##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED September 30, 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 November 1, 2006Common Stock, $1.00 Par Value
    
    55,932,236 Shares




---



##### 



BOWATER INCORPORATED
I N D E X
 Page NumberPART I FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    3Consolidated Balance Sheets at September 30, 2006 and December 31, 2005
    
    
    4Consolidated Statements of Capital Accounts for the Nine Months Ended September 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7  23Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24  43Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    44PART II OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 6.
    
    Exhibits
    
    
    46SIGNATURES
    
    
    47Exhibit 4.1Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 10.6Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




---



##### Table of Contents



BOWATER INCORPORATED
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited, in millions of US dollars except per-share amounts)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net sales
    
    $
    875.9
    
    
    $
    872.9
    
    
    $
    2,668.5
    
    
    $
    2,607.4Costs and expenses:Cost of sales, excluding depreciation, amortization and cost of
timber harvested
    
    
    650.7
    
    
    
    630.5
    
    
    
    2,028.6
    
    
    
    1,880.6Depreciation, amortization and cost of timber harvested
    
    
    80.8
    
    
    
    82.5
    
    
    
    243.1
    
    
    
    245.9Distribution costs
    
    
    83.4
    
    
    
    83.8
    
    
    
    249.8
    
    
    
    256.1Selling and administrative expenses
    
    
    47.9
    
    
    
    41.0
    
    
    
    127.2
    
    
    
    121.0Impairment and other related charges
    
    
    246.4
    
    
    
    
    
    
    
    246.4
    
    
    
    11.9Net gain on disposition of assets
    
    
    (54.0
    )
    
    
    (9.9
    )
    
    
    (154.5
    )
    
    
    (30.7
    )Operating (loss)
 income
    
    
    (179.3
    )
    
    
    45.0
    
    
    
    (72.1
    )
    
    
    122.6Interest expense
    
    
    (50.8
    )
    
    
    (50.0
    )
    
    
    (149.5
    )
    
    
    (149.5
    )Other income, net
    
    
    4.9
    
    
    
    1.9
    
    
    
    9.7
    
    
    
    7.0Loss before income taxes, minority interests, and cumulative
effect of accounting change
    
    
    (225.2
    )
    
    
    (3.1
    )
    
    
    (211.9
    )
    
    
    (19.9
    )Income tax benefit (provision)
    
    
    9.9
    
    
    
    (14.5
    )
    
    
    (29.5
    )
    
    
    (1.1
    )Minority interests, net of tax
    
    
    (0.8
    )
    
    
    1.6
    
    
    
    (1.5
    )
    
    
    2.3Loss before cumulative effect of accounting change
    
    
    (216.1
    )
    
    
    (16.0
    )
    
    
    (242.9
    )
    
    
    (18.7
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    (2.6
    )
    
    
    Net loss
    
    $
    (216.1
    )
    
    $
    (16.0
    )
    
    $
    (245.5
    )
    
    $
    (18.7
    )Loss per share:Basic loss per common share:Loss before cumulative effect of accounting change
    
    $
    (3.76
    )
    
    $
    (0.28
    )
    
    $
    (4.23
    )
    
    $
    (0.33
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.05
    )
    
    
    Net loss per share
    
    $
    (3.76
    )
    
    $
    (0.28
    )
    
    $
    (4.28
    )
    
    $
    (0.33
    )Diluted loss per common share:Loss before cumulative effect of accounting change
    
    $
    (3.76
    )
    
    $
    (0.28
    )
    
    $
    (4.23
    )
    
    $
    (0.33
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.05
    )
    
    
    Net loss per share
    
    $
    (3.76
    )
    
    $
    (0.28
    )
    
    $
    (4.28
    )
    
    $
    (0.33
    )Average number of shares outstanding (in millions):Basic and diluted
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.60
    
    
    $
    0.60
  3




---



##### Table of Contents



BOWATER INCORPORATED
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited, in millions of US dollars except per-share amounts)
 September 30,
    
    December 31,2006
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    120.8
    
    
    $
    30.1Accounts receivable, net
    
    
    461.5
    
    
    
    410.1Inventories
    
    
    356.0
    
    
    
    365.8Timberlands held for sale
    
    
    7.9
    
    
    
    123.1Other current assets
    
    
    29.9
    
    
    
    61.2Total current assets
    
    
    976.1
    
    
    
    990.3Timber and timberlands
    
    
    75.8
    
    
    
    85.4Fixed assets, net
    
    
    2,915.7
    
    
    
    3,049.1Goodwill
    
    
    592.9
    
    
    
    794.1Other assets
    
    
    249.5
    
    
    
    233.5Total assets
    
    $
    4,810.0
    
    
    $
    5,152.4LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    15.1
    
    
    $
    22.2Short-term bank debt
    
    
    
    
    
    
    55.0Accounts payable and accrued liabilities
    
    
    515.2
    
    
    
    487.3Dividends payable
    
    
    11.2
    
    
    
    11.2Total current liabilities
    
    
    541.5
    
    
    
    575.7Long-term debt, net of current installments
    
    
    2,366.3
    
    
    
    2,400.0Pension, other postretirement benefits and other long-term liabilities
    
    
    547.3
    
    
    
    572.9Deferred income taxes
    
    
    371.2
    
    
    
    329.4Minority interests in subsidiaries
    
    
    62.5
    
    
    
    58.9Commitments and contingenciesShareholders equity:Common Stock, $1 par value. Authorized 100,000,000 shares; issued
67,528,308 and 67,529,294 shares at September 30, 2006 and December
31, 2005, respectively
    
    
    67.5
    
    
    
    67.5Exchangeable Shares, no par value. Unlimited shares authorized; 1,434,130
and 1,434,445 shares outstanding September 30, 2006 and December
31, 2005
    
    
    68.1
    
    
    
    68.1Additional paid-in capital
    
    
    1,626.8
    
    
    
    1,621.6Retained
(deficit) earnings
    
    
    (180.1
    )
    
    
    100.1Accumulated other comprehensive loss
    
    
    (175.3
    )
    
    
    (156.0
    )Treasury stock at cost, 11,601,601 and 11,605,074 shares at September 30,
2006 and December 31, 2005, respectively
    
    
    (485.8
    )
    
    
    (485.8
    )Total shareholders equity
    
    
    921.2
    
    
    
    1,215.5Total liabilities and shareholders equity
    
    $
    4,810.0
    
    
    $
    5,152.4
  4




---



##### Table of Contents



BOWATER INCORPORATED
 
 CONSOLIDATED STATEMENTS OF CAPITAL ACCOUNTS
 (Unaudited, in millions of US dollars except share amounts)
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
 AccumulatedAdditional
    
    Retained
    
    Other
    
    
    
    
    
    TotalCommon
    
    Exchangeable
    
    Paid In
    
    (Deficit)
    
    Comprehensive
    
    Treasury
    
    ShareholdersStock
    
    Shares
    
    Capital
    
    Earnings
    
    Loss
    
    Stock
    
    EquityBalance at December 31, 2005
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    100.1
    
    
    $
    (156.0
    )
    
    $
    (485.8
    )
    
    $
    1,215.5Dividends on Common Stock ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34.7
    )
    
    
    
    
    
    
    
    
    
    
    (34.7
    )Retraction of exchangeable shares (315 shares issued
and exchangeable shares retracted)
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Stock-based compensation costs for equity awards
    
    
    
    
    
    
    
    
    
    
    5.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.1Treasury stock used for dividend reinvestment plans and
to pay employee and director benefits (3,473 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (245.5
    )
    
    
    
    
    
    
    
    
    
    
    (245.5
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.1
    )
    
    
    
    
    
    
    (5.1
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    4.0Change in unrealized gain on hedged transactions, net
of tax of $11.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.2
    )
    
    
    
    
    
    
    (18.2
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (264.8
    )Balance at September 30, 2006
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,626.8
    
    
    $
    (180.1
    )
    
    $
    (175.3
    )
    
    $
    (485.8
    )
    
    $
    921.2
  AccumulatedAdditional
    
    
    
    
    
    Other
    
    
    
    
    
    TotalCommon
    
    Exchangeable
    
    Paid In
    
    Retained
    
    Comprehensive
    
    Treasury
    
    ShareholdersStock
    
    Shares
    
    Capital
    
    Earnings
    
    Loss
    
    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 ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34.3
    )
    
    
    
    
    
    
    
    
    
    
    (34.3
    )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
    )Treasury stock used for dividend reinvestment plans and
to pay employee and director benefits (2,615 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.7
    )
    
    
    
    
    
    
    
    
    
    
    (18.7
    )Minimum pension liability, net of tax of $0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.9
    )
    
    
    
    
    
    
    (0.9
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    
    
    
    
    2.3Change in unrealized gain on hedged transactions, net
of tax of $29.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47.4
    )
    
    
    
    
    
    
    (47.4
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64.7
    )Balance at September 30, 2005
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    213.5
    
    
    $
    (74.6
    )
    
    $
    (485.8
    )
    
    $
    1,410.3
  5




---



##### Table of Contents



BOWATER INCORPORATED
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in millions of US dollars except per-share amounts)
 Nine Months Ended September 30,2006
    
    2005Cash flows from operating activities:Net loss
    
    $
    (245.5
    )
    
    $
    (18.7
    )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
    
    
    1.8
    
    
    
    0.1Depreciation, amortization and cost of timber harvested
    
    
    243.1
    
    
    
    245.9Impairment and other related charges
    
    
    246.4
    
    
    
    11.9Deferred income tax provision (benefit)
    
    
    21.6
    
    
    
    (6.9
    )Minority interests, net of tax
    
    
    1.5
    
    
    
    (2.3
    )Pension contributions, net of pension benefit costs
    
    
    (25.9
    )
    
    
    (22.7
    )Net gain on disposition of assets
    
    
    (154.5
    )
    
    
    (30.7
    )Changes in working capital:Accounts receivable
    
    
    (51.4
    )
    
    
    (55.9
    )Inventories
    
    
    6.8
    
    
    
    (26.2
    )Income tax receivables and payables
    
    
    11.2
    
    
    
    4.6Accounts payable and accrued liabilities
    
    
    21.2
    
    
    
    42.4Other, net
    
    
    (10.6
    )
    
    
    1.8Net cash provided by operating activities
    
    
    68.3
    
    
    
    143.3Cash flows from investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (138.0
    )
    
    
    (89.6
    )Dispositions of assets, including timber and timberlands
    
    
    296.5
    
    
    
    33.7Net cash provided by (used for) investing activities
    
    
    158.5
    
    
    
    (55.9
    )Cash flows from financing activities:Cash dividends, including minority interests
    
    
    (34.7
    )
    
    
    (34.3
    )Short-term financing
    
    
    370.9
    
    
    
    413.9Short-term financing repayments
    
    
    (432.5
    )
    
    
    (461.0
    )Repurchase of long-term debt
    
    
    (17.5
    )
    
    
    Payments of long-term debt
    
    
    (22.3
    )
    
    
    (14.3
    )Stock options exercised
    
    
    
    
    
    
    1.9Net cash used for financing activities
    
    
    (136.1
    )
    
    
    (93.8
    )Net increase (decrease) in cash and cash equivalents
    
    
    90.7
    
    
    
    (6.4
    )Cash and cash equivalents:Beginning of year
    
    
    30.1
    
    
    
    29.7End of period
    
    $
    120.8
    
    
    $
    23.3Supplemental disclosures of cash flow information:Cash paid during the year for:Interest, including capitalized interest of $2.8 and $0.6
    
    $
    129.6
    
    
    $
    124.4Income taxes
    
    $
    6.8
    
    
    $
    1.0
  6




---



##### Table of Contents



BOWATER INCORPORATED
 
 Notes to Consolidated Financial Statements  Unaudited
 1. Summary of Significant Accounting Policies
 Basis of Presentation
  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
 Inventory Costs, an amendment of ARB No. 43, Chapter 4
 Share-based Payment
 2. Stock-based Compensation
  Adoption of New Accounting Guidance and Transition
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 
    
    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.
 7




---



##### Table of Contents



BOWATER INCORPORATED
 Notes to Consolidated Financial Statements  Unaudited
 
    
    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
 Pro Forma Information under SFAS 123 for Periods Prior to 2006
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions, except per - share amounts)
    
    2005
    
    2005Net loss as reported:
    
    $
    (16.0
    )
    
    $
    (18.7
    )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
    )
    
    
    (4.3
    )Pro forma net loss
    
    $
    (17.4
    )
    
    $
    (23.0
    )Loss per share:Basic, as reported
    
    $
    (0.28
    )
    
    $
    (0.33
    )Basic, pro forma
    
    
    (0.30
    )
    
    
    (0.40
    )Diluted, as reported
    
    $
    (0.28
    )
    
    $
    (0.33
    )Diluted, pro forma
    
    
    (0.30
    )
    
    
    (0.40
    )
 8




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  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
  Expense Information under SFAS 123R
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Stock Options
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.4
    
    
    $
    Restricted Stock Units
    
    
    2.9
    
    
    
    
    
    
    
    4.8
    
    
    
    0.1EPRs
    
    
    (0.5
    )
    
    
    
    
    
    
    (3.4
    )
    
    
    MTIP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    $
    2.6
    
    
    $
    
    
    
    $
    1.8
    
    
    $
    0.1
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Stock Options
    
    $
    
    
    
    $
    
    
    
    $
    (0.1
    )
    
    $
    Restricted Stock Units
    
    
    (0.7
    )
    
    
    
    
    
    
    (1.1
    )
    
    
    (0.1
    )EPRs
    
    
    0.1
    
    
    
    
    
    
    
    0.8
    
    
    
    MTIP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit
    
    $
    (0.6
    )
    
    $
    
    
    
    $
    (0.4
    )
    
    $
    (0.1
    )
  Stock Plans
  9




---



##### Table of Contents



BOWATER INCORPORATED
 Notes to Consolidated Financial Statements  Unaudited
  Stock Options
   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
    
    
    (409
    )
    
    
    40Outstanding at September 30, 2006
    
    
    5,009
    
    
    $
    43
    
    
    
    5.2
    
    
    $
    Exercisable at September 30, 2006
    
    
    4,672
    
    
    $
    45
    
    
    
    4.9
    
    
    $
    
  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
 10




---



##### Table of Contents



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
    
    
    806
    
    
    
    26Vested during the period
    
    
    (37
    )
    
    
    26Forfeited during the period
    
    
    (26
    )
    
    
    26Outstanding at September 30, 2006
    
    
    743
    
    
    $
    26
   Equity Participation Rights
   11




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  WeightedWeighted
    
    AverageNumber of
    
    Average
    
    Remaining
    
    AggregateRights
    
    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
    
    
    (133
    )
    
    
    47Outstanding at September 30, 2006
    
    
    2,040
    
    
    $
    48
    
    
    
    3.7
    
    
    $
    Exercisable at September 30, 2006
    
    
    2,040
    
    
    $
    48
    
    
    
    3.7
    
    
    $
    
   September 30,
    
    January 1,(Unaudited)
    
    2006
    
    2006Assumptions:Dividend yield
    
    
    3.9
    %
    
    
    2.6
    %Expected volatility
    
    
    30.8 - 32.7
    %
    
    
    30.0 - 33.0
    %Weighted average expected volatility
    
    
    31.7
    %
    
    
    30.1
    %Risk-free interest rate
    
    
    4.6 - 4.9
    %
    
    
    4.1 - 4.4
    %Expected EPR life in years
    
    
    0.3  3.3
    
    
    
    0.1 - 3.6Weighted average fair value of EPRs
    
    $
    0.21
    
    
    $
    1.70Fair value range of each EPR grant
    
    $
    0.00  0.81
    
    
    $
    0.01-4.60
 Mid-Term Incentive Plan
   12




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
   3. Impairment and Other Related Charges
 Goodwill
Impairment
     Asset
Impairment
    13




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 4. Inventories
 September 30,
    
    December 31,(Unaudited, in millions)
    
    2006
    
    2005At lower of cost or market:Raw materials
    
    $
    84.9
    
    
    $
    100.4Work in process
    
    
    19.2
    
    
    
    30.5Finished goods
    
    
    141.4
    
    
    
    131.8Mill stores and other supplies
    
    
    122.3
    
    
    
    114.9367.8
    
    
    
    377.6Excess of current cost over LIFO inventory value
    
    
    (11.8
    )
    
    
    (11.8
    )$
    356.0
    
    
    $
    365.8
 5. Other Income, Net
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Foreign exchange gain (loss)
    
    $
    0.7
    
    
    $
    (1.8
    )
    
    $
    (2.3
    )
    
    $
    (3.6
    )Interest income
    
    
    2.0
    
    
    
    1.0
    
    
    
    4.1
    
    
    
    3.2Income from joint venture
    
    
    1.0
    
    
    
    1.3
    
    
    
    5.2
    
    
    
    3.1Charges
related to repurchase of debt (See Note 11)
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    Miscellaneous income, net
    
    
    1.7
    
    
    
    1.4
    
    
    
    3.2
    
    
    
    4.3$
    4.9
    
    
    $
    1.9
    
    
    $
    9.7
    
    
    $
    7.0
 6. Timberlands Held For Sale
   14




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 7. Accumulated Other Comprehensive Loss
  September 30,
    
    December 31,(Unaudited, in millions)
    
    2006
    
    2005Pension plan additional minimum liabilities (1) (2)
    
    $
    (191.2
    )
    
    $
    (186.1
    )Foreign currency translation (3)
    
    
    15.5
    
    
    
    11.5Unrealized gain on hedging transactions (4)
    
    
    0.4
    
    
    
    18.6$
    (175.3
    )
    
    $
    (156.0
    )
 
 (1)
    
    Net of deferred tax benefit of $70.0 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 $0.3 million and $11.4 million, respectively. 8. Loss Per Share
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Basic weighted-average number of common shares
outstanding
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4Effect of potentially dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted-average number of common shares
outstanding
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
    
    
    
    57.4
  15




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 9. Pension and Postretirement Expense
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    10.5
    
    
    $
    9.2
    
    
    $
    32.4
    
    
    $
    27.7Interest cost
    
    
    29.9
    
    
    
    29.4
    
    
    
    89.1
    
    
    
    86.6Expected return on plan assets
    
    
    (30.8
    )
    
    
    (28.5
    )
    
    
    (91.0
    )
    
    
    (84.8
    )Amortization of prior service cost
    
    
    1.3
    
    
    
    1.0
    
    
    
    4.1
    
    
    
    1.9Curtailment/settlement loss
    
    
    8.8
    
    
    
    
    
    
    
    13.4
    
    
    
    Recognized net actuarial loss
    
    
    8.0
    
    
    
    4.1
    
    
    
    25.7
    
    
    
    12.2Net periodic benefit cost
    
    $
    27.7
    
    
    $
    15.2
    
    
    $
    73.7
    
    
    $
    43.6
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Components of net periodic benefit cost:Service cost
    
    $
    1.1
    
    
    $
    1.0
    
    
    $
    3.1
    
    
    $
    3.3Interest cost
    
    
    3.9
    
    
    
    4.3
    
    
    
    11.9
    
    
    
    13.0Amortization of prior service cost
    
    
    (1.5
    )
    
    
    (1.4
    )
    
    
    (4.5
    )
    
    
    (4.1
    )Recognized net actuarial loss
    
    
    2.1
    
    
    
    2.1
    
    
    
    6.1
    
    
    
    6.4Curtailment gain
    
    
    (5.5
    )
    
    
    (5.5
    )
    
    
    (5.7
    )
    
    
    (5.5
    )Net periodic benefit cost
    
    $
    0.1
    
    
    $
    0.5
    
    
    $
    10.9
    
    
    $
    13.1
     16




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
        17




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 10. Income Taxes
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Loss before income taxes, minority interests
and cumulative effect of accounting change
    
    $
    (225.2
    )
    
    $
    (3.1
    )
    
    $
    (211.9
    )
    
    $
    (19.9
    )Expected income tax benefit
    
    
    78.9
    
    
    
    1.1
    
    
    
    74.2
    
    
    
    7.0Increase (decrease) in income taxes resulting
from:Valuation allowance (1)
    
    
    (18.2
    )
    
    
    (5.1
    )
    
    
    (73.8
    )
    
    
    (5.1
    )Tax reserve adjustment (2)
    
    
    17.5
    
    
    
    13.2
    
    
    
    17.5
    
    
    
    13.2Foreign taxes (3)
    
    
    1.0
    
    
    
    1.5
    
    
    
    36.9
    
    
    
    7.6Goodwill (4)
    
    
    (70.0
    )
    
    
    
    
    
    
    (78.6
    )
    
    
    Foreign exchange
    
    
    (2.1
    )
    
    
    (17.2
    )
    
    
    (23.4
    )
    
    
    (9.4
    )Other, net
    
    
    2.8
    
    
    
    (8.0
    )
    
    
    17.7
    
    
    
    (14.4
    )Income tax
benefit (provision)
    
    $
    9.9
    
    
    $
    (14.5
    )
    
    $
    (29.5
    )
    
    $
    (1.1
    )
 
 (1)
    
    For the three and nine months ended September 30, 2006, income tax benefits and tax credits
of approximately $18.2 million and $73.8 million, respectively, generated primarily 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 three and nine months ended September 30, 2006, approximately $13.3 million
and $45.3 million, respectively, of the valuation allowance related to net operating losses with the
balance of the valuation allowance related to tax credits, foreign exchange, impairment charges and asset
sales. Included in the net $18.2 million valuation allowance in the third quarter of 2006 is a $1.5 million
valuation allowance reversal for an item unrelated to the Canadian losses in which the statute of
limitations expired during the quarter.(2)
    
    On a quarterly basis, we review tax reserves based on changes in tax law and changes in facts
or circumstances. Bowaters tax reserves are adjusted based on either an agreed determination of
a particular matter, the expiration of the statute of limitations for a particular tax period or a change
in facts or circumstances regarding the matter. We had tax reserves of $17.5 million and $13.2 million
associated with various tax matters, on which the statute of limitations expired in the third quarter of 2006
and 2005, respectively. As such, we adjusted our income tax benefit by this amount in the third quarter
of 2006 and 2005, respectively. Additionally, in the third quarter of 2006, the statute of limitations expired on tax reserves
of $1.2 million related to a previous acquisition. As these reserves were acquisition related, goodwill was
reduced by $1.2 million.(3)
    
    Foreign taxes in the first nine months of 2006 benefited by $15.2 million due to capital
gains treatment of certain asset sales.(4)
    
    During the
three and nine months ended September 30, 2006, we recorded a goodwill
impairment charge of $200 million, which does not provide a tax
benefit. 11. Long-term and Short-term Debt
 18




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
    
    
    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.
    12. Commitments and Contingencies
  19




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
   Lumber Duties
   13. Financial Instruments
  Canadian Dollar Forward Contracts
   20




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Natural Gas Hedging Instruments
   Net
    
    Range OfAsset/(Liability)
    
    U.S.$/CDN$Notional
    
    
    
    
    
    Exchange RatesAs of September 30, 2006
    
    Amount of
    
    Fair Market
    
    and Natural(Unaudited, in millions of U.S. dollars)
    
    Derivatives
    
    Value
    
    Gas PricesForeign Currency Exchange
AgreementsBuy Currency:Canadian dollarDue in 2006
    
    $
    40.0
    
    
    $
    0.6
    
    
    
    .8811-.8923Natural Gas Swap
Agreements:Due in 2006
    
    $
    0.3
    
    
    $
    
    
    
    $
    7.10 - 8.00Due in 2007
    
    
    0.7
    
    
    
    (0.1
    )
    
    
    7.40 - 8.62$
    1.0
    
    
    $
    (0.1
    )
    
    $
    7.10 - 8.62
  21




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2006
    
    2005
    
    2006
    
    2005Gains reclassified to earnings on matured cash flow
hedges
    
    $
    (5.0
    )
    
    $
    (21.7
    )
    
    $
    (34.2
    )
    
    $
    (78.5
    )Unrealized gains (losses) for change in value on
unmatured cash flow hedges
    
    
    0.5
    
    
    
    16.5
    
    
    
    4.9
    
    
    
    2.1(4.5
    )
    
    
    (5.2
    )
    
    
    (29.3
    )
    
    
    (76.4
    )Income tax benefit
    
    
    1.7
    
    
    
    1.9
    
    
    
    11.1
    
    
    
    29.0Net increase in Accumulated other comprehensive loss
    
    $
    (2.8
    )
    
    $
    (3.3
    )
    
    $
    (18.2
    )
    
    $
    (47.4
    )
 14. Off-Balance Sheet Debt Guarantees
  15. Segment Information
     22




---



##### Table of Contents



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Coated
    
    Specialty
    
    
    
    
    
    Market
    
    
    
    
    
    Corporate
    
    Consolidated(Unaudited, in millions)
    
    
    
    
    
    Papers
    
    Papers
    
    Newsprint
    
    Pulp
    
    Lumber
    
    and Other
    
    TotalNet SalesThird Quarter
    
    
    2006
    
    
    $
    154.4
    
    
    $
    153.9
    
    
    $
    349.1
    
    
    $
    144.2
    
    
    $
    71.1
    
    
    $
    3.2
    
    
    $
    875.9Third Quarter
    
    
    2005
    
    
    
    165.7
    
    
    
    124.9
    
    
    
    347.9
    
    
    
    127.4
    
    
    
    95.9
    
    
    
    11.1
    
    
    
    872.9Nine Months
    
    
    2006
    
    
    $
    463.5
    
    
    $
    426.6
    
    
    $
    1,089.9
    
    
    $
    410.3
    
    
    $
    261.6
    
    
    $
    16.6
    
    
    $
    2,668.5Nine Months
    
    
    2005
    
    
    
    464.1
    
    
    
    358.0
    
    
    
    1,055.1
    
    
    
    408.2
    
    
    
    298.0
    
    
    
    24.0
    
    
    
    2,607.4
 
 Coated
    
    Specialty
    
    
    
    
    
    Market
    
    
    
    
    
    Corporate
    
    Consolidated(Unaudited, in millions)
    
    
    
    
    
    Papers
    
    Papers
    
    Newsprint
    
    Pulp
    
    Lumber
    
    and Other
    
    TotalOperating Income (Loss)(1)Third Quarter
    
    
    2006
    
    
    $
    15.6
    
    
    $
    (1.4
    )
    
    $
    30.9
    
    
    $
    17.4
    
    
    $
    (17.4
    )
    
    $
    (224.4
    )
    
    $
    (179.3
    )Third Quarter
    
    
    2005
    
    
    
    32.7
    
    
    
    3.0
    
    
    
    23.4
    
    
    
    (1.7
    )
    
    
    (0.7
    )
    
    
    (11.7
    )
    
    
    45.0Nine Months
    
    
    2006
    
    
    $
    60.3
    
    
    $
    (26.8
    )
    
    $
    67.1
    
    
    $
    16.1
    
    
    $
    (20.9
    )
    
    $
    (167.9
    )
    
    $
    (72.1
    )Nine Months
    
    
    2005
    
    
    
    80.0
    
    
    
    4.6
    
    
    
    51.5
    
    
    
    15.2
    
    
    
    17.9
    
    
    
    (46.6
    )
    
    
    122.6AssetsAs of September 30, 2006
    
    
    
    
    
    $
    60.4
    
    
    $
    90.5
    
    
    $
    258.3
    
    
    $
    107.5
    
    
    $
    93.5
    
    
    $
    4,199.8
    
    
    $
    4,810.0As of December 31, 2005
    
    
    
    
    
    
    56.5
    
    
    
    60.2
    
    
    
    239.2
    
    
    
    93.8
    
    
    
    109.9
    
    
    
    4,592.8
    
    
    
    5,152.4
 
 (1)
    
    Corporate and other operating loss includes net gains from land and
other fixed asset sales of $54.0 million, $154.5 million, $9.9 million and $30.7 million for the three and nine
months ended September 30, 2006 and the three and nine months ended September 30, 2005, respectively.
Corporate and other also includes asset impairment and other related charges of
$46.4 million and goodwill impairment of $200 million for the three and nine months
ended September 30, 2006 and asset impairment and other related
charges of $11.9 million for the nine
months ended September 30, 2005. 23




---



##### Table of Contents



BOWATER INCORPORATED
 
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Organization
  Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data
   Accounting Policies and Estimates
    24




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Critical Accounting Policy  Goodwill
     25




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
    Overview of Financial Performance
 th th
  26




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
  Market Outlook
      Our Outlook
 th
  27




---



##### Table of Contents



BOWATER INCORPORATED
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)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    875.9
    
    
    $
    872.9
    
    
    $
    3.0
    
    
    $
    2,668.5
    
    
    $
    2,607.4
    
    
    $
    61.1Operating
(loss) income
    
    
    (179.3
    )
    
    
    45.0
    
    
    
    (224.3
    )
    
    
    (72.1
    )
    
    
    122.6
    
    
    
    (194.7
    )Significant items that increased
(decreased) operating (loss) income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    33.8
    
    
    
    
    
    
    
    
    
    
    $
    123.4Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    
    
    
    
    1.5Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (47.5
    )
    
    
    
    
    
    
    
    
    
    
    (202.7
    )Impairment and other related charges
    
    
    
    
    
    
    
    
    (246.4
    )
    
    
    
    
    
    
    
    
    
    
    (234.5
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (6.9
    )
    
    
    
    
    
    
    
    
    
    
    (6.2
    )Net gain on disposition of assets
    
    
    
    
    
    
    
    
    
    
    44.1
    
    
    
    
    
    
    
    
    
    
    
    123.8$
    (224.3
    )
    
    
    
    
    
    
    
    
    
    $
    (194.7
    )
 Three months ended September 30, 2006 versus September 30, 2005
 
 Sales
 28




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Operating
income
 Product pricing
 Manufacturing costs
 Impairment
and other related charges
 Net gain on disposition of assets
 Nine months ended September 30, 2006 versus September 30, 2005
 
 Sales
 Operating
income
 Product pricing
 Manufacturing costs
 Impairment
and other related charges
 Net gain on fixed assets and land sales
 29




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Segment Results of Operations
   COATED PAPERS
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    154.4
    
    
    $
    165.7
    
    
    $
    (11.3
    )
    
    $
    463.5
    
    
    $
    464.1
    
    
    $
    (0.6
    )Segment income
    
    
    15.6
    
    
    
    32.7
    
    
    
    (17.1
    )
    
    
    60.3
    
    
    
    80.0
    
    
    
    (19.7
    )Significant items that decreased segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (11.6
    )
    
    
    
    
    
    
    
    
    
    $
    (3.0
    )Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.8
    )
    
    
    
    
    
    
    
    
    
    
    (2.7
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (3.3
    )
    
    
    
    
    
    
    
    
    
    
    (13.4
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )$
    (17.1
    )
    
    
    
    
    
    
    
    
    
    $
    (19.7
    )
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Average prices (per short ton)
    
    $
    762
    
    
    $
    821
    
    
    $
    777
    
    
    $
    782Shipments (thousands of short tons)
    
    
    202.6
    
    
    
    201.8
    
    
    
    596.8
    
    
    
    593.2Downtime (thousands of short tons)
    
    
    10.1
    
    
    
    10.3
    
    
    
    46.1
    
    
    
    55.3Inventory at end of period
(thousands of short tons)
    
    
    40.0
    
    
    
    21.3
    
    
    
    40.0
    
    
    
    21.3
 Three months ended September 30, 2006, versus September 30, 2005
 
   30




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
  Nine months ended September 30, 2006, versus September 30, 2005
 
    31




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 SPECIALTY PAPERS
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    153.9
    
    
    $
    124.9
    
    
    $
    29.0
    
    
    $
    426.6
    
    
    $
    358.0
    
    
    $
    68.6Segment (loss) income
    
    
    (1.4
    )
    
    
    3.0
    
    
    
    (4.4
    )
    
    
    (26.8
    )
    
    
    4.6
    
    
    
    (31.4
    )Significant items that increased (decreased) segment (loss) income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    9.9
    
    
    
    
    
    
    
    
    
    
    $
    32.3Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (12.8
    )
    
    
    
    
    
    
    
    
    
    
    (62.9
    )Selling and
administrative expenses
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    0.2$
    (4.4
    )
    
    
    
    
    
    
    
    
    
    $
    (31.4
    )
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Average prices (per short ton)
    
    $
    679
    
    
    $
    637
    
    
    $
    667
    
    
    $
    620Shipments (thousands of short tons)
    
    
    226.8
    
    
    
    196.1
    
    
    
    639.4
    
    
    
    577.3Downtime (thousands of short tons)
    
    
    3.0
    
    
    
    1.1
    
    
    
    5.0
    
    
    
    4.6Inventory at end of period
(thousands of short tons)
    
    
    52.7
    
    
    
    29.2
    
    
    
    52.7
    
    
    
    29.2
 Three months ended September 30, 2006, versus September 30, 2005
 
     32




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Nine months ended September 30, 2006, versus September 30, 2005
 
   NEWSPRINT
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    349.1
    
    
    $
    347.9
    
    
    $
    1.2
    
    
    $
    1,089.9
    
    
    $
    1,055.1
    
    
    $
    34.8Segment income
    
    
    30.9
    
    
    
    23.4
    
    
    
    7.5
    
    
    
    67.1
    
    
    
    51.5
    
    
    
    15.6Significant items that increased (decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    28.8
    
    
    
    
    
    
    
    
    
    
    $
    103.5Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (21.7
    )
    
    
    
    
    
    
    
    
    
    
    (89.3
    )Selling and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    1.6$
    7.5
    
    
    
    
    
    
    
    
    
    
    $
    15.6
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Average prices (per short ton)
    
    $
    643
    
    
    $
    591
    
    
    $
    635
    
    
    $
    576Shipments (thousands of short tons)
    
    
    542.5
    
    
    
    588.3
    
    
    
    1,716.9
    
    
    
    1,833.1Downtime (thousands of short tons)
    
    
    27.2
    
    
    
    35.3
    
    
    
    61.5
    
    
    
    46.4Inventory at end of period
(thousands of short tons)
    
    
    77.5
    
    
    
    100.9
    
    
    
    77.5
    
    
    
    100.9
 Three months ended September 30, 2006, versus September 30, 2005
 
   33




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
    Nine months ended September 30, 2006, versus September 30, 2005
 
   MARKET PULP
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    144.2
    
    
    $
    127.4
    
    
    $
    16.8
    
    
    $
    410.3
    
    
    $
    408.2
    
    
    $
    2.1Segment income (loss)
    
    
    17.4
    
    
    
    (1.7
    )
    
    
    19.1
    
    
    
    16.1
    
    
    
    15.2
    
    
    
    0.9Significant items that increased (decreased) segment income (loss):Product pricing
    
    
    
    
    
    
    
    
    
    $
    18.8
    
    
    
    
    
    
    
    
    
    
    $
    19.2Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    (3.9
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    (14.2
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )$
    19.1
    
    
    
    
    
    
    
    
    
    
    $
    0.9
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Average prices (per short ton)
    
    $
    601
    
    
    $
    518
    
    
    $
    562
    
    
    $
    536Shipments (thousands of short tons)
    
    
    239.8
    
    
    
    245.9
    
    
    
    729.5
    
    
    
    761.9Downtime (thousands of short tons)
    
    
    3.4
    
    
    
    18.8
    
    
    
    22.1
    
    
    
    42.3Inventory at end of period
(thousands of short tons)
    
    
    59.1
    
    
    
    67.8
    
    
    
    59.1
    
    
    
    67.8
 34




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Three months ended September 30, 2006, versus September 30, 2005
 
     Nine months ended September 30, 2006, versus September 30, 2005
 
   LUMBER
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeSales
    
    $
    71.1
    
    
    $
    95.9
    
    
    $
    (24.8
    )
    
    $
    261.6
    
    
    $
    298.0
    
    
    $
    (36.4
    )Segment (loss) income
    
    
    (17.4
    )
    
    
    (0.7
    )
    
    
    (16.7
    )
    
    
    (20.9
    )
    
    
    17.9
    
    
    
    (38.8
    )Significant items that increased (decreased) segment (loss) income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    (12.8
    )
    
    
    
    
    
    
    
    
    
    $
    (28.8
    )Distribution costs
    
    
    
    
    
    
    
    
    
    
    3.3
    
    
    
    
    
    
    
    
    
    
    
    9.2Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (7.5
    )
    
    
    
    
    
    
    
    
    
    
    (19.6
    )Selling and
administrative expenses
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.4$
    (16.7
    )
    
    
    
    
    
    
    
    
    
    $
    (38.8
    )
 35




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Average prices (per mbf)
    
    $
    297
    
    
    $
    348
    
    
    $
    329
    
    
    $
    364Shipments (millions of mbf)
    
    
    239.4
    
    
    
    275.6
    
    
    
    795.5
    
    
    
    819.1Downtime (millions of mbf)
    
    
    69.4
    
    
    
    41.3
    
    
    
    181.3
    
    
    
    159.2Inventory at end of period (millions
of mbf)
    
    
    54.4
    
    
    
    50.5
    
    
    
    54.4
    
    
    
    50.5
 Three months ended September 30, 2006, versus September 30, 2005
 
   Nine months ended September 30, 2006, versus September 30, 2005
 
     36




---



##### Table of Contents



CORPORATE AND OTHER
  Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangeCorporate and Other:Sales
    
    $
    3.2
    
    
    $
    11.1
    
    
    $
    (7.9
    )
    
    $
    16.6
    
    
    $
    24.0
    
    
    $
    (7.4
    )Operating (loss) income:Net gain on disposition of assets
    
    $
    54.0
    
    
    $
    9.9
    
    
    $
    44.1
    
    
    $
    154.5
    
    
    $
    30.7
    
    
    $
    123.8Impairment and other related
Charges
    
    
    (246.4
    )
    
    
    
    
    
    
    (246.4
    )
    
    
    (246.4
    )
    
    
    (11.9
    )
    
    
    (234.5
    )Severance
    
    
    (6.9
    )
    
    
    
    
    
    
    (6.9
    )
    
    
    (11.3
    )
    
    
    
    
    
    
    (11.3
    )Corporate and other
    
    
    (25.1
    )
    
    
    (21.6
    )
    
    
    (3.5
    )
    
    
    (64.7
    )
    
    
    (65.3
    )
    
    
    0.6
 Net gain on disposition of assets :
 37




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Impairment and other related charges:
 Severance:
 Corporate and other
 Interest Expense and Other Income, Net
   Income Taxes
   38




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Liquidity and Capital Resources
  Cash From Operations
    Cash From (Used For) Investing Activities
  39




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
  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
    
    
    $
    
    
    
    $
    340.5
    
    
    
    05/11
    
    
    
    n/aCanadian Credit Agreement
    
    $
    165.0
    
    
    $
    
    
    
    $
    126.9
    
    
    
    05/07
    
    
    
    n/a$
    580.0
    
    
    $
    
    
    
    $
    467.4
 
 (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
$74.5 million for the U.S. and $38.1 million for Canada. We also have letters of credit
outstanding totaling $17.3 million that do not reduce the commitments available under 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. 40




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    a maximum ratio of senior secured indebtedness (including all advances and letters
of credit under the U.S. and Canadian facilities, and any other indebtedness secured by
assets of Bowater and its subsidiaries) to EBITDA
(generally defined as net income, excluding extraordinary, non-recurring or non-cash
items and gains (or losses) on asset dispositions, plus income taxes plus depreciation
plus interest expense) of 1.25 to 1; 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
  41




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Recent Accounting Pronouncements
 Income Taxes
  Taxes Collected from Customers
  Servicing of Financial Assets
  Hybrid Financial Instruments
  42




---



##### Table of Contents



BOWATER INCORPORATED
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Pensions
  §
    
    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.
   Planned Major Maintenance
  Quantifying Financial Statement Misstatements
  Fair Value Measurements
  43




---



##### Table of Contents



BOWATER INCORPORATED
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Exchange Risk
  Interest Rate Risk
  Commodity Price Risk
  
 Item 4. Controls and Procedures.
 (a)
    
    Evaluation of Disclosure Controls and Procedures:
  (b)
    
    Changes in Internal Control over Financial Reporting:
  44




---



##### Table of Contents



BOWATER INCORPORATED
 
 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 those legal proceedings described
in our annual report on Form 10-K filed on March 13, 2006 and our quarterly report on Form
10-Q filed on August 4, 2006.
 45




---



##### Table of Contents



BOWATER INCORPORATED
 
 Item 6. Exhibits
 (a)
    
    Exhibits (numbered in accordance with Item 601 of Regulation S-K):
 Exhibit No.
    
    Description4.1
    
    Softwood Lumber Agreement Cash
Deposits Purchase and Sale Agreement between Bowater Canadian Forest
Products Inc. and Export Development Canada dated September 19,
2006.10.1
    
    Change in Control Agreement between Bowater Incorporated and W. Eric Streed, dated August 7,
200610.2
    
    Change in Control Agreement between Bowater Incorporated and James T. Wright, executed on
October 10, 2006, effective as of September 1, 200510.3
    
    First Amendment to the Bowater Incorporated Outside Directors Stock-Based Deferred Fee Plan
Effective as of May 11, 2005 dated October 10, 200610.4
    
    Sixth Amendment to the Bowater Incorporated Retirement Plan for Outside Directors As Amended
and Restated Effective February 26, 1999, dated October 10, 200610.5
    
    Third Amendment to the Bowater Incorporated Compensatory Benefits Plan As Amended and
Restated Effective February 26, 1999, dated October 10, 200610.6
    
    Fourth Amendment to the Bowater Incorporated Benefits Equalization Plan as Amended and Restated
Effective February 26, 1999, dated October 10, 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.
 46




---



##### Table of Contents



BOWATER INCORPORATED
 
   BOWATER INCORPORATEDBy
    
    /s/ William G. Harvey

William G. HarveyExecutive Vice President and ChiefFinancial OfficerBy
    
    /s/ Joseph B. Johnson

Joseph B. JohnsonVice President and Controller
  47




---



##### Table of Contents



BOWATER INCORPORATED
 
 INDEX
TO EXHIBITS
 Exhibit No.
    
    Description4.1
    
    Softwood Lumber Agreement Cash
Deposits Purchase and Sale Agreement between Bowater Canadian Forest
Products Inc. and Export Development Canada dated September 19,
2006.10.1
    
    Change in Control Agreement between Bowater Incorporated and W. Eric Streed, dated August 7, 200610.2
    
    Change in Control Agreement between Bowater Incorporated and James T. Wright, executed on
October 10, 2006, effective as of September 1, 200510.3
    
    First Amendment to the Bowater Incorporated Outside Directors Stock-Based Deferred Fee Plan
Effective as of May 11, 2005 dated October 10, 200610.4
    
    Sixth Amendment to the Bowater Incorporated Retirement Plan for Outside Directors As Amended and
Restated Effective February 26, 1999, dated October 10, 200610.5
    
    Third Amendment to the Bowater Incorporated Compensatory Benefits Plan As Amended and Restated
Effective February 26, 1999, dated October 10, 200610.6
    
    Fourth Amendment to the Bowater Incorporated Benefits Equalization Plan as Amended and Restated
Effective February 26, 1999, dated October 10, 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.