##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED June 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 COMMISSION FILE NUMBER: 1-1872
 BOWATER INCORPORATED
  Delaware
    
    62-0721803(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
  
   
  þ o
  þ o o
 o þ
  Class
    
    Outstanding at August 1, 2006Common Stock, $1.00 Par Value
    
    55,926,032 Shares




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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in millions of US dollars except per-share amounts)
 BOWATER INCORPORATED
INDEX
 Page NumberPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Statement of Operations for the Three and Six Months Ended June 30,2006 and 2005
    
    
    3Consolidated Balance Sheet at June 30, 2006 and December 31, 2005
    
    
    4Consolidated Statement of Capital Accounts for the Six Months Ended June 30, 2006and 2005
    
    
    5Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7  22Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23  39Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    39  40Item 4.
    
    Controls and Procedures
    
    
    40PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    41  45Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    45Item 6.
    
    Exhibits
    
    
    46SIGNATURES
    
    
    47
 2




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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in millions of US dollars except per-share amounts)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sales
    
    $
    899.4
    
    
    $
    897.5
    
    
    $
    1,792.6
    
    
    $
    1,734.5Cost of sales, excluding depreciation, amortization and cost
of timber harvested
    
    
    697.7
    
    
    
    642.5
    
    
    
    1,377.9
    
    
    
    1,250.1Depreciation, amortization and cost of timber harvested
    
    
    81.2
    
    
    
    81.6
    
    
    
    162.3
    
    
    
    163.4Distribution costs
    
    
    83.5
    
    
    
    89.4
    
    
    
    166.4
    
    
    
    172.3Selling and administrative expense
    
    
    41.3
    
    
    
    41.1
    
    
    
    79.3
    
    
    
    80.0Impairment of assets
    
    
    
    
    
    
    11.9
    
    
    
    
    
    
    
    11.9Net gain on sale of assets
    
    
    71.7
    
    
    
    9.8
    
    
    
    100.5
    
    
    
    20.8Operating income
    
    
    67.4
    
    
    
    40.8
    
    
    
    107.2
    
    
    
    77.6Interest expense
    
    
    49.3
    
    
    
    49.3
    
    
    
    98.7
    
    
    
    99.5Other expense (income), net
    
    
    1.7
    
    
    
    0.2
    
    
    
    (4.8
    )
    
    
    (5.1
    )Income (loss) before income taxes, minority interests, and
cumulative effect of accounting change
    
    
    16.4
    
    
    
    (8.7
    )
    
    
    13.3
    
    
    
    (16.8
    )Income tax provision (benefit)
    
    
    26.3
    
    
    
    (5.6
    )
    
    
    39.4
    
    
    
    (13.4
    )Minority interests, net of tax
    
    
    0.7
    
    
    
    0.5
    
    
    
    0.7
    
    
    
    (0.7
    )Loss before cumulative effect of accounting change
    
    
    (10.6
    )
    
    
    (3.6
    )
    
    
    (26.8
    )
    
    
    (2.7
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    (2.6
    )
    
    
    Net loss
    
    $
    (10.6
    )
    
    $
    (3.6
    )
    
    $
    (29.4
    )
    
    $
    (2.7
    )Loss per share:Basic loss per common share:Loss before cumulative effect of accounting change
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.46
    )
    
    $
    (0.05
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.05
    )
    
    
    Net loss
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.51
    )
    
    $
    (0.05
    )Diluted loss per common share:Loss before cumulative effect of accounting change
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.46
    )
    
    $
    (0.05
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.05
    )
    
    
    Net loss
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.51
    )
    
    $
    (0.05
    )Average number of shares outstanding (in millions):Basic and diluted
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.3Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.40
  3




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##### 



BOWATER INCORPORATED
CONSOLIDATED BALANCE SHEET
(Unaudited, in millions of US dollars except per-share amounts)
 June 30,
    
    December 31,2006
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    113.6
    
    
    $
    30.1Accounts receivable, net
    
    
    427.2
    
    
    
    410.1Inventories
    
    
    354.1
    
    
    
    365.8Timberlands held for sale
    
    
    9.1
    
    
    
    123.1Other current assets
    
    
    38.5
    
    
    
    61.2Total current assets
    
    
    942.5
    
    
    
    990.3Timber and timberlands
    
    
    79.1
    
    
    
    85.4Fixed assets, net
    
    
    2,995.0
    
    
    
    3,049.1Goodwill
    
    
    794.1
    
    
    
    794.1Other assets
    
    
    236.7
    
    
    
    233.5Total assets
    
    $
    5,047.4
    
    
    $
    5,152.4LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    15.2
    
    
    $
    22.2Short-term bank debt
    
    
    
    
    
    
    55.0Accounts payable and accrued liabilities
    
    
    487.3
    
    
    
    487.3Dividends payable
    
    
    11.2
    
    
    
    11.2Total current liabilities
    
    
    513.7
    
    
    
    575.7Long-term debt, net of current installments
    
    
    2,385.8
    
    
    
    2,400.0Pension, other postretirement benefits and other long-term liabilities
    
    
    569.4
    
    
    
    572.9Deferred income taxes
    
    
    368.1
    
    
    
    329.4Minority interests in subsidiaries
    
    
    61.5
    
    
    
    58.9Commitments and contingenciesShareholders equity:Common Stock, $1 par value. Authorized 100,000,000 shares; issued
67,528,383 and 67,529,294 shares at June 30, 2006 and December 31,
2005, respectively
    
    
    67.5
    
    
    
    67.5Exchangeable Shares, no par value. Unlimited shares authorized;
1,434,445 outstanding at both June 30, 2006 and December 31, 2005
    
    
    68.1
    
    
    
    68.1Additional paid-in capital
    
    
    1,623.7
    
    
    
    1,621.6Retained earnings
    
    
    47.7
    
    
    
    100.1Accumulated other comprehensive loss
    
    
    (172.3
    )
    
    
    (156.0
    )Treasury stock at cost, 11,602,683 and 11,605,074 shares at June 30,
2006 and December 31, 2005, respectively
    
    
    (485.8
    )
    
    
    (485.8
    )Total shareholders equity
    
    
    1,148.9
    
    
    
    1,215.5Total liabilities and shareholders equity
    
    $
    5,047.4
    
    
    $
    5,152.4
  4




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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(Unaudited, in millions of US dollars except per-share amounts)
 FOR THE SIX MONTHS ENDED JUNE 30, 2006
 AccumulatedAdditional
    
    
    
    
    
    Other
    
    
    
    
    
    TotalCommon
    
    Exchangeable
    
    Paid In
    
    Retained
    
    Comprehensive
    
    
    
    
    
    ShareholdersStock
    
    Shares
    
    Capital
    
    Earnings
    
    Loss
    
    Treasury Stock
    
    EquityBalance at December 31, 2005
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    100.1
    
    
    $
    (156.0
    )
    
    $
    (485.8
    )
    
    $
    1,215.5Dividends on Common Stock ($0.40 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23.0
    )
    
    
    
    
    
    
    
    
    
    
    (23.0
    )Stock-based compensation costs for equity awards
    
    
    
    
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.1Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29.4
    )
    
    
    
    
    
    
    
    
    
    
    (29.4
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.7
    )
    
    
    
    
    
    
    (4.7
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.8
    
    
    
    
    
    
    
    3.8Change in unrealized gain on hedged
transactions, net
of tax of $9.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.4
    )
    
    
    
    
    
    
    (15.4
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45.7
    )Balance at June 30, 2006
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,623.7
    
    
    $
    47.7
    
    
    $
    (172.3
    )
    
    $
    (485.8
    )
    
    $
    (1,148.9
    )
  AccumulatedAdditional
    
    
    
    
    
    Other
    
    
    
    
    
    TotalCommon
    
    Exchangeable
    
    Paid In
    
    Retained
    
    Comprehensive
    
    
    
    
    
    ShareholdersStock
    
    Shares
    
    Capital
    
    Earnings
    
    Loss
    
    Treasury Stock
    
    EquityBalance at December 31, 2004
    
    $
    67.4
    
    
    $
    69.7
    
    
    $
    1,618.2
    
    
    $
    266.5
    
    
    $
    (28.6
    )
    
    $
    (485.9
    )
    
    $
    1,507.3Dividends on Common Stock ($0.40 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22.9
    )
    
    
    
    
    
    
    
    
    
    
    (22.9
    )Retraction of exchangeable shares (31,913 shares
issued and exchangeable shares retracted)
    
    
    
    
    
    
    (1.6
    )
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised (69,000 shares)
    
    
    0.1
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.9Tax benefit on exercise of stock options
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Restricted stock units cancellation (10,203 shares)
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.7
    )
    
    
    
    
    
    
    
    
    
    
    (2.7
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    (1.2
    )Change in unrealized gain on hedged
transactions, net
of tax of $27.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44.1
    )
    
    
    
    
    
    
    (44.1
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47.5
    )Balance at June 30, 2005
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    240.9
    
    
    $
    (73.4
    )
    
    $
    (485.9
    )
    
    $
    1,438.8
  5




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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in millions of US dollars except per-share amounts)
 Six Months Ended June 30,2006
    
    2005Cash flows from operating activities:Net loss
    
    $
    (29.4
    )
    
    $
    (2.7
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Cumulative effect of accounting change, net of tax
    
    
    2.6
    
    
    
    Stock-based compensation
    
    
    (0.8
    )
    
    
    0.1Depreciation, amortization and cost of timber harvested
    
    
    162.3
    
    
    
    163.4Impairment of assets
    
    
    
    
    
    
    11.9Deferred income tax provision (benefit)
    
    
    28.5
    
    
    
    (18.8
    )Minority interests, net of tax
    
    
    0.7
    
    
    
    (0.7
    )Net gain on sale of assets
    
    
    (100.5
    )
    
    
    (20.8
    )Changes in working capital:Accounts receivable
    
    
    (17.0
    )
    
    
    (69.4
    )Inventories
    
    
    8.7
    
    
    
    (5.9
    )Income tax receivables and payables
    
    
    (2.0
    )
    
    
    3.1Accounts payable and accrued liabilities
    
    
    (11.1
    )
    
    
    (6.9
    )Other, net
    
    
    0.5
    
    
    
    (1.9
    )Net cash provided by operating activities
    
    
    42.5
    
    
    
    51.4Cash flows from investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (90.6
    )
    
    
    (50.1
    )Dispositions of assets, including timber and timberlands
    
    
    238.1
    
    
    
    23.0Net cash provided by (used for) investing activities
    
    
    147.5
    
    
    
    (27.1
    )Cash flows from financing activities:Cash dividends, including minority interests
    
    
    (22.9
    )
    
    
    (22.9
    )Short-term financing
    
    
    289.9
    
    
    
    340.0Short-term financing repayments
    
    
    (351.5
    )
    
    
    (308.0
    )Payments of long-term debt
    
    
    (22.0
    )
    
    
    (14.0
    )Stock options exercised
    
    
    
    
    
    
    1.9Net cash used for financing activities
    
    
    (106.5
    )
    
    
    (3.0
    )Net increase in cash and cash equivalents
    
    
    83.5
    
    
    
    21.3Cash and cash equivalents:Beginning of year
    
    
    30.1
    
    
    
    29.7End of period
    
    $
    113.6
    
    
    $
    51.0Supplemental disclosures of cash flow information:Cash paid during the year for:Interest, including capitalized interest of $2.8 and $0.2
    
    $
    104.9
    
    
    $
    94.3Income taxes
    
    $
    7.2
    
    
    $
    
  6




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 1.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying consolidated financial statements include the accounts of Bowater Incorporated
and subsidiaries (Bowater, also referred to as we or our). The consolidated balance sheet
as of June 30, 2006, and the related statements of operations, capital accounts and cash flows
for the periods ended June 30, 2006 and 2005 are unaudited. In our opinion, all adjustments
(consisting of normal recurring adjustments) necessary for fair presentation of the interim
financial statements have been made. The results of the interim period ended June 30, 2006, are
not necessarily indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the consolidated financial statements and related
notes and critical accounting policies and estimates included in our most recent Annual Report
on Form 10-K. Certain prior-year amounts in the financial statements and the notes have been
reclassified to conform to the 2006 presentation. In the first quarter of 2006, we adjusted the
amount of goodwill allocated to the timberlands held for sale. As a result, goodwill allocated
to timberlands held for sale decreased by $12.7 million and goodwill increased by the same
amount compared to the amounts previously reported in our 2005 consolidated financial statements
and related notes. The reclassifications had no effect on total shareholders equity or net
loss.We adopted Financial Accounting Standards Board (FASB) Statement of Accounting Standards
(SFAS) No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,
Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements(SFAS 154), as of January 1, 2006. SFAS 154 changes the requirements for the
accounting for, and reporting of, a change in accounting principle. Previously, most voluntary
changes in accounting principles were required to be recognized by way of a cumulative effect
adjustment within net income during the period of the change. SFAS 154 requires retrospective
application to prior periods financial statements, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. The adoption of SFAS
154 did not have any effect on our consolidated financial position, results of operations or
cash flows.We adopted SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4(SFAS 151), as
of January 1, 2006. SFAS 151 clarifies the types of costs that should be expensed rather than
capitalized as inventory. This statement also clarifies the circumstances under which fixed
overhead costs associated with operating facilities involved in inventory processing should be
capitalized. The effect of adopting SFAS 151 was immaterial to our financial position and
results of operations.We adopted SFAS No. 123R, Share-based Payment(SFAS 123R), on January 1, 2006. See Note 2 for
further information regarding the impact on our financial position and results of operations.
 7




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 2.
    
    Stock-based CompensationWe maintain incentive stock plans that provide for grants of stock options, equity participation
rights (EPRs) and restricted stock units to our directors, officers and key employees. We
also maintain a Mid-Term Incentive Plan (MTIP) that is tied to the performance of our common
stock. These plans are described more fully below.Adoption of New Accounting Guidance and TransitionPrior to January 2006, we accounted for these plans under the recognition and measurement
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, (APB 25) as permitted by SFAS No. 123, Accounting for
Stock-Based Compensation(SFAS 123). Under APB 25:
 
    
    Compensation expense was generally not recognized for stock options if the exercise
price equaled or exceeded the market value of the underlying common stock on the date
of grant. As of December 31, 2005, all existing and outstanding stock options were
fully vested.
    
    The restricted stock units granted were measured at fair value, which was determined
as the average of the high and low trading price of the stock on the date of the grant,
and amortized over the vesting period.As of December 31, 2005, all restricted stock
unit grants awarded prior to that date were fully amortized.
    
    A liability for the EPRs was recorded based on its intrinsic value. At December 31,
2005, the EPRs base price was higher than Bowaters stock price on that date;
therefore, no liability was recorded.
    
    A liability for the MTIP was recorded when the performance criteria were met. At
December 31, 2005, we did not meet the performance criteria of the MTIP cycles
outstanding; therefore, no liability was recorded.
   Equity
Participation Rights
 8




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Pro Forma Information under SFAS 123 for Periods Prior to 2006
  Three months ended
    
    Six months endedJune 30,
    
    June 30,(Unaudited, in millions, except per-share amounts)
    
    2005
    
    2005Net loss as reported:
    
    $
    (3.6
    )
    
    $
    (2.7
    )Add:Stock-based compensation expense included in net loss, net of tax
    
    
    
    
    
    
    Deduct:Stock-based compensation expense
determined under fair value method, net of tax
    
    
    (1.4
    )
    
    
    (2.9
    )Pro forma net loss
    
    $
    (5.0
    )
    
    $
    (5.6
    )Loss per share:Basic, as reported
    
    $
    (0.06
    )
    
    $
    (0.05
    )Basic, pro forma
    
    
    (0.09
    )
    
    
    (0.10
    )Diluted, as reported
    
    $
    (0.06
    )
    
    $
    (0.05
    )Diluted, pro forma
    
    
    (0.09
    )
    
    
    (0.10
    )
  Assumptions:Expected dividend yield
    
    
    2.2
    %Expected volatility
    
    
    29.0
    %Risk-free interest rate
    
    
    4.0
    %Expected life (in years)
    
    
    7.2Weighted average fair value of each option
    
    $
    11.16
  9




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Expense Information under SFAS 123R
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Stock Options
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.2
    
    
    $
    Restricted Stock Units
    
    
    1.9
    
    
    
    
    
    
    
    1.9
    
    
    
    0.1EPRs
    
    
    (2.0
    )
    
    
    
    
    
    
    (2.9
    )
    
    
    MTIP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense (income)
    
    $
    0.1
    
    
    $
    
    
    
    $
    (0.8
    )
    
    $
    0.1
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Stock Options
    
    $
    (0.1
    )
    
    $
    
    
    
    $
    (0.1
    )
    
    $
    Restricted Stock Units
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.4
    )
    
    
    (0.1
    )EPRs
    
    
    0.5
    
    
    
    
    
    
    
    0.7
    
    
    
    MTIP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax provision (benefit)
    
    $
    
    
    
    $
    
    
    
    $
    0.2
    
    
    $
    (0.1
    )
  Stock Plans
  Stock Options
  10




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  WeightedWeighted
    
    Average
    
    AggregateNumber Of
    
    Average
    
    Remaining
    
    IntrinsicShares
    
    Exercise
    
    Contractual
    
    Value(Unaudited)
    
    (000s)
    
    Price
    
    Life (years)
    
    ($000)Outstanding at December 31, 2005
    
    
    5,067
    
    
    $
    44Granted during the period
    
    
    351
    
    
    $
    27Exercised during the period
    
    
    
    
    
    $
    Canceled during the period
    
    
    (317
    )
    
    $
    39Outstanding at June 30, 2006
    
    
    5,101
    
    
    $
    43
    
    
    
    5.5
    
    
    $
    Exercisable at June 30, 2006
    
    
    4,750
    
    
    $
    45
    
    
    
    5.2
    
    
    $
    
  Assumptions:Expected dividend yield
    
    
    2.95
    %Expected volatility
    
    
    32.1
    %Risk-free interest rate
    
    
    5.1
    %Expected life (in years)
    
    
    6.1
    Restricted Stock Units
  11




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  Number Of Shares
    
    Weighted Average Fair(Unaudited)
    
    (000s)
    
    Value at Grant DateOutstanding at December 31, 2005
    
    
    
    
    
    $
    Granted during the period
    
    
    776
    
    
    
    26Vested during the period
    
    
    
    
    
    
    Forfeited during the period
    
    
    
    
    
    
    Outstanding at June 30, 2006
    
    
    776
    
    
    $
    26
   Equity Participation Rights
    WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber of Rights
    
    Exercise
    
    Contractual
    
    Intrinsic(Unaudited)
    
    (000s)
    
    Price
    
    Term
    
    ValueOutstanding at December 31, 2005
    
    
    2,173
    
    
    $
    48Granted during the period
    
    
    
    
    
    
    Settled during the period
    
    
    
    
    
    
    Canceled during the period
    
    
    (111
    )
    
    
    41Outstanding at June 30, 2006
    
    
    2,062
    
    
    $
    48
    
    
    
    3.8
    
    
    $
    Exercisable at June 30, 2006
    
    
    2,062
    
    
    $
    48
    
    
    
    3.8
    
    
    $
    
  12




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
   June 30,
    
    January 1,(Unaudited)
    
    2006
    
    2006Assumptions:Dividend yield
    
    
    3.5
    %
    
    
    2.6
    %Expected volatility
    
    
    30.4 - 32.1
    %
    
    
    30.0 - 33.0
    %Weighted average expected volatility
    
    
    31.1
    %
    
    
    30.1
    %Risk-free interest rate
    
    
    5.1 - 5.3
    %
    
    
    4.1 - 4.4
    %Expected EPR life in years
    
    
    0.6  3.6
    
    
    
    0.1 - 3.6Weighted average fair value of EPRs
    
    $
    0.43
    
    
    $
    1.70Fair value range of each EPR grant
    
    $
    0.01  1.48
    
    
    $
    0.01-4.60
 Mid-Term Incentive Plan
    13




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 3.
    
    Asset ImpairmentDuring the second quarter of 2005, Bowater management decided to permanently shut the original
line at Benton Harbor. This was based on the significant capital spending that would be
required for the original line to meet the quality standards of our two newer Nuway lines and
because the facilitys infrastructure would not support a restart given the recent record
production of the new Benton Harbor line. This permanent shut resulted in a one time non-cash
asset impairment charge of $11.9 million. For segment reporting purposes, this impairment
charge is included in our Coated and Specialty Papers Division.4.
    
    Inventories
 June 30,
    
    December 31,(Unaudited, in millions)
    
    2006
    
    2005At lower of cost or market:Raw materials
    
    $
    80.9
    
    
    $
    100.4Work in process
    
    
    25.8
    
    
    
    30.5Finished goods
    
    
    139.4
    
    
    
    131.8Mill stores and other supplies
    
    
    119.8
    
    
    
    114.9365.9
    
    
    
    377.6Excess of current cost over LIFO inventory value
    
    
    (11.8
    )
    
    
    (11.8
    )$
    354.1
    
    
    $
    365.8
 5.
    
    Other Expense (Income), NetOther Expense (Income), Net in the Consolidated Statement of Operations includes the
following:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Foreign exchange loss
    
    $
    4.8
    
    
    $
    3.3
    
    
    $
    3.0
    
    
    $
    1.8Interest income
    
    
    (1.0
    )
    
    
    (1.1
    )
    
    
    (2.1
    )
    
    
    (2.2
    )Income from joint venture
    
    
    (1.9
    )
    
    
    (1.1
    )
    
    
    (4.2
    )
    
    
    (1.8
    )Miscellaneous income, net
    
    
    (0.2
    )
    
    
    (0.9
    )
    
    
    (1.5
    )
    
    
    (2.9
    )$
    1.7
    
    
    $
    0.2
    
    
    $
    (4.8
    )
    
    $
    (5.1
    )
 6.
    
    Timberlands Held For SaleWe are currently marketing for sale approximately 43,000 acres of timberlands in the United
States. The sale of these timberlands is expected to be completed in 2006. The $9.1 million of
timberlands held for sale on the Consolidated Balance Sheet are included in the Newsprint
Division. We expect the proceeds of the timberland sales to exceed the carrying value. There
are no liabilities associated with the timberlands held for sale.During the three months ended June 30, 2006, we sold approximately 472,000 acres of timberlands,
our Baker Brook sawmill and other assets for proceeds of $201.3 million. During the three
months ended March 31, 2006, we sold approximately 24,000 acres of timberlands and our Dégelis
sawmill for proceeds of approximately $34.6 million.
 14




---



##### 



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:
 June 30,
    
    December 31,(Unaudited, in millions)
    
    2006
    
    2005Pension plan additional minimum liabilities(1) (2)
    
    $
    (190.8
    )
    
    $
    (186.1
    )Foreign currency translation (3)
    
    
    15.3
    
    
    
    11.5Unrealized gain on hedging transactions (4)
    
    
    3.2
    
    
    
    18.6$
    (172.3
    )
    
    $
    (156.0
    )
 (1)
    
    Net of deferred tax benefit of $69.6 million and
$66.8 million, respectively.(2)
    
    Net of minority interest.(3)
    
    No tax effect is recorded for foreign currency translation since the foreign net assets
translated are deemed permanently invested.(4)
    
    Net of deferred tax expense of $2.0 million and $11.4 million, respectively.
 8.
    
    Loss Per ShareThe information required to compute net loss per basic and diluted share is as follows:
 Three months ended
    
    Six months endedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Basic weighted-average number of common shares
outstanding
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.3Effect of potentially dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted-average number of common shares
outstanding
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.3
 No adjustments to net loss are necessary to compute net loss per basic and diluted share. The
dilutive effect of potentially dilutive securities is calculated using the treasury stock
method. Options to purchase approximately 5.1 million shares for both the six months ended June
30, 2006 and 2005 and 0.8 million restricted stock units for the six months ended June 30, 2006
were excluded from the calculation of diluted loss per share as the impact would have been
anti-dilutive.


15



---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 9.
    
    Pension and Postretirement ExpenseThe components of net periodic benefit costs relating to our pension and other postretirement
(OPEB) plans are as follows for the three and six-months ended June 30, 2006 and 2005:Pension Plans:
 Three months ended
    
    Six months endedJune 30,
    
    June 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    11.0
    
    
    $
    9.3
    
    
    $
    21.9
    
    
    $
    18.5Interest cost
    
    
    30.0
    
    
    
    28.5
    
    
    
    59.2
    
    
    
    57.2Expected return on plan assets
    
    
    (30.6
    )
    
    
    (28.0
    )
    
    
    (60.2
    )
    
    
    (56.3
    )Amortization of prior service cost
    
    
    1.4
    
    
    
    0.4
    
    
    
    2.8
    
    
    
    0.9Curtailment loss
    
    
    
    
    
    
    
    
    
    
    4.6
    
    
    
    Recognized net actuarial loss
    
    
    8.8
    
    
    
    4.1
    
    
    
    17.7
    
    
    
    8.1Net periodic benefit cost
    
    $
    20.6
    
    
    $
    14.3
    
    
    $
    46.0
    
    
    $
    28.4
 OPEB Plans:
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(Unaudited, in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    1.0
    
    
    $
    1.1
    
    
    $
    2.0
    
    
    $
    2.3Interest cost
    
    
    4.0
    
    
    
    4.4
    
    
    
    8.0
    
    
    
    8.7Amortization of prior service cost
    
    
    (1.5
    )
    
    
    (1.3
    )
    
    
    (3.0
    )
    
    
    (2.7
    )Recognized net actuarial loss
    
    
    2.0
    
    
    
    2.1
    
    
    
    4.0
    
    
    
    4.3Curtailment gain
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    Net periodic benefit cost
    
    $
    5.5
    
    
    $
    6.3
    
    
    $
    10.8
    
    
    $
    12.6
 Since the measurement date of our pension and OPEB plans is 90 days prior to the start of our
year, curtailment gains and losses that arise during the year are recorded on a 90-day lag.During January 2006, Bowater announced its plans to permanently close the Thunder Bay A kraft
pulp line in the second quarter of 2006 and eliminate approximately 225 employees. In the first
quarter of 2006, we recorded a pension plan curtailment charge of $4.6 million and an OPEB plan
curtailment gain of $0.2 million in connection with the employee downsizing. Additionally, we
expect to record in the third quarter of 2006 a pension plan charge of approximately $0.6
million related to employees accepting a voluntary portion of the severance plan in April 2006.
The elimination of employees resulted in a partial plan termination, which will result in a
pension plan settlement charge of approximately $12 million in the future (upon settlement of
the assets and liabilities). For segment reporting purposes, this curtailment charge and gain
are included in the Coated and Specialty Papers Division.In May 2006, certain employees received lump-sum payouts from the supplemental executive
retirement plan. A settlement loss of $2.3 million will be recorded in the third quarter
of 2006.In May 2006, Bowater approved changes to its defined benefit pension plan for its U.S.
salaried employees. Benefits for certain employees will be frozen effective January 1,
2007 and will be replaced by a Company
 16




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 contribution to a defined contribution plan. A curtailment loss of $3.9 million will be
recorded in the third quarter of 2006.In June 2006, Bowater approved changes to its defined benefit pension plan for its Canadian
salaried employees. Benefits for certain employees will be frozen effective January 1,
2008 and will be replaced by a Company contribution to a defined contribution plan. A
curtailment charge of approximately $1.7 million will be recorded in the third quarter of
2006.In June 2006, Bowater approved changes to its OPEB plan for Canadian salaried employees.
The OPEB plan was redesigned to phase out OPEB costs by the end of 2010 by increasing the
retirees contributions from 20% to 100% over a four-year period beginning January 1, 2007.
A curtailment gain of approximately $5.5 million will be recorded in the third quarter of
2006.Excluding the effect of the curtailment and settlement charges noted above, these
initiatives will result in a reduction of our previously calculated 2006 net periodic
benefit costs of approximately $6.2 million. A small portion of this reduction was
recognized during the second quarter of 2006. Most of the reduction will be recognized in
the third and fourth quarters of 2006.10.
    
    Income TaxesThe provision for income tax provision (benefit) attributable to loss before income taxes,
minority interests and cumulative effect of accounting change differs from the amounts computed
by applying the United States federal statutory income tax rate of 35% as a result of the
following:
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(Unaudited, in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Income (loss) before income taxes, minority
interests and cumulative effect of
accounting change
    
    $
    16.4
    
    
    $
    (8.7
    )
    
    $
    13.3
    
    
    $
    (16.8
    )Expected income tax provision (benefit)
    
    
    5.8
    
    
    
    (3.0
    )
    
    
    4.7
    
    
    
    (5.9
    )Increase (decrease) in income taxes
resulting from:Valuation allowance (1)
    
    
    42.1
    
    
    
    
    
    
    
    55.6
    
    
    
    Foreign exchange
    
    
    18.3
    
    
    
    (4.7
    )
    
    
    21.3
    
    
    
    (7.8
    )State income taxes, net of federal income
tax benefit
    
    
    2.6
    
    
    
    1.2
    
    
    
    4.3
    
    
    
    1.9Foreign taxes (2)
    
    
    (35.2
    )
    
    
    (3.8
    )
    
    
    (35.9
    )
    
    
    (6.1
    )Medicare subsidy
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.8
    )
    
    
    (0.8
    )Other, net
    
    
    (6.9
    )
    
    
    5.1
    
    
    
    (9.8
    )
    
    
    5.3Income tax provision (benefit)
    
    $
    26.3
    
    
    $
    (5.6
    )
    
    $
    39.4
    
    
    $
    (13.4
    )
 
 (1)
    
    During the first and second quarters of 2006, income tax benefits and tax credits of
approximately $13.5 million and $42.1 million generated on certain of our Canadian
operating losses were entirely offset by tax charges to increase our valuation allowance
related to these tax benefits. For the first and second quarters of 2006, approximately
$13.5 million and $18.5 million, respectively of the valuation allowance related to net
operating losses with the balance of the valuation allowance related to tax credits,
foreign exchange and asset sales.(2)
    
    Foreign taxes in the second quarter and first six months of 2006 benefited by $15.2
million due to capital gains treatment of certain asset sales. 17




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 11.
    
    Long-term and Short-term DebtOn May 31, 2006, we established two new revolving credit facilities, which replaced both our
current revolving credit facility and our 364-day accounts receivable securitization facility.
We accomplished this by entering into (i) a five year Credit Agreement among Bowater
Incorporated (Bowater) as Borrower, several lenders, and Wachovia Bank, National Association,
as Administrative Agent (the US Credit Agreement) and (ii) a 364-day Credit Agreement, along
with its subsidiary Bowater Canadian Forest Products Inc. (BCFPI), among BCFPI as Borrower,
Bowater as parent Guarantor, several lenders, and The Bank of Nova Scotia as Administrative
Agent (the Canadian Credit Agreement).The US Credit Agreement provides for a $415 million revolving credit facility with a scheduled
maturity date of May 25, 2011. The US Credit Agreement is guaranteed by certain of our
wholly-owned subsidiaries in the United States, and is secured by (i) liens on the inventory,
accounts receivable and deposit accounts of Bowater and the guarantors (ii) pledges of 65% of
the stock of certain of our foreign subsidiaries, and (iii) pledges of the stock of our U.S.
subsidiaries that do not own mills or converting facilities. Availability under the US Credit
Agreement is limited to 90% of the net consolidated book value of our accounts receivable and
inventory, excluding BCFPI and its subsidiaries.The Canadian Credit Agreement provides for a $165 million revolving credit facility with a
maturity date of May 29, 2007, subject to annual extensions. The Canadian Credit Agreement is
secured by liens on the inventory, accounts receivable and deposit accounts of BCFPI.
Availability under the Canadian Credit Agreement is limited to 65% of the net book value of the
accounts receivable and inventory of BCFPI and its subsidiaries. Financial covenants under both
the US Credit Agreement and Canadian Credit Agreement are based upon our consolidated financial
results and consist of the following two ratios:§ a maximum ratio of senior secured indebtedness (including all advances and letters of
credit under the US and Canadian facilities, and any other indebtedness secured by assets of
Bowater and its subsidiaries) to EBITDA (generally defined as net income, excluding
extraordinary, non-recurring or non-cash items and gains (or losses) on asset dispositions,
plus income taxes plus depreciation plus interest expense) of 1.25 to 1; and§ a minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset
dispositions) to interest expense of 2.00 to 1.We believe we are in compliance with all of our covenants and other requirements set forth
in our credit facilities.12.
    
    Commitments and ContingenciesBowater is involved in various legal proceedings relating to contracts, commercial disputes,
taxes, environmental issues, employment and workers compensation claims and other matters. We
periodically review the status of these proceedings with both inside and outside counsel. We
believe that the ultimate disposition of these matters will not have a material adverse effect
on our financial condition, but it could have a material adverse effect on the results of
operations in a given quarter or the year.On April 26, 2006, we received a notice of violation from the U.S. Environmental Protection
Agency (EPA) alleging four violations of the Clean Air Act (CAA) at our Calhoun mill. We
have strong arguments that the Calhoun mill did not violate the CAA and continue to discuss
these issues with the EPA.There have been no material developments to those legal proceedings described in our annual
report on Form 10-K filed on March 13, 2006.
 18




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 
 Lumber DutiesIn April 2006, representatives of the governments of the United States and Canada reached
agreement in principle to resolve the dispute over the antidumping duties (ADD) and
countervailing duties (CVD) imposed by the U.S. Department of Commerce on softwood lumber
imports. This agreement has not been finalized; however, we expect the agreement to be ratified
in the fourth quarter. If the proposed agreement is ratified in its current form, Bowater would
expect to recover over $90 million of these duties. Until the agreement is finalized, or the
dispute is otherwise resolved, we will continue to pay the duties as required by the DOC.
Through June 30, 2006, we have paid ADD and CVD of approximately $109.6 million. Should these
duty rates be eliminated or decreased, any recovered duties would be reversed into operating
income.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
exposures. We do not enter into contracts for speculative purposes; however, we do, from time
to time enter into commodity and currency option contracts that are not accounted for as
accounting hedges.We pay a significant portion of the operating expenses of our Canadian mill sites in Canadian
dollars. To reduce our exposure to United States and Canadian dollar exchange rate
fluctuations, we enter into and designate Canadian dollar forward contracts to hedge certain of
our forecasted Canadian dollar cash outflows at the Canadian mill operations. On the date in
which the derivative contract is entered we designate the derivative as a cash flow hedge.The components of the cash flow hedges included in Accumulated other comprehensive loss are as
follows:
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(Unaudited, in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Gains reclassified to earnings on matured cash flow hedges
    
    $
    (11.6
    )
    
    $
    (22.2
    )
    
    $
    (29.2
    )
    
    $
    (56.8
    )Unrealized gains (losses) for change in value on
unmatured cash flow hedges
    
    
    3.6
    
    
    
    (7.4
    )
    
    
    4.4
    
    
    
    (14.4
    )(8.0
    )
    
    
    (29.6
    )
    
    
    (24.8
    )
    
    
    (71.2
    )Income tax benefit
    
    
    3.0
    
    
    
    11.3
    
    
    
    9.4
    
    
    
    27.1Net increase in Accumulated other comprehensive loss
    
    $
    (5.0
    )
    
    $
    (18.3
    )
    
    $
    (15.4
    )
    
    $
    (44.1
    )
 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 minimum
time period we have hedged transactions is one month, and the maximum time period is two years.
Our outstanding hedging contracts continue into the third quarter of 2006. 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. Hedge ineffectiveness associated with these
Canadian dollar forward contracts was not material for the periods presented.The carrying amounts of our short-term financial assets and liabilities (excluding derivatives)
approximate fair value. We estimate the fair value of our long-term debt using rates currently
available for debt with similar terms and remaining maturities. The fair value of derivative
financial instruments is based on current termination values or quoted market prices of
comparable contracts.
 19




---



##### 



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
    
    
    Range OfJune 30, 2006
    
    Amount of
    
    
    Carrying
    
    
    Fair
    
    
    U.S.$/CDN$(Unaudited, in millions of U.S. dollars)
    
    Derivatives
    
    
    Amount
    
    
    Market Value
    
    
    Exchange RatesForeign Currency Exchange AgreementsBuy Currency:Canadian dollar
Due in 2006
    
    $
    57.0
    
    
    $
    5.2
    
    
    $
    5.2
    
    
    
    .8944-.7452
 The counterparties to our derivative financial instruments are substantial and creditworthy
multi-national financial institutions and no one financial institution has more than 37% of our
derivative financial instruments. Therefore, the risk of counterparty nonperformance is
considered to be remote.14.
    
    Off-Balance Sheet Debt GuaranteesIn connection with Bowaters 1999 land sale and note monetization, we guarantee 25% of the
outstanding investor notes principal balance of Timber Note Holdings LLC, one of our Qualified
Special Purpose Entities (QSPEs). Bowater guarantees approximately $7.7 million of the investor
notes principal balance at June 30, 2006. This guarantee is proportionately reduced by annual
principal repayments on the investor notes (annual minimum repayments of $2.0 million) through
2008. The remaining investor notes principal amount is to be repaid in 2009. Timber Note
Holdings LLC has assets of approximately $34.0 million and obligations of approximately $31.1
million, which include the investor notes. Bowater would be required to perform on the
guarantee if the QSPE were to default on the investor notes or if there were a default on the
notes receivable.15.
    
    Segment InformationBelow is a description of the types of products and services from which each reportable segment
derives its revenues:Bowater is organized into four divisions: the Newsprint Division, the Coated and Specialty
Papers Division, the Canadian Forest Products Division, and the Pulp Division. Except for the
Pulp Division, each division is responsible for the sales and marketing of distinct product
lines and the operation of certain manufacturing sites. The Pulp Division is primarily a
marketing and distribution division whose administrative expenses are included in Corporate &
Other Eliminations. Therefore, the other three divisions are our reportable segments.newsprint divisionThe Newsprint Division operates six manufacturing sites (including Ponderay Newsprint Company,
an unconsolidated partnership) in the United States, Canada and South Korea. The principal
product at these manufacturing sites is newsprint, but several of the sites also produce market
and fluff pulp and uncoated specialty papers. This division has primary responsibility for the
domestic and international marketing and sales of newsprint. The division also manages 0.9
million acres of owned or leased timberland in the United States and the Canadian province of
Nova Scotia on which we have cutting rights.
 20




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 
 coated and specialty papers division
  canadian forest products division
  pulp division
  Factors management used to identify our segments:
   21




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  Coated
    
    
    
    
    
    
    Net Gainand
    
    
    Canadian
    
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    Assets
    
    
    Corporate/June 30, 2006
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    and Land
    
    
    Other(Unaudited, in millions)
    
    Division
    
    
    Division
    
    
    Division
    
    
    Sales
    
    
    Eliminations
    
    
    TotalSales-external customers
    
    $
    338.5
    
    
    $
    287.9
    
    
    $
    275.7
    
    
    $
    
    
    
    
    $
    (2.7
    )
    
    $
    899.4Segment income (loss)
    
    
    9.3
    
    
    
    12.3
    
    
    
    (15.6
    )
    
    
    71.7
    
    
    
    
    (10.3
    )
    
    
    67.4Total assets at 6/30/06
    
    
    2,042.3
    
    
    
    1,259.2
    
    
    
    1,245.8
    
    
    
    
    
    
    
    
    500.1
    
    
    
    5,047.4
 Coated
    
    
    
    
    
    
    Net Gainand
    
    
    Canadian
    
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    Assets
    
    
    Corporate/June 30, 2005
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    and Land
    
    
    Other(Unaudited, in millions)
    
    Division
    
    
    Division
    
    
    Division
    
    
    Sales
    
    
    Eliminations
    
    
    TotalSales-external customers
    
    $
    328.2
    
    
    $
    289.5
    
    
    $
    282.3
    
    
    $
    
    
    
    $
    (2.5
    )
    
    $
    897.5Segment income (loss)
    
    
    19.0
    
    
    
    8.0
    
    
    
    4.9
    
    
    
    9.8
    
    
    
    (0.9
    )
    
    
    40.8Total assets at 6/30/05
    
    
    2,055.6
    
    
    
    1,389.3
    
    
    
    1,388.8
    
    
    
    
    
    
    
    504.4
    
    
    
    5,338.1
 Coated
    
    
    
    
    
    
    Net Gainand
    
    
    Canadian
    
    
    on FixedSix Months Ended
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    Assets
    
    
    Corporate/June 30, 2006
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    and Land
    
    
    Other(Unaudited, in millions)
    
    Division
    
    
    Division
    
    
    Division
    
    
    Sales
    
    
    Eliminations
    
    
    TotalSales-external customers
    
    $
    667.6
    
    
    $
    570.5
    
    
    $
    561.2
    
    
    $
    
    
    
    $
    (6.7
    )
    
    $
    1,792.6Segment income (loss)
    
    
    25.1
    
    
    
    15.7
    
    
    
    (21.0
    )
    
    
    100.5
    
    
    
    (13.1
    )
    
    
    107.2
 Coated
    
    
    
    
    
    
    Net Gainand
    
    
    Canadian
    
    
    on FixedSix Months Ended
    
    
    
    
    
    Specialty
    
    
    Forest
    
    
    Assets
    
    
    Corporate/June 30, 2005
    
    Newsprint
    
    
    Papers
    
    
    Products
    
    
    and Land
    
    
    Other(Unaudited, in millions)
    
    Division
    
    
    Division
    
    
    Division
    
    
    Sales
    
    
    Eliminations
    
    
    TotalSales-external customers
    
    $
    637.5
    
    
    $
    565.0
    
    
    $
    539.7
    
    
    $
    
    
    
    $
    (7.7
    )
    
    $
    1,734.5Segment income
    
    
    29.5
    
    
    
    9.6
    
    
    
    6.7
    
    
    
    20.8
    
    
    
    11.0
    
    
    
    77.6
 22




---



##### 



Organization
  Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data
   Accounting Policies and Estimates
    23




---



##### 



Overview of Financial Performance
  Market Outlook
    Our Outlook
     24




---



##### 



Consolidated Results of Operations
 Three Months Ended June 30,
    
    Six Months Ended June 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    899.4
    
    
    $
    897.5
    
    
    $
    1.9
    
    
    $
    1,792.6
    
    
    $
    1,734.5
    
    
    $
    58.1Operating income
    
    
    67.4
    
    
    
    40.8
    
    
    
    26.6
    
    
    
    107.2
    
    
    
    77.6
    
    
    
    29.6Significant items that increased (decreased) operating income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    40.1
    
    
    
    
    
    
    
    
    
    
    $
    87.7Distribution costs
    
    
    
    
    
    
    
    
    
    
    2.7
    
    
    
    
    
    
    
    
    
    
    
    2.6Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (89.8
    )
    
    
    
    
    
    
    
    
    
    
    (153.0
    )Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    11.9
    
    
    
    
    
    
    
    
    
    
    
    11.9Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    0.7Net gain on fixed assets and land sales
    
    
    
    
    
    
    
    
    
    
    61.9
    
    
    
    
    
    
    
    
    
    
    
    79.7$
    26.6
    
    
    
    
    
    
    
    
    
    
    $
    29.6
 25




---



##### 



Three
months ended June 30, 2006 versus June 30, 2005
 Sales
 Operating income
 Product pricing
 Manufacturing costs
 Net gain on fixed assets and land sales
 Six
months ended June 30, 2006 versus June 30, 2005
 Sales
 Operating income
 Product pricing
 Manufacturing costs
 Net gain on fixed assets and land sales
 26




---



##### 



Division/Segments and Product Line Information
  Coated &
    
    CanadianSpecialty
    
    Forest
    
    
    
    
    
    Corporate(In millions)
    
    Newsprint
    
    Papers
    
    Products
    
    Pulp
    
    and OtherProduct Line
    
    Division
    
    Division
    
    Division
    
    Division
    
    Eliminations
    
    TotalCoated
    
    $
    
    
    
    $
    309.1
    *
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    309.1Specialty
    
    
    105.9
    
    
    
    12.2
    *
    
    
    155.2
    
    
    
    
    
    
    
    (0.6
    )
    
    
    272.7Newsprint
    
    
    452.7
    *
    
    
    79.1
    
    
    
    209.2
    
    
    
    
    
    
    
    (0.2
    )
    
    
    740.8Pulp
    
    
    97.7
    
    
    
    170.1
    
    
    
    
    
    
    
    
    *
    
    
    (1.7
    )
    
    
    266.1Lumber
    
    
    
    
    
    
    
    
    
    
    190.5
    *
    
    
    
    
    
    
    
    
    
    
    190.5Other
    
    
    11.3
    
    
    
    
    
    
    
    6.3
    
    
    
    
    
    
    
    (4.2
    )
    
    
    13.4$
    667.6
    
    
    $
    570.5
    
    
    $
    561.2
    
    
    $
    
    
    
    $
    (6.7
    )
    
    $
    1,792.6
 *
    
    Indicates division responsible for the sale of product line for the entire company
 Product Line Information
   Coated Papers  Product Line
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sales (in millions)
    
    $
    156.2
    
    
    $
    154.5
    
    
    $
    309.1
    
    
    $
    298.4Average prices (per short ton)
    
    $
    774
    
    
    $
    785
    
    
    $
    785
    
    
    $
    762Shipments (thousands of short tons)
    
    
    201.8
    
    
    
    196.9
    
    
    
    394.2
    
    
    
    391.4Downtime (thousands of short tons)
    
    
    19.2
    
    
    
    23.3
    
    
    
    36.0
    
    
    
    45.0Inventory at end of period (thousands of short tons)
    
    
    50.0
    
    
    
    23.1
    
    
    
    50.0
    
    
    
    23.1
 Three
months ended June 30, 2006, versus June 30, 2005
  27




---



##### 



Six
months ended June 30, 2006, versus June 30, 2005
  Specialty Papers  Product Line
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sales (in millions)
    
    $
    141.8
    
    
    $
    125.5
    
    
    $
    272.7
    
    
    $
    233.1Average prices (per short ton)
    
    $
    666
    
    
    $
    619
    
    
    $
    661
    
    
    $
    612Shipments (thousands of short tons)
    
    
    212.8
    
    
    
    202.9
    
    
    
    412.6
    
    
    
    381.2Downtime (thousands of short tons)
    
    
    1.4
    
    
    
    2.6
    
    
    
    1.4
    
    
    
    3.5Inventory at end of period (thousands of short tons)
    
    
    38.2
    
    
    
    24.6
    
    
    
    38.2
    
    
    
    24.6
 Three
months ended June 30, 2006, versus June 30, 2005
   Six
months ended June 30, 2006, versus June 30, 2005
  Newsprint  Product Line
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sales (in millions)
    
    $
    367.3
    
    
    $
    367.3
    
    
    $
    740.8
    
    
    $
    707.2Average prices (per metric ton)
    
    $
    640
    
    
    $
    578
    
    
    $
    631
    
    
    $
    568Shipments (thousands of metric tons)
    
    
    574.0
    
    
    
    635.8
    
    
    
    1,174.4
    
    
    
    1,244.8Downtime (thousands of metric tons)
    
    
    64.2
    
    
    
    41.7
    
    
    
    106.3
    
    
    
    83.1Inventory at end of period
(thousands of metric tons)
    
    
    63.7
    
    
    
    87.5
    
    
    
    63.7
    
    
    
    87.5
 28




---



##### 



Three
months ended June 30, 2006, versus June 30, 2005
    Six
months ended June 30, 2006, versus June 30, 2005
  Market Pulp  Product Line
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sales (in millions)
    
    $
    136.7
    
    
    $
    140.5
    
    
    $
    266.1
    
    
    $
    280.8Average prices (per metric ton)
    
    $
    564
    
    
    $
    546
    
    
    $
    544
    
    
    $
    544Shipments (thousands of metric tons)
    
    
    242.3
    
    
    
    257.5
    
    
    
    489.7
    
    
    
    515.9Downtime (thousands of metric tons)
    
    
    14.6
    
    
    
    13.2
    
    
    
    18.7
    
    
    
    23.5Inventory at end of period
(thousands of metric tons)
    
    
    70.5
    
    
    
    66.9
    
    
    
    70.5
    
    
    
    66.9
 Three
months ended June 30, 2006, versus June 30, 2005
   Six
months ended June 30, 2006, versus June 30, 2005
  29




---



##### 



Lumber  Product Line
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sales (in millions)
    
    $
    94.0
    
    
    $
    105.9
    
    
    $
    190.5
    
    
    $
    202.1Average prices (per metric ton)
    
    $
    334
    
    
    $
    372
    
    
    $
    343
    
    
    $
    372Shipments (thousands of metric tons)
    
    
    281.1
    
    
    
    285.1
    
    
    
    556.1
    
    
    
    543.5Downtime (thousands of metric tons)
    
    
    54.0
    
    
    
    69.6
    
    
    
    111.9
    
    
    
    117.9Inventory at end of period (thousands of metric tons)
    
    
    48.9
    
    
    
    53.2
    
    
    
    48.9
    
    
    
    53.2
 Three
months ended June 30, 2006, versus June 30, 2005
  Six
months ended June 30, 2006, versus June 30, 2005
     30




---



##### 



Divisional Performance
 Newsprint Division
 Three Months Ended June 30,
    
    Six Months Ended June 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    338.5
    
    
    $
    328.2
    
    
    $
    10.3
    
    
    $
    667.6
    
    
    $
    637.5
    
    
    $
    30.1Segment income (loss)
    
    
    9.3
    
    
    
    19.0
    
    
    
    (9.7
    )
    
    
    25.1
    
    
    
    29.5
    
    
    
    (4.4
    )Significant items that increased (decreased) segment income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    28.2
    
    
    
    
    
    
    
    
    
    
    $
    55.7Distribution costs
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    (1.1
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (38.5
    )
    
    
    
    
    
    
    
    
    
    
    (60.5
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    1.5$
    (9.7
    )
    
    
    
    
    
    
    
    
    
    $
    (4.4
    )
 Three
months ended June 30, 2006, versus June 30, 2005
   Six
months ended June 30, 2006, versus June 30, 2005
   31




---



##### 



Coated and Specialty Papers Division
 Three Months Ended June 30,
    
    Six Months Ended June 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    287.9
    
    
    $
    289.5
    
    
    $
    (1.6
    )
    
    $
    570.5
    
    
    $
    565.0
    
    
    $
    5.5Segment income
    
    
    12.3
    
    
    
    8.0
    
    
    
    4.3
    
    
    
    15.7
    
    
    
    9.6
    
    
    
    6.1Significant items that increased (decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    7.0
    
    
    
    
    
    
    
    
    
    
    $
    18.6Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    (2.4
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (13.9
    )
    
    
    
    
    
    
    
    
    
    
    (22.4
    )Asset impairment
    
    
    
    
    
    
    
    
    
    
    11.9
    
    
    
    
    
    
    
    
    
    
    
    11.9Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4$
    4.3
    
    
    
    
    
    
    
    
    
    
    $
    6.1
 Three
months ended June 30, 2006, versus June 30, 2005
   Six
months ended June 30, 2006, versus June 30, 2005
   32




---



##### 



Canadian Forest Products Division
 Three Months Ended June 30,
    
    Six Months Ended June 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    275.7
    
    
    $
    282.3
    
    
    $
    (6.6
    )
    
    $
    561.2
    
    
    $
    539.7
    
    
    $
    21.5Segment income (loss)
    
    
    (15.6
    )
    
    
    4.9
    
    
    
    (20.5
    )
    
    
    (21.0
    )
    
    
    6.7
    
    
    
    (27.7
    )Significant items that increased (decreased) segment
income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    4.9
    
    
    
    
    
    
    
    
    
    
    $
    13.2Distribution costs
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    
    
    
    
    
    
    
    
    6.2Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (27.8
    )
    
    
    
    
    
    
    
    
    
    
    (46.2
    )Selling and
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    (0.9
    )$
    (20.5
    )
    
    
    
    
    
    
    
    
    
    $
    (27.7
    )
 Three
months ended June 30, 2006, versus June 30, 2005
   Six
months ended June 30, 2006, versus June 30, 2005
   33




---



##### 



Net Gain on Fixed Assets and Land Sales and Corporate & Other Eliminations
  Three Months Ended June 30,
    
    Six Months Ended June 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeNet gain on fixed assets and
land sales
    
    $
    71.7
    
    
    $
    9.8
    
    
    $
    61.9
    
    
    $
    100.5
    
    
    $
    20.8
    
    
    $
    79.7Corporate & other eliminations:Sales
    
    
    (2.7
    )
    
    
    (2.5
    )
    
    
    (0.2
    )
    
    
    (6.7
    )
    
    
    (7.7
    )
    
    
    1.0Segment income (loss)
    
    
    (10.3
    )
    
    
    (0.9
    )
    
    
    (9.4
    )
    
    
    (13.1
    )
    
    
    11.0
    
    
    
    (24.1
    )
 Net gain on fixed assets and land sales :
 Corporate & other eliminations
 Interest Expense and Other Income
   Income Taxes
   34




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##### 



Liquidity and Capital Resources
  Cash From Operations
   35




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##### 



Cash From (Used For) Investing Activities
  Cash Used for Financing Activities
  Credit Arrangements:
  WeightedAverageAmount
    
    Commitment
    
    Termination
    
    InterestShort-Term Bank Debt
    
    Commitment
    
    Outstanding
    
    Available (1)
    
    Date
    
    Rate (2)(in millions, except for dates and interest rates)US Credit Agreement
    
    $
    415.0
    
    
    $
    
    
    
    $
    345.4
    
    
    
    05/11
    
    
    
    n/aCanadian Credit Agreement
    
    $
    165.0
    
    
    $
    
    
    
    $
    133.4
    
    
    
    05/07
    
    
    
    n/a$
    580.0
    
    
    $
    
    
    
    $
    478.8
 (1)
    
    The commitment available under each of the revolving credit facilities is subject to covenant
restrictions as described below and is reduced by outstanding letters of credit of $69.6
million for the US and $31.6 million for Canada. We also have letters of credit outstanding
totaling $26.6 million that do not reduce our available commitment in the revolving credit
facilities.(2)
    
    Borrowings under the revolving credit facilities incur interest based, at our option, on
specified market interest rates plus a margin. No borrowings were outstanding under these
credit facilities during the quarter.
   36




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##### 



§
    
    a maximum ratio of senior secured indebtedness (including all
advances and letters of credit under the US and Canadian
facilities, and any other indebtedness secured by assets of
Bowater and its subsidiaries) to EBITDA (generally defined as net
income, excluding extraordinary, non-recurring or non-cash items
and gains (or losses) on asset dispositions, plus income taxes
plus depreciation plus interest expense) of 1.25 to 1; and§
    
    a minimum ratio of EBITDA (defined as EBITDA, plus gains (or
minus losses) from asset dispositions) to interest expense of 2.00
to 1.
  Employees
   Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings
   37




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##### 



Canadian Dollar Hedging Program
  Recent Accounting Pronouncements
 Income Taxes
  Taxes Collected from Customers
  Servicing of Financial Assets
  Hybrid Financial Instruments
  38




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##### 



Pensions  Proposed Guidance
  §
    
    recognize in the statement of financial position, the underfunded or overfunded status of postretirement plans measured
as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit
obligation would be the projected benefit obligation,§
    
    recognize actuarial gains and losses and prior service cost and credits as a component of other comprehensive income,§
    
    eliminate the early measurement date option,§
    
    eliminate any remaining unrecognized transition asset or obligation, and§
    
    modify disclosure requirements.
   Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk
  Interest Rate Risk
  39




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##### 



Commodity Price Risk
  Item 4. Controls and Procedures.
 (a)
    
    Evaluation of Disclosure Controls and Procedures:
  (b)
    
    Changes in Internal Control over Financial Reporting:
  PART II  OTHER INFORMATION
 Item 1. Legal Proceedings.
 a.
    
    Bowater is involved in various legal proceedings relating to contracts, commercial
disputes, taxes, environmental issues, employment and workers compensation claims and other
matters. We periodically review the status of these proceedings with both inside and outside
counsel. We believe that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material adverse effect on the
results of operations in a given quarter or the year.b.
    
    On April 26, 2006, we received a notice of violation from the U.S. Environmental
Protection Agency (EPA) alleging four violations of the Clean Air Act (CAA) at our Calhoun
mill for which penalties in excess of $100,000 could be imposed. We have strong arguments
that the Calhoun mill did not violate the CAA and continue to discuss these issues with the
EPA.c.
    
    There have been no material developments to those legal proceedings described in our
annual report on Form 10-K filed on March 13, 2006.
 40




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##### 



Item 1A. Risk Factors
 Market conditions and our responses may result in adverse effects to our results of operations and
financial condition
   Intense competition in the forest products industry could adversely affect our operating results
and financial condition
  Developments in alternative media could further adversely affect the demand for our products
  41




---



##### 



Currency fluctuations may adversely affect our results of operations and financial condition
       Raw material and energy prices are volatile, and shortages or price increases could adversely
affect our operating results
  42




---



##### 



Our substantial indebtedness could adversely affect our financial health and our efforts to reduce
this indebtedness may not be successful
  
    
    limit our ability to obtain additional financing, if needed, for working capital, capital
expenditures, acquisitions, debt service requirements or other purposes;
    
    increase our vulnerability to adverse economic and industry conditions;
    
    require us to dedicate a substantial portion of our cash flows from operations to make payments on
our debt, thereby reducing funds available for operations, future business opportunities or other
purposes;
    
    Limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
    
    place us at a competitive disadvantage compared to our competitors that have less debt.
   
    
    a maximum ratio of senior secured indebtedness (including all advances and letters
of credit under the facilities, and any other indebtedness secured by assets of Bowater
and its subsidiaries) to EBITDA (generally defined as net income, excluding
extraordinary, non-recurring or non-cash items and gains (or losses) on asset
dispositions, plus income taxes plus depreciation plus interest expense) of 1.25 to 1;
and
    
    a minimum ratio of Adjusted EBITDA (defined as EBITDA, plus gains (or minus losses)
from asset dispositions) to interest expense of 2.00 to 1.
  43




---



##### 







We are exposed to changes in banking and capital markets and changes in interest rates




There can be no assurance that we will return to profitability




Changes in laws and regulations could adversely affect our results of operations


.


Changes in the political or economic conditions in the United States or other countries in which
our products are manufactured or sold could adversely affect our results of operations




We may be subject to environmental liabilities




44



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##### 



Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    The following persons were elected as directors in Class I, to serve until the 2009
Annual Meeting of Stockholders or until their successors are elected and qualified:
 Nominee
    
    Votes For
    
    Votes WithheldTogo D. West, Jr.
    
    
    48,760,045
    
    
    
    863,753Richard B. Evans
    
    
    48,766,651
    
    
    
    857,147Bruce W. Van Saun
    
    
    46,054,370
    
    
    
    3,569,428David J. Paterson
    
    
    48,926,275
    
    
    
    697,523
 The terms of the directors in Class II will continue until the 2007 Annual Meeting of
Stockholders, and the terms of the directors in Class III will continue until the 2008
Annual Meeting of Stockholders. The names of the Class II and Class III directors are
included in, and are incorporated by reference to, the definitive proxy statement for our
2006 Annual Meeting of Stockholders, which was filed with the SEC on April 12, 2006.2.
    
    Our stockholders approved Bowaters 2006 Stock Option and Restricted Stock Plan with
42,726,576 votes for, 3,496,109 votes withheld, 16,971 abstentions and 3,384,142 broker
non-votes.3.
    
    Our stockholders ratified the appointment of KPMG LLP as the independent registered
public accounting firm for the 2006 fiscal year with 49,417,381 votes for, 148,822 votes
withheld and 57,595 abstentions.
 45




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##### 



Item 6. Exhibits
  Exhibit No.
    
    Description4.1
    
    Credit Agreement, dated May 31, 2006, by and among Bowater Canadian Forest
Products Inc., as Borrower; Bowater Incorporated, as Guarantor; several lenders and
The Bank of Nova Scotia4.2
    
    Credit Agreement, dated as of May 31, 2006, by and among Bowater Incorporated,
several lenders and Wachovia Bank, National Association10.1
    
    Agreement between Bowater Incorporated and Arnold M. Nemirow, dated May 10,
200710.2
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and Ronald T. Lindsay, dated May 9, 200610.3
    
    Employment Agreement between Bowater Incorporated and Ronald T. Lindsay, dated
May 9, 200610.4
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and William C. Morris, executed on
August 1, 2006, effective as of November 1, 200510.5
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and William G. Harvey, executed on
August 4, 2006, effective as of February 1, 200510.6
    
    Employment Agreement between
Bowater Incorporated and William G. Harvey, executed on
August 4, 2006, effective as of
February 1, 2005.10.7
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and C. Randy Ellington, executed on
August 1, 2006, effective as of January 26, 200510.8
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and Joseph B. Johnson, executed on
August 2, 2006, effective as of January 25, 200610.9
    
    Employment Agreement between Bowater Incorporated and Joseph B. Johnson, executed on
August 2, 2006, effective as of
January 25, 200610.10
    
    Bowater Incorporated Restricted
Stock Unit Agreement between David J. Paterson and Bowater
Incorporated, dated May 10, 2006*10.11
    
    Bowater Incorporated Non-Qualified
Stock Option Agreements between David J. Paterson and Bowater
Incorporated, dated May 1, 2006*10.12
    
    Second Amendment to the Bowater
Incorporated Mid-Term Incentive Plan Effective as of January 1, 2003*10.13
    
    Change in Control Agreement between
David J. Paterson and Bowater Incorporated, dated May 10, 2006*10.14
    
    Form of Bowater Incorporated
Restricted Stock Unit Agreement  Bonus Units*10.15
    
    Form of Bowater Incorporated
Restricted Stock Unit Agreement  Regular Award*10.16
    
    Form of Bowater Incorporated
Performance-Based Vesting Restricted Stock Unit Agreement*10.17
    
    Form of Bowater Incorporated
Non-Qualified Option Agreement*10.18
    
    Form of Bowater Incorporated
2004 Non-Employee Director Stock Unit Plan Award Agreement*10.19
    
    Fourth Amendment to the
Supplemental Benefit Plan for Designated Employees of Bowater
Incorporated and Affiliated Companies As Amended and Restated
Effective February 26, 1999*10.20
    
    Third Amendment to the Bowater
Incorporated Benefits Equalization Plan As Amended and Restated
Effective February 26, 1999*10.21
    
    Second Amendment to the Bowater
Incorporated Compensatory Benefits Plan As Amended and Restated
Effective February 26, 1999*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.
  46




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##### 



BOWATER INCORPORATEDBy
    
    /s/ William G. HarveyWilliam G. HarveySenior Vice President and Chief Financial OfficerBy
    
    /s/ Joseph B. JohnsonJoseph B. JohnsonVice President and ControllerDated: August 8, 2006
 47




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 INDEX TO EXHIBITS
 Exhibit No.
    
    Description4.1
    
    Credit Agreement, dated May 31, 2006, by and among Bowater Canadian Forest
Products Inc., as Borrower; Bowater Incorporated, as Guarantor; several lenders and
The Bank of Nova Scotia4.2
    
    Credit Agreement, dated as of May 31, 2006, by and among Bowater Incorporated,
several lenders and Wachovia Bank, National Association10.1
    
    Agreement between Bowater Incorporated and Arnold M. Nemirow, dated May 10,
200710.2
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and Ronald T. Lindsay, dated May 9, 200610.3
    
    Employment Agreement between Bowater Incorporated and Ronald T. Lindsay, dated
May 9, 200610.4
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and William C. Morris, executed on
August 1, 2006, effective as of November 1, 200510.5
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and William G. Harvey, executed on
August 4, 2006, effective as of February 1, 200510.6
    
    Employment Agreement between
Bowater Incorporated and William G. Harvey, executed on
August 4, 2006, effective as of
February 1, 2005.10.7
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and C. Randy Ellington, executed on
August 1, 2006, effective as of January 26, 200510.8
    
    Amended and Restated Change in Control Agreement between Bowater Incorporated
and Joseph B. Johnson, executed on
August 2, 2006, effective as of January 25, 200610.9
    
    Employment Agreement between Bowater Incorporated and Joseph B. Johnson, executed on
August 2, 2006, effective as of
January 25, 200612.1
    
    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.
 48