##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from      to Commission file number     1-8712 BOWATER INCORPORATED  Delaware
    
    62-0721803(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602(Address of principal executive offices)
    
    (Zip Code)
 (864) 271-7733   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No  [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  Yes [X]  No  [  ] Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of November 01, 2004. Class
    
    Outstanding at November 01, 2004Common Stock, $1.00 Par Value
    
    55,649,739 Shares




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##### 



BOWATER INCORPORATED I N D E X
 PageNumberPART I FINANCIAL INFORMATION1. Financial Statements:Consolidated Statement of Operations for the Three and Nine Months
Ended September 30, 2004, and 2003
    
    
    3Consolidated Balance Sheet at September 30, 2004, and December 31, 2003
    
    
    4Consolidated Statement of Capital Accounts for the Nine Months Ended
September 30, 2004
    
    
    5Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7182. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19373. Quantitative and Qualitative Disclosures About Market Risk
    
    
    384. Controls and Procedures
    
    
    38PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    39Item 6. Exhibits
    
    
    39SIGNATURES
    
    
    40




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##### 



BOWATER INCORPORATED 
 CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in millions of US dollars except per-share amounts)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Sales
    
    $
    834.0
    
    
    $
    690.9
    
    
    $
    2,367.3
    
    
    $
    1,985.5Cost of sales, excluding depreciation, amortization
and cost of timber harvested
    
    
    586.9
    
    
    
    556.3
    
    
    
    1,731.7
    
    
    
    1,626.9Depreciation, amortization and cost of timber harvested
    
    
    83.0
    
    
    
    84.5
    
    
    
    254.1
    
    
    
    253.0Distribution costs
    
    
    85.2
    
    
    
    69.2
    
    
    
    241.6
    
    
    
    193.7Selling and administrative expense
    
    
    39.9
    
    
    
    36.9
    
    
    
    108.7
    
    
    
    107.7Net gain on sale of assets
    
    
    1.7
    
    
    
    4.1
    
    
    
    5.9
    
    
    
    119.2Operating income (loss)
    
    
    40.7
    
    
    
    (51.9
    )
    
    
    37.1
    
    
    
    (76.6
    )Other expense (income)Interest income
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (3.2
    )
    
    
    (3.5
    )Interest expense, net of capitalized interest
    
    
    48.4
    
    
    
    45.8
    
    
    
    146.5
    
    
    
    127.9Other, net
    
    
    (1.3
    )
    
    
    (0.3
    )
    
    
    (6.4
    )
    
    
    10.546.0
    
    
    
    44.4
    
    
    
    136.9
    
    
    
    134.9Loss before income taxes, minority interests
and cumulative effect of accounting changes
    
    
    (5.3
    )
    
    
    (96.3
    )
    
    
    (99.8
    )
    
    
    (211.5
    )Provision for income tax expense (benefit)
    
    
    12.0
    
    
    
    (39.7
    )
    
    
    (44.7
    )
    
    
    (52.4
    )Minority interests in net income (loss) of subsidiaries
    
    
    0.8
    
    
    
    (2.3
    )
    
    
    (3.2
    )
    
    
    (9.5
    )Loss before cumulative effect of accounting changes
    
    
    (18.1
    )
    
    
    (54.3
    )
    
    
    (51.9
    )
    
    
    (149.6
    )Cumulative effect of accounting changes
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    (4.5
    )Net loss
    
    
    (18.1
    )
    
    
    (56.7
    )
    
    
    (51.9
    )
    
    
    (154.1
    )Other comprehensive loss, net of taxForeign currency translation adjustments
    
    
    4.0
    
    
    
    (0.8
    )
    
    
    1.4
    
    
    
    9.6Minimum pension liability adjustments
    
    
    (3.6
    )
    
    
    0.5
    
    
    
    (1.6
    )
    
    
    (6.8
    )Unrealized (loss) gain on hedged transactions
    
    
    13.8
    
    
    
    (4.9
    )
    
    
    (39.2
    )
    
    
    93.8Comprehensive loss
    
    $
    (3.9
    )
    
    $
    (61.9
    )
    
    $
    (91.3
    )
    
    $
    (57.5
    )Basic loss per common shareLoss before cumulative effect of accounting changes
    
    
    (0.32
    )
    
    
    (0.96
    )
    
    
    (0.91
    )
    
    
    (2.63
    )Cumulative effect of accounting changes
    
    
    
    
    
    
    (0.04
    )
    
    
    
    
    
    
    (0.08
    )Net loss
    
    $
    (0.32
    )
    
    $
    (1.00
    )
    
    $
    (0.91
    )
    
    $
    (2.71
    )Diluted loss per common shareLoss before cumulative effect of accounting changes
    
    
    (0.32
    )
    
    
    (0.96
    )
    
    
    (0.91
    )
    
    
    (2.63
    )Cumulative effect of accounting changes
    
    
    
    
    
    
    (0.04
    )
    
    
    
    
    
    
    (0.08
    )Net loss
    
    $
    (0.32
    )
    
    $
    (1.00
    )
    
    $
    (0.91
    )
    
    $
    (2.71
    )Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.60
    
    
    $
    0.60
 See accompanying notes to consolidated financial statements 3




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##### 



BOWATER INCORPORATED 
 CONSOLIDATED BALANCE SHEET
(Unaudited, in millions of US dollars)
 September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15.1
    
    
    $
    19.4Accounts receivable, net
    
    
    421.5
    
    
    
    360.9Inventories
    
    
    308.6
    
    
    
    293.1Unrealized gain on hedged transactions
    
    
    92.7
    
    
    
    126.7Other current assets
    
    
    51.6
    
    
    
    42.9Total current assets
    
    
    889.5
    
    
    
    843.0Timber and timberlands
    
    
    185.1
    
    
    
    184.1Fixed assets, net
    
    
    3,358.7
    
    
    
    3,557.3Goodwill
    
    
    828.2
    
    
    
    828.2Other assets
    
    
    197.2
    
    
    
    203.2Total assets
    
    $
    5,458.7
    
    
    $
    5,615.8LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    13.0
    
    
    $
    13.4Short-term bank debt
    
    
    63.0
    
    
    
    200.5Accounts payable and accrued liabilities
    
    
    465.9
    
    
    
    434.1Dividends payable
    
    
    11.1
    
    
    
    11.7Total current liabilities
    
    
    553.0
    
    
    
    659.7Long-term debt, net of current installments
    
    
    2,425.0
    
    
    
    2,292.4Pension, other post-retirement benefits and other long-term liabilities
    
    
    499.6
    
    
    
    481.4Deferred income taxes
    
    
    419.4
    
    
    
    500.3Minority interests in subsidiaries
    
    
    67.6
    
    
    
    69.3Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value. Authorized 100,000,000 shares; issued
67,267,851 and 67,048,804 shares at September 30, 2004
and December 31, 2003, respectively
    
    
    67.2
    
    
    
    67.0Exchangeable shares, no par value. Unlimited shares authorized;
1,596,765 and 1,641,312 outstanding at September 30, 2004
and December 31, 2003, respectively
    
    
    76.0
    
    
    
    78.2Additional paid-in capital
    
    
    1,610.5
    
    
    
    1,602.6Retained earnings
    
    
    313.2
    
    
    
    399.1Unearned compensation
    
    
    (0.3
    )
    
    
    (1.0
    )Accumulated other comprehensive loss
    
    
    (86.5
    )
    
    
    (47.1
    )Treasury stock, at cost, 11,608,784 and 11,611,203 shares at
September 30, 2004 and December 31, 2003, respectively
    
    
    (486.0
    )
    
    
    (486.1
    )Total shareholders equity
    
    
    1,494.1
    
    
    
    1,612.7Total liabilities and shareholders equity
    
    $
    5,458.7
    
    
    $
    5,615.8
 See accompanying notes to consolidated financial statements 4




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##### 



BOWATER INCORPORATED 
 CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
For The Nine Months Ended September 30, 2004
(Unaudited, in millions of US dollars except per-share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    OtherCommon
    
    Exchangeable
    
    Paid-in
    
    Retained
    
    Unearned
    
    Comprehensive
    
    TreasuryStock
    
    Shares
    
    Capital
    
    Earnings
    
    Compensation
    
    Loss
    
    StockBalance at December 31, 2003
    
    $
    67.0
    
    
    $
    78.2
    
    
    $
    1,602.6
    
    
    $
    399.1
    
    
    $
    (1.0
    )
    
    $
    (47.1
    )
    
    $
    (486.1
    )Retraction of exchangeable shares (44,547 shares issued
and exchangeable shares retracted)
    
    
    
    
    
    
    (2.2
    )
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51.9
    )
    
    
    
    
    
    
    
    
    
    
    Dividends ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34.0
    )
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    Stock options exercised (174,500 shares)
    
    
    0.2
    
    
    
    
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit on exercise of stock options
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension plan additional minimum liability,
net of tax benefit of $0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.6
    )
    
    
    Treasury stock used for dividend reinvestment plans and
to pay employee and director benefits (2,419 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss on hedged transactions,
net of tax benefit of $23.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39.2
    )
    
    
    Balance at September 30, 2004
    
    $
    67.2
    
    
    $
    76.0
    
    
    $
    1,610.5
    
    
    $
    313.2
    
    
    $
    (0.3
    )
    
    $
    (86.5
    )
    
    $
    (486.0
    )
 See accompanying notes to consolidated financial statements 5




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BOWATER INCORPORATED 
 CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in millions of US Dollars)
 Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (51.9
    )
    
    $
    (154.1
    )Adjustments to reconcile net loss to net cash
from operating activities:Cumulative
effect of accounting changes, net of taxes
    
    
    
    
    
    
    4.5Depreciation, amortization and cost of
timber harvested
    
    
    254.1
    
    
    
    253.0Deferred income taxes
    
    
    (55.4
    )
    
    
    (57.5
    )Amortization of unearned compensation
    
    
    0.7
    
    
    
    1.6Minority interests in net loss of subsidiaries
    
    
    (3.2
    )
    
    
    (9.5
    )Net gain on fixed assets and land sales
    
    
    (5.9
    )
    
    
    (119.2
    )Changes in working capital:Accounts receivable, net
    
    
    (60.6
    )
    
    
    (29.1
    )Inventories
    
    
    (15.5
    )
    
    
    (31.2
    )Income taxes receivable
    
    
    
    
    
    
    75.6Accounts payable and accrued liabilities
    
    
    57.1
    
    
    
    41.8Income taxes payable
    
    
    (26.2
    )
    
    
    25.9Other, net
    
    
    (7.5
    )
    
    
    22.7Net cash from operating activities
    
    
    85.7
    
    
    
    24.5Cash
flows from (used for) investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (60.3
    )
    
    
    (186.5
    )Disposition of assets, including timber and timberlands
    
    
    10.3
    
    
    
    146.1Net cash used for investing activities
    
    
    (50.0
    )
    
    
    (40.4
    )Cash flows from (used for) financing activities:Cash dividends, including minority interests
    
    
    (34.6
    )
    
    
    (33.8
    )Short-term financing
    
    
    540.5
    
    
    
    693.1Short-term financing repayments
    
    
    (683.1
    )
    
    
    (784.1
    )Long-term financing
    
    
    245.9
    
    
    
    394.2Payments of long-term debt
    
    
    (113.8
    )
    
    
    (272.0
    )Stock options exercised
    
    
    5.1
    
    
    
    0.7Net cash used for financing activities
    
    
    (40.0
    )
    
    
    (1.9
    )Net decrease in cash and cash equivalents
    
    
    (4.3
    )
    
    
    (17.8
    )Cash and cash equivalents at beginning of year
    
    
    19.4
    
    
    
    35.9Cash and cash equivalents at end of period
    
    $
    15.1
    
    
    $
    18.1SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest, including capitalized interest of $0 and $7.5
    
    $
    121.9
    
    
    $
    114.8Income taxes
    
    $
    33.9
    
    
    $
    3.0
 See accompanying notes to consolidated financial statements 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 September 30, 2004 and the related statements of operations,
capital accounts and cash flows for the periods ended September 30, 2004 and
2003 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, 2004 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 2004 presentation. The reclassifications
had no effect on total shareholders equity or net loss.Timber and TimberlandsThe acquisition cost of land and timber, property taxes, lease payments, site
preparation and other costs related to the planting and growing of timber are
capitalized. Capitalization policies are consistent prior to and during
harvesting. These costs, excluding land, are charged against revenue at the
time the timber is harvested, based on annually determined depletion rates,
and are included in the line titled Depreciation, amortization and cost of
timber harvested in the Consolidated Statement of Operations. Growth and
yield models are used to estimate timber volume on our land from year to
year. These volumes affect the depletion rates, which is calculated annually
based on the capitalized costs and the total timber volume based on the
current stage of the growth cycle.Revenue RecognitionBowater ships all products directly from its manufacturing sites to a
customers location or to a customer-designated site. In accordance with
Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No.
104, regarding revenue recognition, we recognize revenue only when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred; the sellers price to the buyer is fixed or
determinable; and collectibility is reasonably assured.2.
    
    Asset Retirement ObligationsEffective January 1, 2003, Bowater adopted Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations.
This Statement requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred and for
which a reasonable estimate of a fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
related long-lived asset. Subsequently, the asset retirement costs are to be
allocated to expense using a systematic and rational method and the liability
is to be accreted to its face amount.In connection with the adoption of SFAS No. 143, we recorded a cumulative
effect charge, net of taxes, of $2.1 million (or $0.04 per share) to our
consolidated statement of operations for the first quarter of 2003. The
adoption adjustment also included a net increase to fixed assets of $0.9
million, long-term obligations of $4.3 million and deferred tax assets of
$1.3 million. Asset retirement obligations were recorded for those
obligations where a legally
enforceable obligation exists, the life is determinable and a reasonable
estimate of fair value can be made. Asset retirement obligations recorded in
connection with the adoption of SFAS No. 143 were primarily for industrial
waste landfills, bark piles and sludge basins where we have a legally
enforceable obligation to perform capping and post closure monitoring
procedures upon closing of these assets. Prior to SFAS No. 143, Bowater had
not recorded an obligation for these asset retirement obligations. Bowater
has not had to legally restrict these assets for purposes of settling its
asset retirement obligations. 7




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  Additionally, we have certain asset retirement obligations that have
indeterminate useful lives and thereby have an indeterminate settlement date
for the related asset retirement obligation. As a result, no asset
retirement obligation has been recorded for these assets. These assets
include, for example, wastewater and effluent ponds that will be required to
be drained once the related operating facility is closed and removal of
chemicals and other related materials from storage sites on owned facilities
once the related operating facility is closed. Once the life of these assets
becomes determinable and an estimate of fair value can be made, an asset
retirement obligation will be recorded.The following table describes changes to Bowaters asset retirement
obligation liability for the periods ended September 30, 2004 and 2003: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2004
    
    2003
    
    2004
    
    2003Asset retirement obligation at the beginning of
period
    
    $
    4.7
    
    
    $
    4.5
    
    
    $
    4.6
    
    
    $
    Cumulative effect adjustment of adoption of
SFAS No. 143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.3Payments against asset retirement obligation
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.4
    )Accretion expense
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3Asset retirement obligation at the end of period
    
    $
    4.5
    
    
    $
    4.6
    
    
    $
    4.5
    
    
    $
    4.6
  3.
    
    Off-Balance Sheet Arrangement  FIN 46, Consolidation of Variable
Interest EntitiesIn January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation (FIN) No. 46, Consolidation of Variable Interest
Entities. Many variable interest entities (VIEs) have commonly been
referred to as special-purpose entities or off-balance sheet structures. In
general, a VIE is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN
46 requires a VIE to be consolidated by a company if that company is subject
to a majority of the risk of loss from the VIEs activities or entitled to
receive a majority of the entitys residual returns or both. The
consolidation requirements of FIN 46 apply immediately to VIEs created after
January 31, 2003. The consolidation requirements apply to older entities in
the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the VIE was established.In October 2003, the FASB issued FASB Staff Position FIN 46-6 which (i)
deferred the implementation of FIN 46 for VIEs created before February 1,
2003, for periods ending after December 15, 2003, and (ii) permitted early
adoption of FIN 46 before the end of the deferral period for some or all VIEs
in which an entity holds an interest. Effective July 1, 2003, Bowater early
adopted FIN 46 specific to the Covington, Tennessee paper coating facility
(referred to as Nuway) which had been financed through a special purpose
entity (SPE). This SPE was determined to be a VIE and required to be
consolidated by Bowater in accordance with FIN 46. As such, in the third
quarter of 2003, Bowater consolidated assets of approximately $49.4 million
and debt of approximately $51.8 million and recorded a non-cash, after tax
cumulative effect charge, of $2.4 million (or $0.04 per share). On August
11, 2003, Bowater terminated the lease agreement with the SPE and paid
approximately $51.8 million to pay off the debt. 8




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  The pro forma effects of the application of FIN 46, as if the statement had
been adopted on January 1, 2003 (rather than July 1, 2003) are presented
below: Nine Months Ended(In millions, except per-share amounts)
    
    September 30, 2003Net loss
    
    $
    (155.5
    )Basic loss per common share
    
    
    (2.73
    )Diluted loss per common share
    
    
    (2.73
    )
  In December 2003, the FASB issued a revision to FIN 46 (FIN 46R). Under
the new FIN 46R guidance, application of FIN 46R is required in financial
statements of entities that have interests in structures that are commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Application for all other types of variable interest entities is
required in financial statements for periods ending after March 15, 2004.
Bowater completed its adoption of FIN 46R in the first quarter of 2004.
Adoption of FIN 46R had no impact on Bowaters Consolidated Financial
Statements.  4.
    
    Stock Based CompensationBowater accounts for stock-based compensation utilizing the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Under APB No. 25, compensation
expense for employee stock options is generally not recognized if the
exercise price of the option equals or exceeds the fair value of the
underlying stock on the date of grant.The following table represents the pro forma effect on net loss and loss per
share if we had applied the fair value-based method and recognition
provisions of SFAS No. 123 Accounting for Stock-Based Compensation. The
estimated fair value of the option is amortized to expense over the vesting
period of the option award, in accordance with the provisions of SFAS No.
123. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions, except per-share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Net loss as reported:
    
    $
    (18.1
    )
    
    $
    (56.7
    )
    
    $
    (51.9
    )
    
    $
    (154.1
    )Add: Stock-based compensation expense included in
net
loss, net of related tax effects
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    1.3Deduct: Stock-based compensation expense
determined under fair value based methods, net of
related tax effects
    
    
    (1.8
    )
    
    
    (1.8
    )
    
    
    (5.5
    )
    
    
    (5.6
    )Pro forma net loss
    
    $
    (19.8
    )
    
    $
    (58.1
    )
    
    $
    (56.9
    )
    
    $
    (158.4
    )Loss per share:Basic, as reported
    
    $
    (0.32
    )
    
    $
    (1.00
    )
    
    $
    (0.91
    )
    
    $
    (2.71
    )Basic, pro forma
    
    
    (0.35
    )
    
    
    (1.02
    )
    
    
    (1.00
    )
    
    
    (2.78
    )Diluted, as reported
    
    $
    (0.32
    )
    
    $
    (1.00
    )
    
    $
    (0.91
    )
    
    $
    (2.71
    )Diluted, pro forma
    
    
    (0.35
    )
    
    
    (1.02
    )
    
    
    (1.00
    )
    
    
    (2.78
    )
 9




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  The fair value of each option granted in the nine months ended September 30,
2004 and 2003, was estimated on the date of grant using the Black-Scholes
option-pricing model with the weighted average assumptions below. There were
no options granted during the three-months ended September 30, 2004 and 2003. Nine Months EndedSeptember 30,2004
    
    2003Assumptions:Dividend yield
    
    
    1.80
    %
    
    
    1.96
    %Expected volatility
    
    
    30.60
    %
    
    
    31.77
    %Risk-free interest rate
    
    
    3.40
    %
    
    
    3.35
    %Expected option lives in years
    
    
    6.80
    
    
    
    6.24Weighted average fair value of each option
    
    $
    13.88
    
    
    $
    12.19
  In January 2004, Bowater granted 862,000 options pursuant to its 2002 stock
option plan at an exercise price of approximately $45 per share. The options
generally become exercisable over a period of two years and expire 10 years
from date of grant.On January 28, 2003, Bowater granted 82,510 restricted stock awards to
certain officers under the 2002 stock option plan. In accordance with APB
No. 25, Bowater is recognizing a compensation charge over the vesting periods
equal to the fair market value of these shares on the date of the grant. The
expense measured under SFAS No. 123 does not differ from that under APB No.
25. Shares of restricted stock awarded under the 2002 plan vest over a
two-year period and are subject to forfeiture in the event of termination of
employment prior to the vesting dates. Prior to vesting, the participants
may vote and receive dividends. The market value of the restricted shares
granted on January 28, 2003 was approximately $3.3 million and was recorded
in the first quarter of 2003 as unearned compensation, which is a separate
component of shareholders equity. Bowater recorded compensation expense
related to the amortization of unearned compensation of approximately $0.2
million and $0.7 million for the three and nine-month periods ended September
30, 2004, respectively and approximately $0.6 million and $1.6 million for
the three and nine-month periods ended September 30, 2003, respectively.5.
    
    Net Gain (Loss) on Fixed Assets and Land SalesDuring the three and nine months ended September 30, 2004, Bowater recorded a
net pre-tax gain of $1.7 million, or $0.01 per diluted share after tax and
$5.9 million, or $0.07 per diluted share after tax, respectively, related to
land sales and gains or losses on fixed assets.During the three and nine months ended September 30, 2003, Bowater recorded a
net pre-tax gain of $4.1 million, or $0.04 per diluted share after tax, and
$119.2 million, or $1.3 per diluted share after tax, respectively, related to
land sales and gains or losses on fixed assets. In the second quarter of
2003, Bowater completed the sale of 81,768 acres of owned and leased
timberlands for aggregate consideration of $121.8 million. This transaction
resulted in a pre-tax gain of approximately $97.5 million.6.
    
    Other (Income) ExpenseOther, net in the Consolidated Statement of Operations includes the
following: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2004
    
    2003
    
    2004
    
    2003Foreign exchange (gain) loss
    
    $
    1.2
    
    
    $
    2.1
    
    
    $
    (0.1
    )
    
    $
    15.9Income from joint venture
    
    
    (1.7
    )
    
    
    (1.0
    )
    
    
    (3.2
    )
    
    
    (0.8
    )Miscellaneous income
    
    
    (0.8
    )
    
    
    (1.4
    )
    
    
    (3.1
    )
    
    
    (4.6
    )$
    (1.3
    )
    
    $
    (0.3
    )
    
    $
    (6.4
    )
    
    $
    10.5
 10




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  7.
    
    Accumulated Other Comprehensive LossThe components of Accumulated other comprehensive loss in the Consolidated
Balance Sheet are as follows: September 30,
    
    December 31,(Unaudited, in millions)
    
    2004
    
    2003Pension plan additional minimum liabilities (1)
    
    $
    (158.5
    )
    
    $
    (156.9
    )Foreign currency translation (2)
    
    
    4.3
    
    
    
    2.9Unrealized gain on hedging transactions (3)
    
    
    67.7
    
    
    
    106.9$
    (86.5
    )
    
    $
    (47.1
    )
  (1)
    
    Net of deferred tax benefit of $88.7 million and $88.2 million,
respectively.(2)
    
    No tax effect is recorded for foreign currency translation since the
foreign net assets translated are deemed permanently invested.(3)
    
    Net of deferred tax expense of $41.6 million and $65.5 million,
respectively.  8.
    
    Loss Per ShareBasic and diluted loss per share are based on net loss and do not include any
impact from Other comprehensive loss. The calculation of basic and diluted
loss per share after cumulative effect of accounting changes is as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions, except per-share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Basic computation:Basic loss available to common shareholders
    
    $
    (18.1
    )
    
    $
    (56.7
    )
    
    $
    (51.9
    )
    
    $
    (154.1
    )Basic weighted average shares outstanding
    
    
    57.2
    
    
    
    56.9
    
    
    
    57.2
    
    
    
    56.9Basic loss per common share
    
    $
    (0.32
    )
    
    $
    (1.00
    )
    
    $
    (0.91
    )
    
    $
    (2.71
    )Diluted computation:Diluted loss available to common shareholders
    
    $
    (18.1
    )
    
    $
    (56.7
    )
    
    $
    (51.9
    )
    
    $
    (154.1
    )Basic weighted average shares outstanding
    
    
    57.2
    
    
    
    56.9
    
    
    
    57.2
    
    
    
    56.9Effect of dilutive securities:Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    57.2
    
    
    
    56.9
    
    
    
    57.2
    
    
    
    56.9Diluted loss per common share
    
    $
    (0.32
    )
    
    $
    (1.00
    )
    
    $
    (0.91
    )
    
    $
    (2.71
    )
  The dilutive effect of options outstanding is calculated using the treasury
stock method. Options for approximately 4.7 million shares and
4.1 million shares outstanding at September 30, 2004 and 2003, respectively, were
excluded from the calculation of diluted loss per share as the impact would
have been antidilutive. 11




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  9.
    
    Severance Related LiabilitiesCOST REDUCTION PROGRAM:In connection with a multifaceted cost reduction initiative announced in the
fourth quarter of 2002 and completed in the fourth quarter of 2003, Bowater
reduced its salaried and hourly workforce at certain locations by
approximately 600 people. The majority of the 600 terminations were part of
either a voluntary or involuntary workforce reduction that included
termination charges for severance, medical, pension, and other benefits.
Total costs associated with the initiative were $47.9 million ($34.5 million
in 2003 and $13.4 million in 2002), including $11.8 million of pension
related costs ($5.3 million for pension and other postretirement plan
curtailments and $6.5 million of other pension plan benefits related to
accelerated pension years of service). The termination costs are classified
as either cost of sales (manufacturing personnel) or selling and
administrative expense (administrative personnel) in the Consolidated
Statement of Operations. Termination costs under the above initiative for
the three and nine-month periods ended September 30, 2003, totaled
approximately $4.7 million and $29.6 million, respectively. Included in the
employee termination costs of $4.7 million for the third quarter of 2003 are
pension plan benefits of approximately $1.1 million. Payments relating to
the cost reduction initiative for the nine months ended September 30, 2004
totaled approximately $8.6 million. The remaining accrual at September 30,
2004, of $1.5 million, which excludes the pension related charges, is
expected to be paid over the remainder of 2004 and is included in Accounts
payable and accrued liabilities in the Consolidated Balance Sheet.The following table summarizes the activity of our cost reduction initiative,
by reportable segment, expensed to our Consolidated Statement of Operations: Expense For Three
    
    Expense For NineMonths Ended
    
    Months Ended(Unaudited, in Millions)
    
    September 30, 2003
    
    September 30, 2003Employee termination costs by segment:Newsprint Division
    
    $
    3.2
    
    
    $
    20.5Coated and Specialty Papers Division
    
    
    1.3
    
    
    
    5.6Canadian Forest Products Division
    
    
    0.1
    
    
    
    2.4Forest Products Division
    
    
    0.1
    
    
    
    1.1$
    4.7
    
    
    $
    29.6
  The following table summarizes the activity for the liabilities described
above, excluding the pension related costs: Write-offs &Payments
    
    IncreaseDecember 31,
    
    Against
    
    (Decrease)
    
    Foreign
    
    September(Unaudited, in millions)
    
    2003
    
    Reserve
    
    Reserve
    
    Exchange
    
    30, 2004Employee termination
costs
    
    $
    9.0
    
    
    $
    8.6
    
    
    $
    1.1
    
    
    $
    
    
    
    $
    1.5
  10.
    
    Long-Term and Short-Term Debt and Off-Balance Sheet Debt GuaranteesOn March 17, 2004, Bowater sold, in a registered offering, $250 million of
notes due March 15, 2010. Interest on the notes accrue at a rate based on
LIBOR plus 3% and is payable quarterly beginning on June 15, 2004. On or
after March 15, 2006, Bowater may redeem all or a portion of the notes at any
time. The redemption price will be 102% of the principal amount if redeemed
from March 15, 2006 to March 14, 2007; 101% if redeemed from March 15, 2007
to March 14, 2008; and 100% if redeemed on or after March 15, 2008. We
received net proceeds from the sale of the notes of $246.2 million, which
were net of underwriting fees of $3.8 million. These fees are being
amortized over the life of the notes. The proceeds were used to pay amounts
outstanding under the short-term bank debt credit facilities ($146.2 million)
and the associated term loan ($100.0 million). 12




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited On April 22, 2004, Bowater closed on a new three-year revolving credit
facility due April 2007. The new facility provides $400 million of revolving
credit in the United States and $35 million in Canada. This new facility
replaces the previous $500 million three-year credit facility in the United
States and the $100 million 364-day credit facility in Canada. Borrowings
under the new 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. The facility contains various covenants, including
requirements to maintain a minimum consolidated net worth (generally defined
as common shareholders equity, plus any outstanding preferred stock plus
minimum pension liability amounts) of $1.5 billion, a maximum 62.5% ratio of
total debt to total capital (defined as total debt less revaluation of debt
assumed through acquisitions, plus net worth including minority interest,
plus minimum pension liability amounts), and to maintain an annual minimum
EBITDA (generally defined as net income, excluding extraordinary,
non-recurring or non-cash items, plus income taxes plus depreciation plus net
interest expense) of $250.0 million measured quarterly, beginning March 31,
2005, through December 31, 2005, and $400.0 million at the end of each
quarter thereafter. If 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, 2003). As of September 30, 2004 there was an outstanding amount of $3.0 million on
the revolving credit facility in the United States and no outstanding amounts
on the Canadian revolving credit facility. Additionally, there was an
outstanding amount of $60 million on the 364-day Accounts Receivable
Securitization Arrangement. Bowater has off-balance sheet debt guarantees of approximately $42.4 million
at September 30, 2004, with $32.4 million related to Ponderay Newsprint
Company (Ponderay) and $10.0 million related to Timber Note Holdings LLC, a
Qualified Special Purpose Entity. Bowater has a 40% interest in Ponderay, an unconsolidated partnership.
Ponderay has a credit facility with several banks that is made up of two
separate tranches. The first tranche is a $25.0 million revolving credit
facility and the second tranche is a $81.0 million term loan. Bowater and
the other partners serve as guarantors on the term loan. Ponderays
outstanding balance under the term loan at September 30, 2004 was $81.0
million. The revolving credit facility has $10 million reserved for letters
of credit. There are no other balances outstanding under the revolving
credit facility. Ponderays term loan outstanding balance is reduced
annually by its excess cash flows as defined in the credit facility and the
final balance is due at maturity on April 12, 2006. Bowater guarantees 40%
of the outstanding balance under the Ponderay term loan (a guarantee of $32.4
million at September 30, 2004). Bowaters guarantee is reduced as the
outstanding balance of the term loan is reduced. Bowater would be required
to perform on the guarantee if Ponderay were to default on its credit
facility and Ponderays assets, which collateralize the debt, were
insufficient to pay off the credit facility. In connection with Bowaters 1999 land sale and note monetization, we
guarantee 25% of the outstanding investor notes principal balance of Timber
Note Holdings LLC. Bowater currently guarantees approximately $10.0 million
of the investor notes principal balance. This guarantee is proportionately
reduced by annual principal repayments on the investor notes (annual minimum
repayments of $2.0 million) through 2008. The remaining investor notes
principal amount is to be repaid in 2009. Bowater would be required to
perform on the guarantee if Timber Note Holdings LLC were to default on the
investor notes or if there were a default on the notes receivable. 13




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  11.
    
    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 and nine months
ended September 30, 2004 and 2003:Pension Plans: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    2004
    
    2003Components of net periodic benefit cost:Service cost
    
    $
    8.6
    
    
    $
    7.9
    
    
    $
    27.7
    
    
    $
    23.9Interest cost
    
    
    27.2
    
    
    
    25.6
    
    
    
    81.8
    
    
    
    76.6Expected return on plan assets
    
    
    (27.0
    )
    
    
    (25.9
    )
    
    
    (81.2
    )
    
    
    (77.9
    )Amortization of transition amount
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.4
    )Amortization of prior service cost
    
    
    .5
    
    
    
    0.3
    
    
    
    1.5
    
    
    
    0.7Recognized net actuarial loss
    
    
    3.3
    
    
    
    1.1
    
    
    
    9.7
    
    
    
    3.3Amount of curtailment loss
recognized (See Note 9)
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    3.0Amount of settlement loss recognized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.6Cost of special or contractual
termination benefits
recognized (See Note 9)
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    5.7Net periodic benefit cost
    
    $
    12.6
    
    
    $
    10.2
    
    
    $
    39.5
    
    
    $
    37.5
  Other Postretirement Plans: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    2004
    
    2003Components of net periodic benefit cost:Service cost
    
    $
    1.0
    
    
    $
    1.0
    
    
    $
    3.4
    
    
    $
    3.0Interest cost
    
    
    4.0
    
    
    
    3.6
    
    
    
    12.9
    
    
    
    10.8Amortization of prior service cost
    
    
    (1.5
    )
    
    
    (1.6
    )
    
    
    (4.6
    )
    
    
    (4.8
    )Recognized net actuarial loss
    
    
    2.0
    
    
    
    2.0
    
    
    
    7.3
    
    
    
    6.0Net periodic benefit cost
    
    $
    5.5
    
    
    $
    5.0
    
    
    $
    19.0
    
    
    $
    15.0
  In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was passed. The Act introduced a
prescription drug benefit under Medicare Part D as well as a federal subsidy
to sponsors of retiree health care benefit plans that provide a benefit that
is at least actuarially equivalent to Medicare Part D. Our postretirement
benefits include prescription drug benefits for Medicare-eligible retirees.
In March 2004, the FASB issued FASB Staff Position (FSP) 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) that provides guidance
on the accounting for the effects of the Act for employers that sponsor
postretirement health care plans that provide drug benefits. This FSP also
requires those employers to provide certain disclosures regarding the effect
of the federal subsidy provided by the Act.  Bowater adopted FSP 106-2 effective July 1, 2004 and applied the prospective
transition method. As a result, a remeasurement of the plans assets and
accumulated postretirement benefit obligation (APBO), including the effects 14




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited of the subsidy was made. The remeasurement resulted in a reduction of our
net periodic benefit cost for 2004 of $2.5 million, of which $1.25 million
will be recorded each in the third and fourth quarters of 2004. The $2.5
million reduction consisted of $0.3 million for the reduction of current
period service costs, $1.3 million for the reduction of amortization of
actuarial experience loss and $0.9 million for reduction in interest costs on
our APBO. The remeasurement changed the prior service cost component of our
APBO by approximately $36.9 million.  12.
    
    Commitments and Contingenciesa.
    
    Bowater is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers
compensation claims and other matters. We periodically review the status
of these proceedings with both inside and outside counsel. We believe
that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material
adverse effect on the results of operations in a given quarter or the
year.b.
    
    There have been no material developments to the legal proceedings
described in our annual report on Form 10-K filed on March 10, 2004.13.
    
    Financial InstrumentsBowater utilizes certain derivative instruments to enhance its ability to
manage risk relating to cash flow exposure. Derivative instruments are
entered into for periods consistent with related underlying cash flow
exposures and do not constitute positions independent of those positions. We
do not enter into contracts for speculative purposes; however, we do, from
time to time enter into commodity and certain forward contracts that are not
accounted for as accounting hedges. On the date into which the derivative
contract is entered we designate the derivative as a cash flow hedge.We pay a significant portion of the operating expenses of our Canadian mill
sites in Canadian dollars. To reduce our exposure to United States and
Canadian dollar exchange rate fluctuations, we enter into and designate
Canadian dollar forward contracts to hedge certain of our forecasted Canadian
dollar cash outflows at the Canadian mill operations.The components of the net gain related to cash flow hedges and included in
Accumulated other comprehensive loss for the three and nine months ended
September 30, 2004 and 2003 are as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    2004
    
    2003Gains resulting from
reclassification to
earnings from Accumulatedother comprehensive loss
    
    $
    (33.0
    )
    
    $
    (12.0
    )
    
    $
    (91.3
    )
    
    $
    (25.8
    )Unrealized gain for change
in value of cash flow
hedges
    
    
    55.2
    
    
    
    4.1
    
    
    
    28.0
    
    
    
    177.222.2
    
    
    
    (7.9
    )
    
    
    (63.3
    )
    
    
    151.4Income tax (expense) benefit
    
    
    (8.4
    )
    
    
    3.0
    
    
    
    23.9
    
    
    
    (57.6
    )Net gain in Accumulated
other comprehensive loss
    
    $
    13.8
    
    
    $
    (4.9
    )
    
    $
    (39.2
    )
    
    $
    93.8
  We formally document all relationships between hedging instruments and hedged
items, as well as our risk-management objectives and strategies for
undertaking various hedge transactions. We link all hedges that are
designated as cash flow hedges to forecasted transactions. The maximum time
period we have hedged transactions is two years. We also assess, both at the
inception of the hedge and on an on-going basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting
changes in cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge, we discontinue hedge
accounting prospectively. 15




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited  Information regarding our Canadian dollar contracts notional amount,
carrying value, fair market value, and range of exchange rates of the
contracts is summarized in the table below. The notional amount of these
contracts represents the amount of foreign currencies to be purchased or sold
at maturity and does not represent our exposure on these contracts. Notional
    
    Net Asset (Liability)
    
    Range OfAmount of
    
    Carrying
    
    Fair
    
    U.S.$/CDN$September 30, 2004 (in millions)
    
    Derivatives
    
    Amount
    
    Market Value
    
    Exchange RatesForeign Currency Exchange AgreementsBuy Currency:Canadian dollarDue in 2004
    
    $
    127.0
    
    
    $
    33.2
    
    
    $
    33.2
    
    
    
    .6476 - .6124Due in 2005
    
    
    507.0
    
    
    
    66.1
    
    
    
    66.1
    
    
    
    .7489 - .6316Due in 2006
    
    
    183.0
    
    
    
    10.0
    
    
    
    10.0
    
    
    
    .7609 - .7124$
    817.0
    
    
    $
    109.3
    
    
    $
    109.3
  In order to reduce our exposure to exchange rate fluctuations on our Canadian
dollar denominated long-term debt, we enter into Canadian dollar forward
contracts with notional amounts of approximately $100 million. These
economic hedge contracts are marked to market through earnings. The
contracts are settled quarterly and gains or losses are included in Other,
net in our Consolidated Statement of Operations. At September 30, 2004, our
outstanding Canadian dollar forward contracts had notional amounts of $100
million due on December 30, 2004. The fair value of the Canadian dollar
forward contracts outstanding at September 30, 2004 was a liability of $0.1
million. We recorded gains of $5.9 million and $3.3 million for the three
and nine months ended September 30, 2004, respectively, and gains of $0.1
million and $17.3 million for the three and nine months ended September 30,
2003, respectively, in the Consolidated Statement of Operations as a result
of these economic hedge contracts.The counterparties to our derivative financial instruments are substantial
and creditworthy multi-national financial institutions and no one financial
institution has more than 17% of our derivative financial instruments.
Therefore, the risk of counterparty nonperformance is considered to be
remote.14.
    
    Segment InformationBelow is a description of the types of products and services from which each
reportable segment derives its revenues:Bowater is organized into five divisions: the Newsprint Division, the Coated
and Specialty Papers Division, the Canadian Forest Products Division, the
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 four divisions are our reportable segments. Certain
segment information for the three and nine-month periods ended September 30,
2003 has been reclassified to conform to the September 30, 2004 presentation.NEWSPRINT DIVISIONThe Newsprint Division operates seven manufacturing sites (including Ponderay
Newsprint Company, an unconsolidated partnership) in the United States,
Canada and South Korea. The principal product at these manufacturing sites
is newsprint, but several of the sites also produce market pulp and uncoated
specialty papers. This division has primary responsibility for the domestic
and international marketing and sales of newsprint. 16




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited COATED AND SPECIALTY PAPERS DIVISION The Coated and Specialty Papers Division operates a manufacturing site that
produces coated paper, market pulp and uncoated specialty papers, and two
Nuway coating facilities, both located in the United States. This division
has primary responsibility for the marketing and sales of the full spectrum of coated and
uncoated specialty papers manufactured by Bowater. CANADIAN FOREST PRODUCTS DIVISION The Canadian Forest Products Division operates four paper manufacturing sites
in Canada. The division manages 0.4 million acres of owned or leased
timberland and over 23.5 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 eight sawmills and one wood treatment plant, supplies
wood to four paper mills and eight sawmills, and is responsible for the
marketing and sales of its timber and lumber production. FOREST PRODUCTS DIVISION The Forest Products Division manages 1.0 million acres of timberland owned or
leased in the United States and the Canadian provinces of Ontario and Nova
Scotia and over 8.3 million acres of Crown-owned land in the province of
Ontario on which we have cutting rights. The division also operates five
softwood sawmills, supplies wood fiber to our pulp and paper production sites
and markets and sells timber and southern yellow pine lumber in North
America. PULP DIVISION The Pulp Division markets and distributes market pulp produced by other
divisions. Financial results for the production and sale of market pulp are
included in the Newsprint Division or the Coated and Specialty Papers
Division, depending upon which site manufactures the product. The Pulp
Divisions selling and administrative expenses are included in Corporate and
Other Eliminations. Accordingly, no separate results are reported for this
division. Factors management used to identify our segments: Bowaters reportable segments are business units responsible for the
marketing and sales of different products. They are managed separately
because of the different products they are responsible for manufacturing and
distributing. The line entitled Segment income (loss) in the following tables is equal to
Operating income (loss) as presented in our Consolidated Statement of
Operations. In addition, none of the income or loss items following
Operating income (loss) in our Consolidated Statement of Operations are
allocated to our segments, since they are reviewed separately by Bowaters
management. 17




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited The following tables summarize information about segment profit and loss for
the three and nine-month periods ended September 30, 2004 and 2003 and
segment assets as of September 30, 2004 and 2003: Coated
    
    
    
    
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    
    
    
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Forest
    
    Assets
    
    Corporate/September 30, 2004
    
    Newsprint
    
    Papers
    
    Products
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales-including internal sales
    
    $
    417.5
    
    
    $
    159.4
    
    
    $
    220.0
    
    
    $
    47.9
    
    
    $
    
    
    
    $
    
    
    
    $
    844.8Elimination of intersegment
sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10.8
    )
    
    
    (10.8
    )Sales - external customers
    
    
    417.5
    
    
    
    159.4
    
    
    
    220.0
    
    
    
    47.9
    
    
    
    
    
    
    
    (10.8
    )
    
    
    834.0Segment income
    
    
    6.9
    
    
    
    8.7
    
    
    
    7.6
    
    
    
    5.3
    
    
    
    1.7
    
    
    
    10.5
    
    
    
    40.7Total assets at 9/30/04
    
    $
    2,599.6
    
    
    $
    759.4
    
    
    $
    1,254.4
    
    
    $
    249.8
    
    
    $
    
    
    
    $
    595.5
    
    
    $
    5,458.7
 Coated
    
    
    
    
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    
    
    
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Forest
    
    Assets
    
    Corporate/September 30, 2003
    
    Newsprint
    
    Papers
    
    Products
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales-including internal sales
    
    $
    355.7
    
    
    $
    132.0
    
    
    $
    184.9
    
    
    $
    34.2
    
    
    $
    
    
    
    $
    
    
    
    $
    706.8Elimination of intersegment
sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.9
    )
    
    
    (15.9
    )Sales - external customers
    
    
    355.7
    
    
    
    132.0
    
    
    
    184.9
    
    
    
    34.2
    
    
    
    
    
    
    
    (15.9
    )
    
    
    690.9Segment income (loss)
    
    
    (23.5
    )
    
    
    (15.3
    )
    
    
    (10.0
    )
    
    
    (0.7
    )
    
    
    4.1
    
    
    
    (6.5
    )
    
    
    (51.9
    )Total assets at 9/30/03
    
    $
    2,748.6
    
    
    $
    753.8
    
    
    $
    1,243.1
    
    
    $
    242.6
    
    
    $
    
    
    
    $
    635.8
    
    
    $
    5,623.9
 Coated
    
    
    
    
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    
    
    
    
    on FixedNine Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Forest
    
    Assets
    
    Corporate/September 30, 2004
    
    Newsprint
    
    Papers
    
    Products
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales-including internal sales
    
    $
    1,213.1
    
    
    $
    452.9
    
    
    $
    601.1
    
    
    $
    131.8
    
    
    $
    
    
    
    $
    
    
    
    $
    2,398.9Elimination of intersegment
sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31.6
    )
    
    
    (31.6
    )Sales - external customers
    
    
    1,213.1
    
    
    
    452.9
    
    
    
    601.1
    
    
    
    131.8
    
    
    
    
    
    
    
    (31.6
    )
    
    
    2,367.3Segment income (loss)
    
    
    (16.5
    )
    
    
    14.6
    
    
    
    (10.8
    )
    
    
    7.5
    
    
    
    5.9
    
    
    
    36.4
    
    
    
    37.1
 Coated
    
    
    
    
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    
    
    
    
    on FixedNine Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Forest
    
    Assets
    
    Corporate/September 30, 2003
    
    Newsprint
    
    Papers
    
    Products
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales-including internal sales
    
    $
    1,066.1
    
    
    $
    355.5
    
    
    $
    539.9
    
    
    $
    80.8
    
    
    $
    
    
    
    $
    
    
    
    $
    2,042.3Elimination of intersegment
sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56.8
    )
    
    
    (56.8
    )Sales  external customers
    
    
    1,066.1
    
    
    
    355.5
    
    
    
    539.9
    
    
    
    80.8
    
    
    
    
    
    
    
    (56.8
    )
    
    
    1,985.5Segment income (loss)
    
    
    (74.9
    )
    
    
    (49.4
    )
    
    
    (37.5
    )
    
    
    (5.6
    )
    
    
    119.2
    
    
    
    (28.4
    )
    
    
    (76.6
    )
 18




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES 
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Organization Bowater is organized into five divisions: the Newsprint Division, the Coated
and Specialty Papers Division, the Canadian Forest Products Division, the
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. Therefore, Bowaters
financial results are collected, analyzed and reported through the other four
divisions. Newsprint Division The Newsprint Division operates seven manufacturing sites (including Ponderay
Newsprint Company, an unconsolidated partnership) in the United States, Canada
and South Korea. The principal product at these manufacturing sites is
newsprint, but several of the sites also produce market pulp and uncoated
specialty papers. This division has primary responsibility for the domestic
and international marketing and sales of newsprint. Coated and Specialty Papers Division The Coated and Specialty Papers Division operates a manufacturing site that
produces coated paper, market pulp and uncoated specialty papers, and two Nuway
coating facilities, both located in the United States. This division
has primary responsibility for the marketing and sales of the full spectrum of coated and
uncoated specialty papers manufactured by Bowater. Canadian Forest Products Division The Canadian Forest Products Division operates four paper manufacturing sites
in Canada. The division manages 0.4 million acres of owned or leased
timberland and over 23.5 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 eight sawmills and one wood treatment plant, supplies
wood to four paper mills and eight sawmills, and is responsible for the
marketing and sales of its timber and lumber production. Forest Products Division The Forest Products Division manages 1.0 million acres of timberland owned or
leased in the United States and the Canadian provinces of Ontario and Nova
Scotia and over 8.3 million acres of Crown-owned land in the province of
Ontario on which we have cutting rights. The division also operates five
softwood sawmills, supplies wood fiber to our pulp and paper production sites
and markets and sells timber and southern yellow pine lumber in North America. Pulp Division The Pulp Division markets and distributes market pulp produced by other
divisions. Financial results for the production and sale of market pulp are
included in the Newsprint Division or the Coated and Specialty Papers Division,
depending upon which site manufactures the product. The Pulp Divisions
selling and administrative expenses are included in Corporate and Other
Eliminations. Accordingly, no separate results are reported for this
division. 19




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Information Statements that are not reported financial results or other historical
information are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include,
for example, statements about our business outlook, assessment of market
conditions, strategies, future plans, future sales, prices for our major
products, inventory levels, capital spending and tax and exchange rates. These
forward-looking statements are not guarantees of future performance. These
statements are based on managements expectations that involve a number of
business risks and uncertainties, any of which could cause actual results to
differ materially from those expressed in or implied by the forward-looking
statements. In addition to specific factors described in connection with any
particular forward-looking statement, factors that could cause actual results
to differ materially include, but are not limited to, those described under the
caption Cautionary Statement Regarding Forward-Looking Information in
Bowaters annual report on Form 10-K for the year ended December 31, 2003, and
from time to time, in Bowaters other filings with the Securities and Exchange
Commission. In addition, other risks could adversely affect us, as it is not
possible for us to predict or assess all risks. We disclaim any obligation to
publicly update or revise any forward-looking statements even if our situation
changes in the future. Information about industry or general economic conditions contained in this
report are derived from third party sources (e.g. trade publications) that
Bowater believes are widely accepted and accurate; however, Bowater has not
independently verified this information and cannot provide assurances of its
accuracy. Accounting Policies and Estimates The following discussion and analysis provides information that we believe is
useful in understanding our operating results, cash flows and financial
condition on our unaudited Consolidated Financial Statements included in this
quarterly report. Our significant accounting policies are described in Note 1
to the Consolidated Financial Statements in Bowaters annual report on Form
10-K for the year ended December 31, 2003. Bowaters critical accounting
policies and estimates are described under the caption Critical Accounting
Policies and Estimates in Item 7 of Bowaters annual report on Form 10-K for
the year ended December 31, 2003. The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates, assumptions and judgments
and rely on projections of future results of operations and cash flows. We
base our estimates and assumptions on historical data and other assumptions
that we believe are reasonable under the circumstances. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities in our financial statements.
In addition, they affect the reported amounts of revenues and expenses during
the reporting period. Our judgments are based on our assessment as to the effect certain estimates,
assumptions of future trends or events may have on the financial condition and
results of operations reported in our Consolidated Financial Statements. Our
projections of future results of operations and cash flows are utilized by an
independent valuation firm to assist us in our determination of fair value for
selected assets. These values are important assumptions in certain of our
critical accounting policies. It is important that the reader of our financial
statements understand that actual results could differ materially from these
estimates, assumptions, projections and judgments. Overview of Financial Performance The operating environment continued to improve in the third quarter of 2004 as
we reported positive operating income results. In the third quarter of 2004,
we had record sales of coated and specialties and shipments of these grades
increased 15% compared to the third quarter of 2003. Our product mix continues
to improve as it evolves to more coated and specialty papers and lesser amounts
of newsprint. Coated and specialties has now climbed to almost 30% of our
sales  compared to about 40% for newsprint and the remaining balance is about
evenly divided between pulp and lumber. Although our operating results have
improved, we had a net loss for the quarter of $18.1 million ($0.32 per diluted
share) with operating income of $40.7 million. These results compare favorably
to the third quarter of 2003, when our net loss was $56.7 million ($1.00 per
diluted share) with an operating loss of $51.9 million, and to operating income
of the second quarter of 2004, when our net loss was $1.3 million ($0.02 per 20




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations diluted share) with operating income of $19.7 million. The principal reason
for these improved results was higher product pricing across our products and
an increase in coated and specialties in our overall product mix (compared to
the third quarter of 2003). Our wood and fiber costs were up slightly in the
third quarter of 2004 compared to the second quarter of 2004 and significantly
higher compared to the third quarter of 2003. The strong Canadian dollar in
the third quarter of 2004 raised manufacturing costs at our Canadian sites. Our debt, net of cash, decreased approximately $30.4 million in the third
quarter (compared to $19.3 million decrease in the second quarter) due to cash
provided by operations of $64.0 million, partially offset by approximately
$21.4 million of capital spending and $11.4 million in dividend payments. Outlook In the fourth quarter, we expect stronger pricing in newsprint, coated and
specialty papers. We announced a $50 per metric ton newsprint price increase
for the domestic market and a $65 Canadian dollar per metric ton newsprint
price increase for the Canadian market, effective September 1, 2004. We also
expect fourth quarter price increases in Asia and Latin America. We have
announced a $60 per short ton price increase for all coated paper and
supercalendered grades and a $45 per short ton price increase for all specialty
grades, effective September 1, 2004. We are currently implementing these price
increases, however, market conditions will determine whether we fully realize
these increases. There has been significant weakening in pulp and lumber
pricing beginning late in the third quarter and extending into the fourth
quarter. Our costs in the fourth quarter will be negatively impacted by a
major scheduled outage at the Thunder Bay pulp mill, the strong Canadian dollar
and higher energy and chemical costs. The Company expects to incur
approximately $7 million of maintenance expense for the 15 day Thunder Bay pulp
mill outage and expects to reduce market pulp production by approximately
10,000 metric tons. In addition, in the fourth quarter we will be taking
severance charges of approximately $4-5 million primarily as a result of the
closure of the groundwood pulp mill at our Thunder Bay facility. We believe that demand for our products will improve with the recovery in the
U.S. economy. Newspaper ad lineage is up 1.7% year to date. North American
coated mechanical demand is up 8.3% this year according to the Pulp and Paper
Products Council. Catalog pieces are up 8.3% through the first six months of
2004. Magazine advertising pages continue their rebound - up 8.5% in
September. Despite the favorable indicators of demand and price increases, there continues
to be significant risks to the recovery. Prices realized during the third
quarter were insufficient to return us to profitability. Our ability to fully
implement all product pricing announced thus far in 2004 may be influenced by
the recovery of demand for those products. The Canadian dollar strengthened to
end the third quarter of 2004 at an exchange rate of .79 compared to an
exchange rate of .74 at the end of June 2004. This strengthening of the
Canadian dollar continued to put cost pressures on our Canadian manufacturing
operations. The Canadian dollar has strengthened further in October 2004, and
we cannot predict whether this trend will continue. Other economic factors may
shorten or weaken the apparent economic recovery, which could negatively impact
demand for our products. 21




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeSales
    
    $
    834.0
    
    
    $
    690.9
    
    
    $
    143.1
    
    
    $
    2,367.3
    
    
    $
    1,985.5
    
    
    $
    381.8Operating income (loss)
    
    
    40.7
    
    
    
    (51.9
    )
    
    
    92.6
    
    
    
    37.1
    
    
    
    (76.6
    )
    
    
    113.7Significant items that increased (decreased) operating income:Net gain on fixed assets and land
sales
    
    
    
    
    
    
    
    
    
    $
    (2.4
    )
    
    
    
    
    
    
    
    
    
    $
    (113.3
    )Product pricing
    
    
    
    
    
    
    
    
    
    
    98.0
    
    
    
    
    
    
    
    
    
    
    
    229.5Distribution costs
    
    
    
    
    
    
    
    
    
    
    (10.0
    )
    
    
    
    
    
    
    
    
    
    
    (28.4
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    4.3
    
    
    
    
    
    
    
    
    
    
    
    (5.7
    )Employee termination costs
    
    
    
    
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    
    
    
    
    29.6Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    2.0$
    92.6
    
    
    
    
    
    
    
    
    
    
    $
    113.7
 Three months ended September 30, 2004, versus September 30, 2003 Salesincreased in the third quarter of 2004 as compared to the third quarter
of 2003 due to higher transaction prices for all products and due to increased
shipments of newsprint, coated and specialty papers and lumber as further
discussed in the Product Line Information section. Operating incomeincreased in the third quarter of 2004 as compared to the
third quarter of 2003. The above table analyzes the major items that increased
operating income. A brief explanation of these major items follows: Net gain on fixed assets and land salesrelates primarily to land sales and
the disposition or write-off of fixed assets. The decrease is due to lower
land sales in the third quarter of 2004 compared to the third quarter of
2003. Product pricingfor all of our major product groups was higher in the third
quarter of 2004 as compared to the third quarter of 2003. Please refer to
the discussion of Product Line Information for a more detailed analysis of
product pricing and shipments. Distribution costswere higher in the third quarter of 2004 as compared to
the third quarter of 2003 as a result of higher shipments and higher duties
due to increased lumber shipments and transaction prices. Manufacturing costswere lower in the third quarter of 2004 as compared to
the third quarter of 2003 resulting from improved production volumes ($17.8
million) and lower chemical costs ($6.1 million). These improvements were offset by a
stronger Canadian dollar ($16.9 million) and increased costs for fiber,
wood, labor and repair materials ($21.9 million). The negative impact on manufacturing
costs of a strong Canadian dollar was offset by gains on hedged transactions
that were recorded against manufacturing costs during the period. Employee termination costswere lower in the third quarter of 2004 as
compared to the third quarter of 2003, as we completed our cost reduction
program in the fourth quarter of 2003. 22




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Nine months ended September 30, 2004, versus September 30, 2003 Salesincreased in the first nine months of 2004 as compared to first nine
months of 2003 due to higher transaction prices for all products and due to
increased shipments of coated and specialty papers, pulp and lumber as further
discussed in the Product Line Information section. Operating incomeincreased in the first nine months of 2004 as compared to the
first nine months of 2003. The above table analyzes the major items that
increased operating income. A brief explanation of these major items follows: Net gain on fixed assets and land salesrelates primarily to land sales and
the disposition or write-off of fixed assets. The decrease is primarily due
to lower land sales in the first nine months of 2004 compared to the first
nine months of 2003. In the second quarter of 2003, Bowater completed the
sale of 81,768 acres of owned and leased timberlands for aggregate
consideration of $121.8 million. This transaction resulted in a pre-tax
gain of approximately $97.5 million. Product pricingfor all of our major product groups was higher in the first
nine months of 2004 as compared to the first nine months of 2003. Please
refer to the discussion of Product Line Information for a more detailed
analysis of product pricing and shipments. Distribution costswere higher in the first nine months of 2004 as compared
to the first nine months of 2003 as a result of higher shipments and higher
duties due to increased lumber shipments and transaction prices. Manufacturing costswere higher in the first nine months of 2004 as compared
to the first nine months of 2003 as a result of a stronger Canadian dollar
($68.4 million), increased fiber and wood costs ($37.6 million) and higher
labor and repair materials ($28.7 million). These higher costs were partially offset by
improved production volumes ($45.1 million) and lower chemical
costs ($16.6 million). The
negative impact on manufacturing costs of a strong Canadian dollar was
offset by gains on hedged transactions that were recorded against
manufacturing costs during the period ($65.5 million). Employee termination costswere lower in the first nine months of 2004 as
compared to the first nine months of 2003, as we completed our cost
reduction program in the fourth quarter of 2003. Division/Segments and Product Line Information Bowater is organized by Division. Bowater also provides product line
disclosures for informational purposes to our analysts and investors. The
Divisions have operational responsibility over their group of operating assets.
The Divisions also have sales responsibilities that over-lap several of the
Companys operating Divisions/Segments. The matrix below depicts the various
products that fall under each of the Companys operating Divisions/Segments.
The shaded areas in the matrix below represent the Division that is responsible
for the sale of the product line for the entire company. Coated &
    
    CanadianSpecialty
    
    Forest
    
    ForestNewsprint
    
    Papers
    
    Products
    
    ProductsProduct Line
    
    Division
    
    Division
    
    Division
    
    Division
    
    Pulp DivisionNewsprint
    
    

ü
    
    
    
    
    
    
    
    üCoated & Specialties
    
    
    ü
    
    
    
ü
    
    
    
    üPulp
    
    
    ü
    
    
    
    üLumber
    
    
    
    
    
    
    
    
    
    
ü
    
    
    
    ü
 23




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Product Line Information Presented below is a discussion of each significant product line followed by a
discussion of the results of each of the reported divisions. In general, our products are globally-traded commodities. Pricing and the
level of shipments of these products will continue to be influenced by the
balance between supply and demand as affected by global economic conditions,
changes in consumption and capacity, the level of customer and producer
inventories and fluctuations in exchange rates. Newsprint  Product Line Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Sales (in millions)
    
    $
    336.9
    
    
    $
    302.0
    
    
    $
    987.2
    
    
    $
    900.0Average prices (per metric ton)
    
    $
    532
    
    
    $
    485
    
    
    $
    520
    
    
    $
    474Shipments (thousands of metric tons)
    
    
    633.3
    
    
    
    623.2
    
    
    
    1,899.6
    
    
    
    1,898.0Downtime (thousands of metric tons)
    
    
    43.0
    
    
    
    60.1
    
    
    
    135.1
    
    
    
    161.6Inventory at end of period
(thousands of metric tons)
    
    
    85.7
    
    
    
    92.4
    
    
    
    85.7
    
    
    
    92.4
 Three months ended September 30, 2004, versus September 30, 2003 Our average newsprint transaction price for all markets was 9.7% higher in the
third quarter of 2004 compared to the third quarter of 2003. The increase
reflects the realization of price increases in the North American and
International markets. Newsprint shipments increased by 1.6% in the third
quarter of 2004 primarily due to increases in export shipments. We plan to take
41,000 metric tons of market and maintenance downtime in the fourth quarter of
2004. The market downtime is primarily attributable to an idled paper machine
at our Thunder Bay mill (since late June 2003). We expect this market downtime
to continue until market conditions improve. We will continue to match
production to orders. We announced a $50 per metric ton price increase for the domestic market and a
$65 per metric ton Canadian dollar price increase for the Canadian market,
effective September 1, 2004. We also expect fourth quarter price increases in
Asia and Latin America. Market conditions will determine whether we fully
realize these increases. Newsprint Third Party Data:In the third quarter of 2004, total U.S. newsprint
demand and consumption of newsprint decreased 3.3% and 0.2%, respectively as
compared to the same periods of the prior year. North American net exports of
newsprint decreased 4.1% from the third quarter 2003 level. Total inventories
(North American mills and users) at September 30, 2004 were 1.4 million metric
tons, approximately 7,000 metric tons, or 0.5%, higher than the previous
quarter and 4,000 metric tons, or 0.3%, higher than the end of the third
quarter 2003. Newspaper advertising linage improved 0.3% in August 2004
compared to August 2003. Nine months ended September 30, 2004, versus September 30, 2003 Our average newsprint transaction price for all markets was 9.7% higher in the
first nine months of 2004 compared to the first nine months of 2003. The
increase reflects the realization of price increases in the North American and
International markets. Newsprint shipments were flat in the first nine months
of 2004. Newsprint Third Party Data:In the first nine months of 2004, total United
States demand and consumption of newsprint decreased 1.0% and 1.5%,
respectively as compared to the same period a year ago. North American net 24




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations exports of newsprint decreased 7.2% from the first nine months of 2003.
Newspaper advertising linage improved 1.7% in the first eight months of 2004
compared to the first eight months of 2003. Coated and Specialty Papers  Product Line Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Sales (in millions)
    
    $
    244.6
    
    
    $
    192.7
    
    
    $
    664.8
    
    
    $
    530.7Average prices (per short ton)
    
    $
    628
    
    
    $
    569
    
    
    $
    602
    
    
    $
    563Shipments (thousands of short tons)
    
    
    389.8
    
    
    
    338.9
    
    
    
    1,104.9
    
    
    
    942.3Downtime (thousands of short tons)
    
    
    22.3
    
    
    
    26.6
    
    
    
    77.2
    
    
    
    63.7Inventory at end of period
(thousands of short tons)
    
    
    45.0
    
    
    
    59.5
    
    
    
    45.0
    
    
    
    59.5
 Three months ended September 30, 2004, versus September 30, 2003 Our average transaction price for coated paper was 10.0% higher in the third
quarter of 2004 compared to the third quarter of 2003 due to the realization of
price increases in 2004. Our coated mechanical papers shipments increased
13.6% in the third quarter of 2004 as compared to the third quarter of 2003,
due to strong market demand. Our average transaction price for specialty
papers was 11.0% higher in the third quarter of 2004 compared to the third
quarter of 2003 due to the price increases noted above. Our shipments of
specialty papers increased 16.4% in the third quarter of 2004 compared to the
third quarter of 2003 due to increased market demand. We announced a $60 per short ton price increase for all coated paper and
supercalendered grades, effective September 1, 2004. We also announced a $45
per short ton price increase for all specialty grades, effective September 1,
2004. Market conditions will determine whether we fully realize these
increases. Coated and Specialty Papers Third Party Data:U.S. magazine advertising pages
increased 5.5% compared to the third quarter of 2003 and catalog mailings
(measured by standard mail pieces) increased 8.7% in the second quarter of 2004
compared to the same period last year. North American demand for coated
mechanical papers was up 6.5% in the third quarter of 2004 compared to the
third quarter of 2003. North American demand for supercalendered high gloss
papers and other uncoated mechanical papers was down 1.6% and up 16.9%,
respectively, in the third quarter of 2004 compared to the third quarter of
2003. Nine months ended September 30, 2004, versus September 30, 2003 Our average transaction price for coated paper was 5.8% higher in the first
nine months of 2004 compared to the first nine months of 2003 due to
realization of price increases during 2003 and 2004. Our coated papers
shipments increased 23.7% in the first nine months of 2004, compared to the
first nine months of 2003, primarily as a result of the conversion of a paper
machine at Catawba from newsprint to coated papers. Our average transaction
price for specialty papers was 6.9% higher in the first nine months of 2004,
compared to the first nine months of 2003, due to the price increases noted
above. Our specialty papers shipments increased 11.5% in the first nine months
of 2004, compared to the first nine months of 2003, due to increased demand and
production changes. Coated and Specialty Papers Third Party Data:U.S. magazine advertising pages
increased 2.2% compared to the first nine months of 2003 and catalog mailings
(measured by standard mail pieces) increased 8.3% in the first six months of
2004 compared to the same period last year. North American demand for coated
mechanical papers was up 8.3% through September 2004, compared to the first
nine months of 2003. North American demand for supercalendered high gloss
papers and other uncoated mechanical papers was down 3.2% and up 14.5%,
respectively, through September 2004, compared to the first nine months of
2003. 25




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Market Pulp Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Sales (in millions)
    
    $
    135.3
    
    
    $
    120.8
    
    
    $
    411.5
    
    
    $
    360.9Average prices (per metric ton)
    
    $
    527
    
    
    $
    469
    
    
    $
    515
    
    
    $
    472Shipments (thousands of metric tons)
    
    
    256.5
    
    
    
    257.3
    
    
    
    799.2
    
    
    
    765.2Downtime (thousands of metric tons)
    
    
    7.7
    
    
    
    18.7
    
    
    
    31.3
    
    
    
    45.0Inventory at end of period
(thousands of metric tons)
    
    
    62.2
    
    
    
    68.4
    
    
    
    62.2
    
    
    
    68.4
 Three months ended September 30, 2004, versus September 30, 2003 Our average transaction price for market pulp was 12.4% higher in the third
quarter of 2004 compared to the third quarter of 2003. The increase reflects
the realization of price increases in the latter half of 2003 and first nine
months of 2004 brought about by improved world supply and demand. Our market
pulp inventories ended the third quarter of 2004 at 18 days supply, 22 days
below the industry average. Market Pulp Third Party Data:Demand for market pulp decreased in the third
quarter of 2004 compared to the same period last year. World shipments were
down 2.0% in the third quarter of 2004 compared to the same period in 2003.
World producers operated at 95.7% of capacity but shipped at 91% of capacity.
Consequently, inventories have increased over the quarter by 438,000 metric
tons, to end September 2004 at 3.9 million metric tons, or 40 days supply.
Inventories are 612,000 metric tons higher and 7 days supply higher than the
corresponding period of 2003. Nine months ended September 30, 2004, versus September 30, 2003 Our average transaction price for market pulp was 9.2% higher in the first nine
months of 2004 compared to the first nine months of 2003. The increase
reflects the realization of price increases in the latter half of 2003 and
first nine months of 2004 brought about by improved world supply and demand.
Our shipments increased 4.4% in the first nine months of 2004 compared to the
same period of 2003 primarily as a result of improved demand from our core
markets and reduced downtime at our Thunder Bay facility. Market Pulp Third Party Data:Demand for market pulp increased in the first
nine months of 2004 compared to the same period last year. World shipments
were up 4.4% for the first nine months of 2004 compared to the same period in
2003. World producers operated at 96% capacity and shipped at 94% of capacity.
Consequently, inventories have increased during the time period and ended
September at 3.9 million metric tons, or 40 days supply. 26




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Lumber Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Sales (in millions)
    
    $
    107.4
    
    
    $
    64.0
    
    
    $
    281.0
    
    
    $
    170.8Average prices
    
    $
    395
    
    
    $
    288
    
    
    $
    360
    
    
    $
    266Shipments (million board feet)
    
    
    271.5
    
    
    
    222.1
    
    
    
    780.8
    
    
    
    642.7Downtime (million board feet)
    
    
    74.1
    
    
    
    85.0
    
    
    
    224.0
    
    
    
    252.6Inventory at end of period
(million board feet)
    
    
    64.0
    
    
    
    51.9
    
    
    
    64.0
    
    
    
    51.9
 Three months ended September 30, 2004, versus September 30, 2003 Lumber prices increased in the third quarter of 2004 as compared to the third
quarter of 2003 as a result of strong demand over the latter half of 2003 and
2004 and lower overall inventories. Our lumber shipments increased 22.3% in
the third quarter of 2004 due primarily to the increased production from our
Thunder Bay sawmill, which was in start-up mode during the third quarter of
2003. On July 7, 2004, we temporarily idled our Ignace sawmill due to a wood
supply shortage. We expect to restart the Ignace sawmill once wood supply
conditions improve. Third party data:The U.S. housing starts decreased 1.2% in the third quarter
of 2004 as compared to the same period last year. Nine months ended September 30, 2004, versus September 30, 2003 Lumber prices increased in the first nine months of 2004 as compared to the
first nine months of 2003 as a result of continued strong demand associated
with record high housing starts and lower overall inventories. Our lumber
shipments increased 21.5% in the first nine months of 2004 as compared to the
first nine months of 2003 due to start up of the Thunder Bay sawmill as
discussed previously. Third party data:The U.S. housing starts increased 8.7% in the first nine
months of 2004 as compared to the same period last year. The U.S. Commerce Department (DOC) has imposed antidumping (AD) duties of 8.43%
on all of Bowaters Canadian softwood lumber imports and countervailing (CV)
duties of 18.79% on softwood lumber imported from all provinces except New
Brunswick and Nova Scotia. The duties became effective for lumber shipments
beginning May 22, 2002 and are payable in cash. Lumber duties are included as
a component of distribution costs on our consolidated statement of operations.
To date we have paid AD and CV duties of approximately $60.7 million. The Canadian government has appealed the duties to the World Trade Organization
(WTO) and under the terms of the North American Free Trade Agreement (NAFTA),
requesting that the duties be refunded. The final amount of CV and AD duties
that may be assessed on Canadian softwood lumber imports into the U.S. will
depend upon negotiations among the governments involved in the dispute, annual
administrative reviews by the DOC, and upon determinations made by the NAFTA,
WTO or other adjudicatory panels to which the duties may be appealed. Until
the dispute is resolved, we will continue to pay the duties as assessed by the
DOC. The DOC is currently conducting AD and CV administrative reviews to establish
the ultimate duty rates and liabilities for imports since May 22, 2002. In
June and July the DOC issued three determinations regarding the CV and AD rates
that may become applicable to us. While these determinations contained rates
that were less than 50% of those we are currently paying, these rates are not
final or effective. Therefore, we do not anticipate adjusting our AD/CV duty
rates until a final determination is made as a result of the applicable NAFTA
or DOC process. 27




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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
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeSales
    
    $
    417.5
    
    
    $
    355.7
    
    
    $
    61.8
    
    
    $
    1,213.1
    
    
    $
    1,066.1
    
    
    $
    147.0Segment income (loss)
    
    
    6.9
    
    
    
    (23.5
    )
    
    
    30.4
    
    
    
    (16.5
    )
    
    
    (74.9
    )
    
    
    58.4Significant items that increased (decreased)
segment income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    39.5
    
    
    
    
    
    
    
    
    
    
    $
    99.9Distribution costs
    
    
    
    
    
    
    
    
    
    
    (3.0
    )
    
    
    
    
    
    
    
    
    
    
    (9.2
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (10.2
    )
    
    
    
    
    
    
    
    
    
    
    (53.6
    )Employee termination costs
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    20.5Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    0.8$
    30.4
    
    
    
    
    
    
    
    
    
    
    $
    58.4
 Three months ended September 30, 2004, versus September 30, 2003 Sales increased in the third quarter of 2004 as compared to the third quarter
of 2003 primarily as a result of higher product pricing for newsprint ($21.4
million), market pulp ($13.4 million) and specialty papers ($4.7 million) and
increased shipments. See the previous discussion of product line results. Segment income increased in the third quarter of 2004 primarily as a result of
higher product pricing noted above and lower employee termination costs as we
completed our cost reduction program in the fourth quarter of 2003. These
product pricing improvements were partially offset by higher manufacturing
costs. Manufacturing costs were higher primarily from a stronger Canadian
dollar ($7.7 million) and higher prices for recycled fiber,
energy, labor and repair materials
($16.2 million), partially offset by improved production volumes
($10.6 million) and lower wood
and chemical costs ($4.9 million). Nine months ended September 30, 2004, versus September 30, 2003 Sales increased in the first nine months of 2004 as compared to the first nine
months of 2003 primarily as a result of higher product pricing for newsprint
($61.2 million), market pulp ($29.7 million), and specialty papers ($9.0
million) and increased shipments. See the previous discussion of product line
results. Segment loss decreased in the first nine months of 2004 compared to the first
nine months of 2003 primarily as a result of higher product pricing noted above
and lower employee termination costs referred to above. These product pricing
improvements were partially offset by higher manufacturing costs.
Manufacturing costs were higher primarily from a stronger Canadian dollar
($31.2 million) and higher prices for recycled fiber, energy,
labor and repair materials
($47.2 million), partially offset by improved production volumes
($18.0 million), lower
depreciation expense ($5.9 million) and lower wood and chemical costs ($7.0 million). 28




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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
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeSales
    
    $
    159.4
    
    
    $
    132.0
    
    
    $
    27.4
    
    
    $
    452.9
    
    
    $
    355.5
    
    
    $
    97.4Segment income (loss)
    
    
    8.7
    
    
    
    (15.3
    )
    
    
    24.0
    
    
    
    14.6
    
    
    
    (49.4
    )
    
    
    64.0Significant items that increased (decreased) segment income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    16.9
    
    
    
    
    
    
    
    
    
    
    $
    28.7Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (2.3
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    7.3
    
    
    
    
    
    
    
    
    
    
    
    35.2Employee termination costs
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    5.6Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    (3.2
    )$
    24.0
    
    
    
    
    
    
    
    
    
    
    $
    64.0
 Three months ended September 30, 2004, versus September 30, 2003 Sales increased in the third quarter of 2004 as compared to the third quarter
of 2003 primarily as a result of increased shipments, due primarily to the
conversion of the No. 3 paper machine at the Catawba facility in early 2003
from newsprint to coated paper, and higher product pricing in coated and
specialty papers ($12.7 million) and pulp ($4.2 million). See the previous
discussion of product line results. Segment income increased in the third quarter of 2004 as compared to the third
quarter of 2003 primarily as a result of higher product pricing in coated and
specialty papers and pulp, lower manufacturing costs associated with improved
production volumes for coated papers, and lower employee termination costs. Nine months ended September 30, 2004, versus September 30, 2003 Sales increased in the first nine months of 2004 as compared to the first nine
months of 2003 primarily as a result of increased shipments, due primarily to
the conversion of the No. 3 paper machine at the Catawba facility in early 2003
from newsprint to coated paper, and higher product pricing in coated and
specialty papers ($18.9 million) and pulp ($9.8 million). See the previous
discussion of product line results. Segment income increased in the first nine months of 2004 as compared to the
first nine months of 2003 primarily as a result of higher product pricing in
coated and specialty papers and pulp, lower manufacturing costs associated with
improved production volumes for coated papers, and lower employee termination
costs. 29




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Canadian Forest Products Division Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeSales
    
    $
    220.0
    
    
    $
    184.9
    
    
    $
    35.1
    
    
    $
    601.1
    
    
    $
    539.9
    
    
    $
    61.2Segment income (loss)
    
    
    7.6
    
    
    
    (10.0
    )
    
    
    17.6
    
    
    
    (10.8
    )
    
    
    (37.5
    )
    
    
    26.7Significant items that increased (decreased) segment income
(loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    30.2
    
    
    
    
    
    
    
    
    
    
    $
    76.3Distribution costs
    
    
    
    
    
    
    
    
    
    
    (3.6
    )
    
    
    
    
    
    
    
    
    
    
    (12.7
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (8.4
    )
    
    
    
    
    
    
    
    
    
    
    (41.4
    )Employee termination costs
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    2.4Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    2.1$
    17.6
    
    
    
    
    
    
    
    
    
    
    $
    26.7
 Three months ended September 30, 2004, versus September 30, 2003 Sales increased in the third quarter of 2004 as compared to the third quarter
of 2003 primarily as a result of higher product pricing for newsprint ($8.2
million), coated and specialty papers ($5.6 million), lumber ($15.9 million),
and timber ($0.5 million). See the previous discussion of product line
results. Segment income increased in the third quarter of 2004 as compared to the third
quarter of 2003 primarily as a result of higher product pricing as discussed
above and improved production volumes ($2.0 million). These improvements were
offset by higher manufacturing costs and higher distribution costs from higher
shipments and lumber duties on increased lumber shipments and transaction
prices. The higher manufacturing costs are due to a stronger Canadian dollar
($7.9 million), higher fiber and wood costs ($3.3 million), higher power ($1.0
million) and higher labor costs ($2.2 million). Nine months ended September 30, 2004, versus September 30, 2003 Sales increased in the first nine months of 2004 as compared to the first nine
months of 2003 primarily as a result of higher product pricing for newsprint
($25.5 million), coated and specialty papers ($10.2 million), lumber ($39.4
million), and timber ($1.2 million), offset by lower shipments. See the
previous discussion of product line results. Segment loss decreased in the first nine months of 2004 as compared to the
first nine months of 2003, primarily as a result of higher product pricing and
lower selling and administrative expenses. These improvements were offset by
higher manufacturing costs and higher distribution costs from higher shipments
and lumber duties on increased lumber shipments and transaction prices. The
higher manufacturing costs are due to a stronger Canadian dollar ($32.3
million), higher fiber and wood costs ($6.4 million), higher
repair cost ($2.4
million), higher labor ($3.3 million) and lower production
volumes ($5.0 million). 30




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Forest Products Division Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeSales
    
    $
    47.9
    
    
    $
    34.2
    
    
    $
    13.7
    
    
    $
    131.8
    
    
    $
    80.8
    
    
    $
    51.0Segment income (loss)
    
    
    5.3
    
    
    
    (0.7
    )
    
    
    6.0
    
    
    
    7.5
    
    
    
    (5.6
    )
    
    
    13.1Significant items that increased (decreased) segment income
(loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    11.4
    
    
    
    
    
    
    
    
    
    
    $
    24.6Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.7
    )
    
    
    
    
    
    
    
    
    
    
    (2.9
    )Shipments
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (4.1
    )
    
    
    
    
    
    
    
    
    
    
    (10.0
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    2.0$
    6.0
    
    
    
    
    
    
    
    
    
    
    $
    13.1
 Three months ended September 30, 2004, versus September 30, 2003 Sales increased in the third quarter of 2004 as compared to the third quarter
of 2003 as a result of increased lumber transaction prices and increased lumber
shipments. The increase in lumber shipments was primarily the result of the
new sawmill in Thunder Bay Ontario, which had shipments in the third quarter of
2004 but was in a start up mode in the third quarter of 2003. See the previous
discussion of product line results. Segment income increased in the third quarter of 2004 compared to the third
quarter of 2003 primarily as a result of increased lumber transaction pricing.
Higher lumber transaction prices were partially offset by higher distribution
and manufacturing costs. Manufacturing costs increased primarily as a result
of higher wood costs ($1.8 million) and a stronger Canadian dollar ($1.3 million). Nine months ended September 30, 2004, versus September 30, 2003 Sales increased in the first nine months of 2004 as compared to the first nine
months of 2003 as a result of increased lumber transaction prices and increased
lumber shipments. The increase in lumber shipments was primarily the result of
the new sawmill in Thunder Bay Ontario, which had shipments in the first nine
months of 2004 but was primarily in the start up mode during the same period in
2003. See the previous discussion of product line results. Segment income increased in the first nine months of 2004 as compared to the
first nine months of 2003 primarily as a result of increased lumber transaction
pricing. Higher lumber transaction prices were partially offset by higher
distribution and manufacturing costs. Manufacturing costs increased primarily
as a result of higher wood costs ($4.2 million) and the stronger Canadian dollar
($4.9 million). 31




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Net Gain on Fixed Assets and Land Sales and Corporate & Other Eliminations Net gain (loss) on fixed assets and land sales and corporate and other
eliminations are included in order to reconcile division sales and segment
income (loss) to our total sales and operating income (loss) on our
Consolidated Statement of Operations. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeNet gain on fixed assets and
land sales
    
    $
    1.7
    
    
    $
    4.1
    
    
    $
    (2.4
    )
    
    $
    5.9
    
    
    $
    119.2
    
    
    $
    113.3Corporate & other eliminations:Sales
    
    
    (10.8
    )
    
    
    (15.9
    )
    
    
    5.1
    
    
    
    (31.6
    )
    
    
    (56.8
    )
    
    
    25.2Segment income (loss)
    
    
    10.5
    
    
    
    (6.5
    )
    
    
    17.0
    
    
    
    36.4
    
    
    
    (28.4
    )
    
    
    64.8
 Net gain on fixed assets and land sales:During the three and nine months ended
September 30, 2004, Bowater recorded a net pre-tax gain of $1.7 million and
$5.9 million, respectively, related to land sales and gains or losses on fixed
assets. During the three and nine months ended September 30, 2003, Bowater
recorded a net pre-tax gain of $4.1 million and $119.2 million, respectively,
related to land sales and gains or losses on fixed assets. These decreases are
primarily due to lower land sales in the 2004 periods compared to the 2003
periods. In the second quarter of 2003, Bowater completed the sale of 81,768
acres of owned and leased timberlands for aggregate consideration of $121.8
million. This transaction resulted in a pre-tax gain of approximately $97.5
million. Corporate & other eliminations: The elimination of intersegment sales decreased
$5.1 million in the third quarter of 2004 versus the same period in 2003.
Corporate income increased $17.0 million in the third quarter of 2004 over the
same period in 2003 due primarily to increased gains on foreign currency
hedges. The elimination of intersegment sales decreased $25.2 million in the
first nine months of 2004 versus the same period in 2003. Corporate income
increased $64.8 million in the first nine months of 2004 versus the same period
in 2003 due primarily to increased gains on foreign currency hedges. Interest and Other Income and Expenses Interest expense increased $2.6 million from $45.8 million for the three months
ended September 30, 2003 to $48.4 million for the three months ended September
30, 2004. Interest expense increased $18.6 million from $127.9 million for the
nine-months ended September 30, 2003 to $146.5 million for the nine-months
ended September 30, 2004. This increase in both periods is primarily
attributable to higher average debt balances, higher interest rates and less
capitalized interest. Additionally, during the nine-months ended September 30,
2004, we wrote-off deferred financing fees of approximately $1.5 million in
connection with our replacement of the $500 million three-year credit facility
in April 2004 and the repayment of our $100 million term loan in March 2004. Based on the current debt balances at September 30, 2004, we expect quarterly
interest expense for the balance of 2004 to be at levels similar to the third
quarter of 2004. Other income increased $1.0 million from income of $0.3 million during the
three months ended September 30, 2003 to income of $1.3 million during the
three months ended September 30, 2004. Other income increased $16.9 million
(income of $6.4 million for the nine-months ended September 30, 2004 versus an
expense of $10.5 million for the nine-months ended September 30, 2003)
primarily as a result of a decrease in foreign currency exchange losses of
$16.0 million during the period. Bowater recorded a foreign exchange gain of
$0.1 million during the nine-months ended September 30, 2004 compared to a loss
of $15.9 million for the same period of 2003. The majority of our exchange
gain/loss amounts are attributable to the revaluation of unhedged foreign
denominated assets and liabilities into United States dollars. For a further
discussion of the effect of fluctuations in the Canadian  U.S. Dollar exchange
rates, see Canadian  U.S. Dollar Exchange Rate Fluctuation Effect on
Earnings. 32




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations Income Taxes Bowaters effective tax rate for the third quarter of 2004 was (226.4%) versus
41.2% for the third quarter of 2003. Bowaters effective tax rate for the first
nine months of 2004 was 44.8% versus 24.8% for the first nine months of 2003.
Our effective tax rate varies frequently and substantially from the
weighted-average effect of both domestic and foreign statutory tax rates
primarily as a result of the tax treatment on foreign currency gains and
losses. Significant strengthening of the Canadian dollar in the third quarter of 2004
resulted in significant unrealized statutory foreign currency exchange gains on
which the Company provided a deferred tax expense for Canadian statutory taxes.
On a consolidated basis, the unrealized statutory foreign currency exchange
gains are substantially offset by certain foreign currency exchange losses on
which the Company receives no U.S. tax benefit. Additionally, during the third
quarter a statute of limitations expired for pre 2001 tax years. Income tax
reserves of $6.8 million associated with the pre 2001 Canadian tax years were
eliminated, resulting in a decrease to income tax expense in the third quarter
of 2004. These tax reserve adjustments were offset by an increase in tax
expense related to a revised estimated effective tax rate for the year. The effective tax rate for the first nine months of 2004 was primarily impacted
by the tax treatment on foreign currency gains and losses discussed previously,
but to a lesser extent as compared to the third quarter as the Canadian dollar
weakened in the first six months of 2004 and deferred tax benefits were
recorded for Canadian statutory taxes. The rates in 2003 were impacted primarily by significant foreign currency
exchange losses on which the Company received no tax benefit. The rates in
both 2004 and 2003 were also influenced by permanent tax differences that are
not dependent on pre-tax income or loss. Due to the variability and volatility of foreign exchange rates we are unable
to estimate the impact of future changes in exchange rates on our effective tax
rate. Liquidity and Capital Resources The primary components of our cash flows are as follows: Nine Months Ended September 30,(In millions)
    
    2004
    
    2003Decrease in cash and cash equivalents
    
    $
    (4.3
    )
    
    $
    (17.8
    )Cash from operations
    
    
    85.7
    
    
    
    24.5Changes in working capital items
    
    
    (45.3
    )
    
    
    83.0Cash used for investing activities
    
    
    (50.0
    )
    
    
    (40.4
    )Cash invested in fixed assets, timber and timberlands
    
    
    (60.3
    )
    
    
    (186.5
    )Disposition of fixed assets, timber, and timberlands
    
    
    10.3
    
    
    
    146.1Cash used for financing activities
    
    
    (40.0
    )
    
    
    (1.9
    )Short-term financing, net
    
    
    (142.6
    )
    
    
    (91.0
    )Long-term financing, net
    
    
    132.1
    
    
    
    122.2Dividends
    
    
    (34.6
    )
    
    
    (33.8
    )
 Cash from Operating Activities:During the nine months of 2004 and 2003,
Bowater had net losses of $51.9 million and $154.1 million, respectively. Cash
provided by operating activities totaled $85.7 million in the first nine months
of 2004 compared to $24.5 million during the same period of 2003. During the
first quarter of 2003, Bowater received income tax refunds of $75.6 million,
which was primarily attributable to the 2002 calendar year net operating losses
which were carried back to the calendar years 1997 through 2000. These tax
refunds are included in the working 33




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations capital items of $83.0 million. Excluding such income tax refunds, Bowaters
working capital items for the first nine months of 2003 would have been
approximately $7.4 million. Cash used for Investing Activities:Cash used for investing activities totaled
$50.0 million and $40.4 million for the first nine months of 2004 and 2003,
respectively. For 2004, capital expenditures primarily have been, and will
continue to be, for compliance and maintenance requirements, while 2003 capital
expenditures related to the completion of two significant projects at our
Catawba mill as well as compliance and maintenance matters. We expect capital
expenditures to be less than $100 million in 2004 and approximately $150
million in 2005. Cash used for Financing Activities:Cash used for financing activities totaled
$40.0 million and $1.9 million for the first nine months of 2004 and 2003,
respectively. Cash used for financing activities for the first nine months of
2004 includes the sale of $250.0 million of notes that are due March 15, 2010
(See Note 10 of the Notes to Consolidated Financial Statements). We received
net proceeds from the sale of the notes of $246.2 million, which were net of
underwriting fees of $3.8 million. The proceeds from the sale of the notes
were used to pay amounts outstanding under the short-term bank debt credit
facilities ($146.2 million) and the three-year term loan ($100.0 million).
Bowater had net payments of $142.6 million and $91.0 million on our short-term
credit facilities during the first nine months of 2004 and 2003, respectively. Credit Arrangements: Bowater had available
borrowings on our short-term bank debt - credit
facilities as follows: Amount
    
    Commitment
    
    TerminationShort-Term Bank Debt
    
    Commitment
    
    Outstanding
    
    Available (2)
    
    Date(in millions)Revolving credit facility
    
    $
    435.0
    
    
    $
    3.0
    
    
    $
    341.4
    
    
    
    04/2007364-day Accounts
Receivable
Securitization
Arrangement (1)
    
    
    200.0
    
    
    
    60.0
    
    
    
    118.8
    
    
    
    12/2004$
    635.0
    
    
    $
    63.0
    
    
    $
    460.2
  (1)
    
    The amount that can be borrowed at any time under our 364-day accounts
receivable 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.  (2)
    
    The commitment available under the 364-day Accounts Receivable
Securitization Arrangement is based on qualified trade accounts
receivable. The commitments available under the Revolving credit facility
is subject to covenant restrictions described below and is reduced by
outstanding letters of credit, which were $90.6 million at September 30,
2004. On April 22, 2004, we replaced our expiring revolving credit facilities with a
new three-year revolving credit facility due April 2007. The new facility
provides $400 million of revolving credit in the United States and $35 million
in Canada. Borrowings under the new 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. The facility contains various covenants,
including requirements to maintain a minimum consolidated net worth (generally
defined as common shareholders equity, excluding hedging gains in place as of
December 31, 2003, plus any outstanding preferred stock plus minimum pension
liability amounts) of $1.5 billion, a maximum 62.5% ratio of total debt to
total capital (defined as total debt less revaluation of debt assumed through
acquisitions, plus net worth including minority interest, plus minimum pension
liability amounts), and to maintain an annual minimum EBITDA (generally defined
as net income, excluding extraordinary, non-recurring or non-cash items, plus
income taxes plus depreciation plus net interest expense) of $250.0 million
measured quarterly beginning March 31, 2005, through December 31, 2005 and
$400.0 million at the 34




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations end of each quarter thereafter. If we generate net
income, the minimum net worth requirement increases by half of our consolidated
net income for each fiscal quarter, excluding gains from cash flow hedges in place as of December
31, 2003. At September 30, 2004, our consolidated net worth was approximately
$1,652.9 billion, and our ratio of total debt to total capital was 58.5%,
calculated according to our credit facilities guidelines. Total debt as a percentage of total capitalization is the most directly
comparable measure using GAAP. A reconciliation of the GAAP items to the
calculation of total debt as a percentage of total capitalization, in
accordance with our credit facilities, is as follows: (in millions, except ratios)
    
    September 30, 2004Total debt
    
    $
    2,501.0Less: Revaluation of debt
    
    
    (79.1
    )Total debt, per credit facilities
    
    $
    2,421.9Capitalization:Total shareholders equity
    
    $
    1,494.1Total debt
    
    
    2,501.0Minority interest
    
    
    67.6Less: Revaluation of debt
    
    
    (79.1
    )Plus: Additional minimum pension liability
    
    
    158.5Total capitalization, per credit facilities
    
    $
    4,142.1Total debt as a percentage of total capitalization in accordance with credit facilities
    
    
    58.5
    %Total debt as a percentage of total capitalization, in accordance with GAAP
    
    
    61.6
    %
 We believe we are in compliance with all of our covenants and other
requirements set forth in our credit facilities. We believe that cash generated from operations and access to our credit
facilities will be sufficient to provide for our anticipated requirements for
working capital, contractual obligations and capital expenditures for the next
12 months. In addition, we periodically review timberland holdings and sell
timberlands. In October 2004, Moodys downgraded our credit rating to Ba3 with a negative
outlook. In March 2004, S&P downgraded our credit ratings to BB with a stable
outlook. There is no way to predict with certainty any future rating actions
by these two agencies. The interest rates associated with the bank lines of
credit described above are based on the lower of the two credit ratings. Each
reduction in the lower of the two ratings will increase our cost of borrowing
under this facility. Although further downgrades would have no material impact
on availability under our present debt and credit agreements, a reduction in
our credit ratings could impact our access to and cost of capital and financial
flexibility in the future. Employees As of September 30, 2004, Bowater employed 8,300 people, of whom 5,700 were
represented by bargaining units. Labor agreements covering approximately 2,200
employees at five of our six Canadian paper mills expired on April 30, 2004.
These employees are represented predominantly by the Communications, Energy and
Paper Union (CEP). The CEP negotiated with Abitibi Consolidated Inc. as the
target company for the region and they reached a five-year collective
bargaining agreement, which was ratified on July 16, 2004. Traditionally,
agreements reached with the target company have been the basis for other
agreements in the region. We are currently in negotiations with the CEP at the
mill level. While we consider relations with our employees to be good and we
do not expect a work stoppage to occur prior to the finalization of new labor
agreements, however, the outcomes of the negotiations regarding the expired
labor agreements are not entirely within our control and therefore we can
provide no assurance regarding these outcomes or the timing of these
negotiations or their effect on our operations. 35




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations We successfully negotiated a labor agreement covering approximately 150 of our
employees at our Mokpo, Korea paper mill, which expires in July 2006. The wage
portion of the labor agreement is for a one-year period and will be
renegotiated in July 2005. Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings Nearly half of our manufacturing costs and certain financial liabilities are
denominated in Canadian dollars. Sales are denominated in the currency of the
country in which they occur. Accordingly, changes in the Canadian-U.S. dollar
exchange rate may significantly impact our revenues and costs. The magnitude
and direction of this impact primarily depends on our production and sales
volume, the proportion of our production and sales that occur in Canada, the
proportion of our tax and other financial liabilities denominated in Canadian
dollars, our hedging levels, and the magnitude, direction and duration of
changes in the Canadian-U.S. dollar exchange rate. Increases in the value of
the Canadian dollar versus the U.S. dollar reduce our earnings, which are
reported in U.S. dollar terms. We attempt to partially limit our exposure to Canadian-U.S. dollar exchange
rate fluctuations through hedging transactions. Under the exchange rates,
hedging levels and operating conditions that existed during the three months
ended September 30, 2004, for every one-cent change in the Canadian-U.S. dollar
exchange rate, our operating income, net of hedging, for the three months ended
September 30, 2004 would have been reduced by approximately $1.5 million, or
approximately $6.0 million on an annualized basis. For a description of our
hedging activities, see Note 13 to the Notes to Consolidated Financial
Statements included in this quarterly report. Canadian Dollar Hedging Program At September 30, 2004, we had approximately $109.3 million of unrealized gains
recorded on our Canadian dollar hedging program compared to approximately
$172.4 million of unrealized gains at December 31, 2003. These unrealized
gains are classified in Other current assets or Other assets in our
Consolidated Balance Sheet depending on the maturity date of the hedging
contract. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued FIN
46, Consolidation of Variable Interest Entities. Many variable interest
entities (VIE) have commonly been referred to as special-purpose entities or
off-balance sheet structures. In general, a VIE is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support
its activities. FIN 46 requires a VIE to be consolidated by a company if that
company is subject to a majority of the risk of loss from the VIEs activities
or entitled to receive a majority of the entitys residual returns or both.
The consolidation requirements of FIN 46 apply immediately to VIEs created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the VIE was established. In October 2003, the FASB issued FASB Staff Position FIN 46-6 which (i)
deferred the implementation of FIN 46 for VIEs created before February 1, 2003,
for periods ending after December 15, 2003, and (ii) permitted early adoption
of FIN 46 before the end of the deferral period for some or all VIEs in which
an entity holds an interest. Effective July 1, 2003, Bowater early adopted FIN 46 specific to the Covington
paper coating facility (referred to as Nuway) which had been financed through
a special purpose entity (SPE). This SPE was determined to be a VIE and
required to be consolidated by Bowater in accordance with FIN 46. As such, in
the third quarter of 2003, Bowater consolidated assets of approximately $49.4
million and debt of approximately $51.8 million and recorded a non-cash, after
tax cumulative effect charge, of $2.4 million (or $0.04 per share). On August
11, 2003, Bowater terminated the lease agreement with the SPE and paid
approximately $51.8 million to pay off the debt. 36




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations In December 2003, the FASB issued a revision to FIN 46 (FIN 46R). Under the
new FIN 46R guidance, application of FIN 46R is required in financial
statements of entities that have interests in structures that are commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Application for all other types of variable interest entities is
required in financial statements for periods ending after March 15, 2004.
Bowater adopted the remaining provisions of FIN 46R in the first quarter of
2004. Adoption of FIN 46R had no impact on Bowaters Consolidated Financial
Statements. In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was passed. The Act introduced a prescription drug
benefit under Medicare Part D as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. Our postretirement benefits include
prescription drug benefits for Medicare-eligible retirees. In March 2004, the
FASB issued FASB Staff Position (FSP) 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) that provides guidance on the accounting
for the effects of the Act for employers that sponsor postretirement health
care plans that provide drug benefits. This FSP also requires those employers
to provide certain disclosures regarding the effect of the federal subsidy
provided by the Act. Bowater adopted FSP 106-2 effective July 1, 2004 and applied the prospective
transition method. As a result, a remeasurement of the plans assets and
accumulated postretirement benefit obligation (APBO), including the effects of
the subsidy was made. The remeasurement resulted in a reduction of our net
periodic benefit cost for 2004 of $2.5 million, of which $1.25 million will be
recorded each in the third and fourth quarters of 2004. The $2.5 million
reduction consisted of $0.3 million for the reduction of current period service
costs, $1.3 million for the reduction of amortization of actuarial experience
loss and $0.9 million for reduction in interest costs on our APBO. The
remeasurement changed the prior service cost component of our APBO by
approximately $36.9 million. On October 13, 2004, the FASB concluded that Statement 123R, Share-Based
Payment, which would require all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair value, would be
effective for public companies for interim or annual periods beginning after
June 15, 2005. FASB 123R allows two methods of adoption  the modified
prospective transition method or the modified retrospective transition method.
Bowater will be required to adopt FASB 123R in its third quarter of 2005 and is
currently evaluating the effect that the adoption of FASB 123R will have on our
financial position and results of operations. 37




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Foreign Exchange Risk We have updated the disclosure concerning our Canadian dollar forward
contracts, which is included in Note 13 to the Notes to Consolidated Financial
Statements included in this quarterly report. For information about the effect
of Canadian-U.S. dollar exchange rate fluctuations on our manufacturing costs
and Canadian dollar denominated liabilities, see the section entitled
Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings. Interest Rate Risk We are exposed to interest rate risk on our fixed-rate long-term debt and our
short-term variable rate bank and long-term debt. Our objective is to manage
the impact of interest rate changes on earnings and cash flows and on the
market value of our borrowings. We maintain a mix of fixed rate and variable
rate borrowings. At September 30, 2004 we had $2,154.5 million of fixed rate
long-term debt and $346.5 million of short and long-term variable rate debt.
The fixed rate long-term debt is exposed to fluctuations in fair value
resulting from changes in market interest rates, but not earnings or cash
flows. Our variable rate debt approximates fair value as it bears interest
rates that approximate market, but changes in interest rates do affect future
earnings and cash flows. Based on our short and long-term variable rate debt
at September 30, 2004 of $346.5 million, a 100 basis point increase in interest
rates would increase our quarterly interest expense by approximately $0.9
million. Commodity Price Risk We purchase significant amounts of energy, chemicals, wood fiber and recovered
paper to supply our manufacturing facilities. These raw materials are
market-priced commodities and, as such, are subject to fluctuations in market
prices. Increases in the prices of these commodities will tend to reduce our
reported earnings and decreases will tend to increase our reported earnings.
From time to time, we may enter into contracts aimed at securing a stable
source of supply for commodities such as timber, wood fiber, energy, chemicals
and recovered paper. These contracts typically require us to pay the market
price at the time of purchase. Thus under these contracts we generally remain
subject to market fluctuations in commodity prices. 
 Item 4. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures: We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2004. Based on that
evaluation, the Chairman, President and Chief Executive Officer and the Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in recording, processing, summarizing, and timely reporting
information required to be disclosed in our reports to the Securities and
Exchange Commission. (b) Changes in Internal Control over Financial Reporting: In connection with the evaluation of internal control over financial
reporting, there were no changes during the period covered by this report that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 38




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES 
 PART II OTHER INFORMATION 
 Item 1. Legal Proceedings.  a.
    
    Bowater is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and workers
compensation claims and other matters. We periodically review the status
of these proceedings with both inside and outside counsel. We believe
that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material
adverse effect on the results of operations in a given quarter or the
year.b.
    
    There have been no material developments to the legal proceedings
described in our annual report on Form 10-K filed on March 10, 2004. 
 Item 6. Exhibits (a) Exhibits (numbered in accordance with Item 601 of Regulation
S-K): Exhibit No.
    
    Description10.1
    
    Form of Non-Qualified Stock Option
Agreement for 2002 Stock Option Plan.12.1
    
    Statement regarding Computation of Ratio of Earnings to Fixed Charges.31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 39




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized. BOWATER INCORPORATEDBy       /s/ David G. MaffucciDavid G. MaffucciExecutive Vice President and Chief Financial Officer By       /s/ Michael F. NocitoMichael F. NocitoVice President and Controller Dated: November 8, 2004 40




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##### 



INDEX TO EXHIBITS Exhibit No.
    
    Description10.1
    
    Form of Non-Qualified Stock Option
Agreement for 2002 Stock Option Plan.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.