
    
    46.3
    
    
    
    84.7
    
    
    
    
    
    
    
    
    *
    
    
    (1.6
    )
    
    
    129.4Lumber
    
    
    
    
    
    
    
    
    
    
    96.5
    *
    
    
    
    
    
    
    
    
    
    
    96.5Other
    
    
    5.8
    
    
    
    
    
    
    
    6.2
    
    
    
    
    
    
    
    (2.0
    )
    
    
    10.0$
    329.1
    
    
    $
    282.6
    
    
    $
    285.5
    
    
    $
    
    
    
    $
    (4.0
    )
    
    $
    893.2
 
 *
    
    Indicates division responsible for the sale of product line for the entire company Product Line Information
   Coated Papers  Product Line
 Three Months EndedMarch 31,2006
    
    
    2005Sales (in millions)
    
    $
    152.9
    
    
    $
    143.9Average prices (per short ton)
    
    $
    795
    
    
    $
    740Shipments (thousands of short tons)
    
    
    192.4
    
    
    
    194.5Downtime (thousands of short tons)
    
    
    16.8
    
    
    
    21.6Inventory at end of period (thousands of short tons)
    
    
    46.3
    
    
    
    18.9
 Three months ended March 31, 2006, versus March 31, 2005
  21




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Specialty Papers  Product Line
 Three Months EndedMarch 31,2006
    
    
    2005Sales (in millions)
    
    $
    130.9
    
    
    $
    107.6Average prices (per short ton)
    
    $
    655
    
    
    $
    603Shipments (thousands of short tons)
    
    
    199.8
    
    
    
    178.3Downtime (thousands of short tons)
    
    
    
    
    
    
    Inventory at end of period (thousands of short tons)
    
    
    34.9
    
    
    
    32.1
 Three months ended March 31, 2006, versus March 31, 2005
    Newsprint  Product Line
 Three Months EndedMarch 31,2006
    
    
    2005Sales (in millions)
    
    $
    373.5
    
    
    $
    339.9Average prices (per metric ton)
    
    $
    622
    
    
    $
    558Shipments (thousands of metric tons)
    
    
    600.4
    
    
    
    609.0Downtime (thousands of metric tons)
    
    
    42.1
    
    
    
    41.4Inventory at end of period (thousands of metric tons)
    
    
    75.7
    
    
    
    107.0
 Three months ended March 31, 2006, versus March 31, 2005
   22




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Market Pulp  Product Line
 Three Months EndedMarch 31,2006
    
    
    2005Sales (in millions)
    
    $
    129.4
    
    
    $
    140.3Average prices (per metric ton)
    
    $
    523
    
    
    $
    543Shipments (thousands of metric tons)
    
    
    247.4
    
    
    
    258.4Downtime (thousands of metric tons)
    
    
    4.1
    
    
    
    10.3Inventory at end of period (thousands of metric tons)
    
    
    86.3
    
    
    
    54.6
 Three months ended March 31, 2006, versus March 31, 2005
   Lumber  Product Line
 Three Months EndedMarch 31,2006
    
    
    2005Sales (in millions)
    
    $
    96.5
    
    
    $
    96.2Average prices (per mbf)
    
    $
    351
    
    
    $
    372Shipments (millions of mbf)
    
    
    275.0
    
    
    
    258.4Downtime (millions of mbf)
    
    
    57.9
    
    
    
    48.3Inventory at end of period (millions of mbf)
    
    
    62.0
    
    
    
    71.3
 Three months ended March 31, 2006, versus March 31, 2005
   23




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Divisional Performance
 Newsprint Division
 Three Months Ended March 31,(In millions)
    
    2006
    
    
    2005
    
    
    ChangeSales
    
    $
    329.1
    
    
    $
    309.3
    
    
    $
    19.8Segment income
    
    
    15.8
    
    
    
    10.5
    
    
    
    5.3Significant items that increased
(decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    30.6Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.2
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (25.2
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    1.1$
    5.3
 Three months ended March 31, 2006, versus March 31, 2005
   24




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Coated and Specialty Papers Division
 Three Months Ended March 31,(In millions)
    
    2006
    
    
    2005
    
    
    ChangeSales
    
    $
    282.6
    
    
    $
    275.5
    
    
    $
    7.1Segment income (loss)
    
    
    3.4
    
    
    
    1.6
    
    
    
    1.8Significant items that increased
(decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    11.7Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.7
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (8.5
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.3$
    1.8
 Three months ended March 31, 2006, versus March 31, 2005
   Canadian Forest Products Division
 Three Months Ended March 31,(In millions)
    
    2006
    
    
    2005
    
    
    ChangeSales
    
    $
    285.5
    
    
    $
    257.4
    
    
    $
    28.1Segment income (loss)
    
    
    (5.4
    )
    
    
    1.8
    
    
    
    (7.2
    )Significant items that increased
(decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    6.3Distribution costs
    
    
    
    
    
    
    
    
    
    
    3.7Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (17.1
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.1
    )$
    (7.2
    )
 25




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Three months ended March 31, 2006, versus March 31, 2005
   Net Gain on Fixed Assets and Land Sales and Corporate & Other Eliminations
  Three Months Ended March 31,(In millions)
    
    2006
    
    
    2005
    
    
    ChangeNet gain on sale of assets
    
    $
    28.8
    
    
    $
    11.0
    
    
    $
    17.8Corporate & other eliminations:Sales
    
    $
    (4.0
    )
    
    $
    (5.2
    )
    
    $
    1.2Segment income (loss)
    
    
    (2.8
    )
    
    
    11.9
    
    
    
    (14.7
    )
 Net gain on fixed assets and land sales:
 Corporate & other eliminations
 Interest and Other Income and Expenses
   Income Taxes
  26




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Liquidity and Capital Resources
  Three MonthsEnded March 31,(In millions)
    
    2006
    
    
    2005Increase (decrease) in cash and cash equivalents
    
    $
    (7.5
    )
    
    $
    17.6Cash from (used for) operations
    
    
    22.0
    
    
    
    19.9Net income (loss)
    
    
    (18.8
    )
    
    
    0.9Adjustments to net (income) loss:Depreciation
    
    
    81.1
    
    
    
    81.8Deferred income taxes
    
    
    4.6
    
    
    
    (10.5
    )Net gain on land sales
    
    
    (28.8
    )
    
    
    (11.0
    )Working capital:Accounts receivable, net
    
    
    (26.0
    )
    
    
    (24.4
    )Inventories
    
    
    (11.6
    )
    
    
    (25.6
    )Income taxes receivable
    
    
    
    
    
    
    7.3Income taxes payable
    
    
    7.3
    
    
    
    Accounts payable and accrued liabilities
    
    
    6.9
    
    
    
    7.8Total working capital changes
    
    
    (23.4
    )
    
    
    (34.9
    )Cash from (used for) investing activities
    
    
    (0.7
    )
    
    
    (12.7
    )Cash invested in fixed assets, timber and timberlands
    
    
    (37.5
    )
    
    
    (25.1
    )Disposition
of fixed assets, timberlands and note monetizations
    
    
    36.8
    
    
    
    12.4Cash from (used for) financing activities
    
    
    (28.8
    )
    
    
    10.4Short-term financing, net
    
    
    (7.3
    )
    
    
    23.0Long-term financing, net
    
    
    (10.0
    )
    
    
    (3.1
    )Dividends
    
    
    (11.5
    )
    
    
    (11.4
    )
 27




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cash From Operations
   Cash Used for Investing Activities
  Cash Used for Financing Activities
  28




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Credit Arrangements:
  WeightedAverageAmount
    
    Commitment
    
    Termination
    
    InterestShort-Term Bank Debt
    
    Commitment
    
    Outstanding
    
    Available (1)
    
    Date
    
    Rate(in millions, except for dates and interest rates)Revolving credit facility (2)
    
    $
    435.0
    
    
    $
    6.0
    
    
    $
    394.8
    
    
    04/07
    
    
    9.3
    %364-day Accounts Receivable
Securitization Arrangement
(3)
    
    
    200.0
    
    
    
    42.0
    
    
    
    63.7
    
    
    12/06
    
    
    4.8
    %$
    635.0
    
    
    $
    48.0
    
    
    $
    458.5
 
 (1)
    
    The commitment available under the revolving credit facility is subject to covenant
restrictions as described below and is reduced by outstanding
letters of credit of $34.2 million. The commitment available under the 364-day accounts
receivables securitization arrangement is reduced by outstanding letters of credit of $61.4
million.(2)
    
    Borrowings under the revolving credit facility incur interest based, at our option, on
specified market interest rates plus a margin tied to the credit rating of our long-term debt.(3)
    
    The amount that can be borrowed at any time under our 364-day accounts receivables
securitization arrangement depends on the amount and nature of the accounts receivable. The
interest rate is based on commercial paper issued by the lenders plus a margin.  i.
    
    a minimum consolidated net worth (generally defined as common shareholders equity,
plus any outstanding preferred stock plus minimum pension liability amounts) of $1.3
billion. If Bowater generates net income, the minimum net worth requirement increases by
half of Bowaters consolidated net income for each fiscal quarter (excluding gains from
cash flow hedges in place as of December 31, 2004);ii.
    
    a maximum 65.0% ratio of total debt to total capital (defined as total debt less
revaluation of debt assumed through acquisitions, plus net worth including minority
interest, plus minimum pension liability amounts); andiii.
    
    an annual minimum EBITDA (generally defined as net income, excluding extraordinary,
non-recurring or non-cash items, plus income taxes plus depreciation plus net interest
expense) of $250.0 million measured quarterly beginning March 31, 2005, through December
31, 2005 and $400.0 million at the end of each quarter thereafter.
   29




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Quarters EndedRolling 4(Unaudited, in millions)
    
    6/30/2005
    
    
    9/30/2005
    
    
    12/31/2005
    
    
    3/31/2006
    
    
    QtrsNet income (loss)
    
    $
    (3.6
    )
    
    $
    (16.0
    )
    
    $
    (101.9
    )
    
    $
    (18.8
    )
    
    $
    (140.3
    )Provision for income tax expense (benefit)
    
    
    (5.6
    )
    
    
    14.5
    
    
    
    38.2
    
    
    
    13.1
    
    
    
    60.2Depreciation, amortization and cost of timber harvested
    
    
    81.6
    
    
    
    82.5
    
    
    
    83.5
    
    
    
    81.1
    
    
    
    328.7Interest expense, net of capitalized interest
    
    
    49.3
    
    
    
    50.0
    
    
    
    49.8
    
    
    
    49.4
    
    
    
    198.5Interest income
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (1.6
    )
    
    
    (1.1
    )
    
    
    (4.8
    )EBITDA
    
    $
    120.6
    
    
    $
    130.0
    
    
    $
    68.0
    
    
    $
    123.7
    
    
    $
    442.3Adjustments:Severance
    
    
    
    
    
    
    
    
    
    
    13.3
    
    
    
    4.4
    
    
    
    17.7Cumulative effect of accounting changes, net of taxes
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    2.6
    
    
    
    3.1Minority interest in net income (loss) of subsidiaries
    
    
    0.5
    
    
    
    (1.6
    )
    
    
    (7.5
    )
    
    
    
    
    
    
    (8.6
    )Foreign exchange (gain) loss
    
    
    3.3
    
    
    
    1.8
    
    
    
    (0.5
    )
    
    
    (1.8
    )
    
    
    2.8Asset impairment
    
    
    11.9
    
    
    
    
    
    
    
    70.7
    
    
    
    
    
    
    
    82.6Income from joint venture
    
    
    (1.1
    )
    
    
    (1.3
    )
    
    
    (0.8
    )
    
    
    (2.3
    )
    
    
    (5.5
    )14.6
    
    
    
    (1.1
    )
    
    
    75.7
    
    
    
    2.9
    
    
    
    92.1EBITDA, as calculated according to our
credit facilitys guidelines
    
    $
    135.2
    
    
    $
    128.9
    
    
    $
    143.7
    
    
    $
    126.6
    
    
    $
    534.4
  (In millions, except ratios)
    
    March 31, 2006Total debt
    
    $
    2,458.0Less: Revaluation of debt
    
    
    (65.1
    )Total debt, per credit facilities
    
    $
    2,392.9Capitalization:Total shareholders equity
    
    $
    1,174.7Total debt
    
    
    2,458.0Minority interest
    
    
    58.9Less: Revaluation of debt
    
    
    (65.1
    )Plus: Additional minimum pension liability, net of tax
    
    
    186.2Total capitalization, per credit facilities
    
    $
    3,812.7Total debt as a percentage of total capitalization in accordance with our credit facility
    
    
    62.8
    %Total debt as a percentage of total capitalization, in accordance with GAAP
    
    
    66.5
    %
   Employees
  30




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings
   Canadian Dollar Hedging Program
  Recent Accounting Pronouncements
   31




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
    
 32




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk
  Interest Rate Risk
  Commodity Price Risk
  
 Item 4. Controls and Procedures.
     33




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 a.
    
    Bowater is involved in various legal proceedings relating to contracts, commercial
disputes, taxes, environmental issues, employment and workers compensation claims and other
matters. We periodically review the status of these proceedings with both inside and outside
counsel. We believe that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material adverse effect on the
results of operations in a given quarter or the year.
 b.
    
    On April 26, 2006, we received a notice of violation from the U.S. Environmental
Protection Agency (EPA) alleging four violations of the Clean Air Act (CAA) at our Calhoun
mill. We have strong arguments that the Calhoun mill did not violate the CAA and will enter
into discussions with the EPA in June 2006.
 c.
    
    There have been no material developments to those legal proceedings described in our
annual report on Form 10-K filed on March 13, 2006.
 
 Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Employment Agreement, dated April 4, 2006, by and between Bowater Incorporated and David J.
Paterson.12.1
    
    Statement regarding Computation of Ratio of Earnings to Fixed Charges.31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 34




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 
   BOWATER INCORPORATEDBy /s/ William G. HarveyWilliam G. HarveySenior Vice President and Chief Financial Officer By /s/ Joseph B. JohnsonJoseph B. JohnsonVice President and Controller  35




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Employment Agreement, dated April 4, 2006, by and between Bowater Incorporated and
David J. Paterson.12.1
    
    Statement regarding Computation of Ratio of Earnings to Fixed Charges.31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 36