##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 2005.
 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 þ
  Class
    
    Outstanding at November 4, 2005Common Stock, $1.00 Par Value
    
    55,923,300 Shares




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##### 



BOWATER INCORPORATED
I N D E X
 Page NumberPART I FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Statement of Operations for the Three and Nine Months Ended September 30,
2005, and 2004
    
    
    3Consolidated Balance Sheet at September 30, 2005 and December 31, 2004
    
    
    4Consolidated Statement of Capital Accounts for the Nine Months Ended September 30, 2005
    
    
    5Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7  15Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16  35Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 6. Exhibits
    
    
    37SIGNATURES
    
    
    38




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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in millions of US dollars except per-share amounts)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    2004
    
    2005
    
    2004Sales
    
    $
    872.9
    
    
    $
    834.0
    
    
    $
    2,607.4
    
    
    $
    2,367.3Cost of sales,
excluding
depreciation,
amortization and
cost of timber
harvested
    
    
    630.5
    
    
    
    586.9
    
    
    
    1,880.6
    
    
    
    1,731.7Depreciation,
amortization and
cost of timber
harvested
    
    
    82.5
    
    
    
    83.0
    
    
    
    245.9
    
    
    
    254.1Distribution costs
    
    
    83.8
    
    
    
    85.2
    
    
    
    256.1
    
    
    
    241.6Selling and
administrative
expense
    
    
    41.0
    
    
    
    39.9
    
    
    
    121.0
    
    
    
    108.7Impairment of assets
    
    
    
    
    
    
    
    
    
    
    11.9
    
    
    
    Net gain on sale of
assets
    
    
    9.9
    
    
    
    1.7
    
    
    
    30.7
    
    
    
    5.9Operating income
    
    
    45.0
    
    
    
    40.7
    
    
    
    122.6
    
    
    
    37.1Other expense
(income):Interest income
    
    
    (1.0
    )
    
    
    (1.1
    )
    
    
    (3.2
    )
    
    
    (3.2
    )Interest
expense, net of
capitalized
interest
    
    
    50.0
    
    
    
    48.4
    
    
    
    149.5
    
    
    
    146.5Other, net
    
    
    (0.9
    )
    
    
    (1.3
    )
    
    
    (3.8
    )
    
    
    (6.4
    )48.1
    
    
    
    46.0
    
    
    
    142.5
    
    
    
    136.9Loss before income
taxes and minority
interests
    
    
    (3.1
    )
    
    
    (5.3
    )
    
    
    (19.9
    )
    
    
    (99.8
    )Income tax expense
(benefit)
    
    
    14.5
    
    
    
    12.0
    
    
    
    1.1
    
    
    
    (44.7
    )Minority interests
in net (income)
loss of
subsidiaries
    
    
    (1.6
    )
    
    
    0.8
    
    
    
    (2.3
    )
    
    
    (3.2
    )Net loss
    
    
    (16.0
    )
    
    
    (18.1
    )
    
    
    (18.7
    )
    
    
    (51.9
    )Other comprehensive
loss, net of tax:Foreign
currency
translation
adjustments
    
    
    3.5
    
    
    
    4.0
    
    
    
    2.3
    
    
    
    1.4Minimum pension
liability
adjustments
    
    
    (1.4
    )
    
    
    (3.6
    )
    
    
    (0.9
    )
    
    
    (1.6
    )Net change in
derivative
instruments
    
    
    (3.3
    )
    
    
    13.8
    
    
    
    (47.4
    )
    
    
    (39.2
    )Comprehensive loss
    
    $
    (17.2
    )
    
    $
    (3.9
    )
    
    $
    (64.7
    )
    
    $
    (91.3
    )Basic loss per common share
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.33
    )
    
    $
    (0.91
    )Diluted loss per common share
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.33
    )
    
    $
    (0.91
    )Dividends declared per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.60
    
    
    $
    0.60
  3




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##### 



BOWATER INCORPORATED
CONSOLIDATED BALANCE SHEET
(Unaudited, in millions of US dollars except per-share amounts)
 September 30,
    
    December 31,2005
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    23.3
    
    
    $
    29.7Accounts receivable, net
    
    
    432.9
    
    
    
    377.0Inventories
    
    
    353.3
    
    
    
    327.9Unrealized gain on hedged transactions
    
    
    46.6
    
    
    
    100.2Other current assets
    
    
    57.5
    
    
    
    67.9Total current assets
    
    
    913.6
    
    
    
    902.7Timber and timberlands
    
    
    186.2
    
    
    
    186.2Fixed assets, net
    
    
    3,125.3
    
    
    
    3,301.1Goodwill
    
    
    828.2
    
    
    
    828.2Other assets
    
    
    233.5
    
    
    
    240.7Total assets
    
    $
    5,286.8
    
    
    $
    5,458.9LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    20.6
    
    
    $
    14.0Short-term bank debt
    
    
    27.0
    
    
    
    73.0Accounts payable and accrued liabilities
    
    
    496.7
    
    
    
    458.4Dividends payable
    
    
    11.2
    
    
    
    11.2Total current liabilities
    
    
    555.5
    
    
    
    556.6Long-term debt, net of current installments
    
    
    2,403.0
    
    
    
    2,427.9Pension, other postretirement benefits and other long-term liabilities
    
    
    494.9
    
    
    
    495.2Deferred income taxes
    
    
    354.8
    
    
    
    403.4Minority interests in subsidiaries
    
    
    68.3
    
    
    
    68.5Shareholders equity:Common Stock, $1 par value. Authorized 100,000,000 shares; issued
67,529,294 and 67,438,584 shares at September 30, 2005 and December
31, 2004, respectively
    
    
    67.5
    
    
    
    67.4Exchangeable Shares, no par value. Unlimited shares authorized;
1,434,445 and 1,466,358 outstanding at September 30, 2005 and
December 31, 2004, respectively
    
    
    68.1
    
    
    
    69.7Additional paid-in capital
    
    
    1,621.6
    
    
    
    1,618.3Retained earnings
    
    
    213.5
    
    
    
    266.5Unearned compensation
    
    
    
    
    
    
    (0.1
    )Accumulated other comprehensive loss
    
    
    (74.6
    )
    
    
    (28.6
    )Treasury stock at cost, 11,605,770 and 11,608,385 shares at September
30, 2005 and December 31, 2004, respectively
    
    
    (485.8
    )
    
    
    (485.9
    )Total shareholders equity
    
    
    1,410.3
    
    
    
    1,507.3Total liabilities and shareholders equity
    
    $
    5,286.8
    
    
    $
    5,458.9
  4




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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(Unaudited, in millions of US dollars except per-share amounts)
 AccumulatedCommon
    
    
    
    
    
    Additional Paid In
    
    
    
    
    
    Unearned
    
    Other Comprehensive(In millions, except share amounts)
    
    Stock
    
    Exchangeable Shares
    
    Capital
    
    Retained Earnings
    
    Compensation
    
    Loss
    
    Treasury StockBalance at December 31, 2004
    
    $
    67.4
    
    
    $
    69.7
    
    
    $
    1,618.3
    
    
    $
    266.5
    
    
    $
    (0.1
    )
    
    $
    (28.6
    )
    
    $
    (485.9
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.7
    )
    
    
    
    
    
    
    
    
    
    
    Retraction of Exchangeable Shares
(31,913 shares of Common Stock issued
and Exchangeable Shares retracted)
    
    
    
    
    
    
    (1.6
    )
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends on Common Stock ($0.60 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34.3
    )
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    Stock options exercised (69,000 shares)
    
    
    0.1
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit on exercise of stock options
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reduction of pension plan additional
minimum liability, net of tax benefit of
$0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.9
    )
    
    
    Change in unrealized gain on hedged
transactions, net of change in accrued
tax of $29.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47.4
    )
    
    
    Restricted stock cancellation (10,203
shares)
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned compensation on
restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Treasury stock used for dividend
reinvestment plans and to pay employee
and director benefits (2,615 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Balance at September 30, 2005
    
    $
    67.5
    
    
    $
    68.1
    
    
    $
    1,621.6
    
    
    $
    213.5
    
    
    $
    
    
    
    $
    (74.6
    )
    
    $
    (485.8
    )
  5




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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in millions of US dollars except per-share amounts)
 Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (18.7
    )
    
    $
    (51.9
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation, amortization and cost of timber harvested
    
    
    245.9
    
    
    
    254.1Impairment of assets
    
    
    11.9
    
    
    
    Deferred income taxes
    
    
    (6.9
    )
    
    
    (55.4
    )Amortization of unearned compensation on restricted stock
    
    
    0.1
    
    
    
    0.7Minority interests in net loss of subsidiaries
    
    
    (2.3
    )
    
    
    (3.2
    )Net gain on fixed assets and land sales
    
    
    (30.7
    )
    
    
    (5.9
    )Changes in working capital:Accounts receivable, net
    
    
    (55.9
    )
    
    
    (60.6
    )Inventories
    
    
    (26.2
    )
    
    
    (15.5
    )Income taxes receivable
    
    
    4.6
    
    
    
    Accounts payable and accrued liabilities
    
    
    42.4
    
    
    
    57.1Income taxes payable
    
    
    
    
    
    
    (26.2
    )Other, net
    
    
    (20.9
    )
    
    
    (7.5
    )Net cash provided by operating activities
    
    
    143.3
    
    
    
    85.7Cash flows from investing activities:Cash invested in fixed assets, timber and timberlands
    
    
    (89.6
    )
    
    
    (60.3
    )Dispositions of assets, including timber and timberlands
    
    
    33.7
    
    
    
    10.3Net cash used for investing activities
    
    
    (55.9
    )
    
    
    (50.0
    )Cash flows from financing activities:Cash dividends, including minority interests
    
    
    (34.3
    )
    
    
    (34.6
    )Short-term financing
    
    
    413.9
    
    
    
    540.5Short-term financing repayments
    
    
    (461.0
    )
    
    
    (683.1
    )Long-term financing
    
    
    
    
    
    
    245.9Payments of long-term debt
    
    
    (14.3
    )
    
    
    (113.8
    )Stock options exercised
    
    
    1.9
    
    
    
    5.1Net cash used for financing activities
    
    
    (93.8
    )
    
    
    (40.0
    )Net decrease in cash and cash equivalents
    
    
    (6.4
    )
    
    
    (4.3
    )Cash and cash equivalents:Beginning of year
    
    
    29.7
    
    
    
    19.4End of year
    
    $
    23.3
    
    
    $
    15.1Supplemental disclosures of cash flow information:Cash paid during the year for:Interest, including capitalized interest of $0.6 and $0
    
    $
    107.5
    
    
    $
    121.9Income taxes
    
    $
    1.0
    
    
    $
    33.9
  6




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 1.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying consolidated financial statements include the accounts of Bowater Incorporated
and subsidiaries (Bowater). The consolidated balance sheet as of September 30, 2005, and the
related statements of operations, capital accounts and cash flows for the periods ended
September 30, 2005 and 2004 are unaudited. In our opinion, all adjustments (consisting of
normal recurring adjustments) necessary for fair presentation of the interim financial
statements have been made. The results of the interim period ended September 30, 2005, are not
necessarily indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the consolidated financial statements, critical
accounting policies, significant accounting policies and the notes to the consolidated financial
statements included in our most recent Annual Report on Form 10-K. Certain prior-year amounts
in the financial statements and the notes have been reclassified to conform to the 2005
presentation. The reclassifications had no effect on total shareholders equity or net loss.2.
    
    Stock Based CompensationBowater accounts for stock-based compensation utilizing the intrinsic value method in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Under APB No. 25, compensation expense for employee stock options is generally not
recognized if the exercise price of the option equals or exceeds the fair value of the
underlying stock on the date of grant.The following table represents the pro forma effect on net loss and loss per share if we had
applied the fair value-based method and recognition provisions of SFAS No. 123 Accounting for
Stock-Based Compensation. The estimated fair value of the option is amortized to expense over
the vesting period of the option award, in accordance with the provisions of SFAS No. 123.
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(Unaudited, in millions, except per-share amounts)
    
    2005
    
    2004
    
    2005
    
    2004Net loss as reported:
    
    $
    (16.0
    )
    
    $
    (18.1
    )
    
    $
    (18.7
    )
    
    $
    (51.9
    )Add:Stock-based compensation expense included innet loss, net of related tax effects
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.5Deduct:Stock-based compensation expense
determined under fair value based methods,
net of related tax effects
    
    
    (1.4
    )
    
    
    (1.8
    )
    
    
    (4.3
    )
    
    
    (5.5
    )Pro forma net loss
    
    $
    (17.4
    )
    
    $
    (19.8
    )
    
    $
    (23.0
    )
    
    $
    (56.9
    )Loss per share:Basic, as reported
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.33
    )
    
    $
    (0.91
    )Basic, pro forma
    
    
    (0.30
    )
    
    
    (0.35
    )
    
    
    (0.40
    )
    
    
    (1.00
    )Diluted, as reported
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.33
    )
    
    $
    (0.91
    )Diluted, pro forma
    
    
    (0.30
    )
    
    
    (0.35
    )
    
    
    (0.40
    )
    
    
    (1.00
    )
 7




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 The fair value of each option granted in the three and nine months ended September 30, 2005 and
2004, was estimated on the date of grant using the Black-Scholes option-pricing model with the
weighted average assumptions below.
 Nine Months EndedSeptember 30,2005
    
    2004Assumptions:Dividend yield
    
    
    2.2
    %
    
    
    1.8
    %Expected volatility
    
    
    29.0
    %
    
    
    30.6
    %Risk-free interest rate
    
    
    4.0
    %
    
    
    3.4
    %Expected option lives in years
    
    
    7.2
    
    
    
    6.8Weighted average fair value of each option
    
    $
    11.16
    
    
    $
    13.88
 In January 2005 and 2004, respectively, Bowater granted 740,750 and 862,000 options pursuant to
its 2002 stock option plan at an exercise price of $37 and $45 per share, respectively. In May
2005, Bowater granted an additional 15,000 options pursuant to its 2002 stock option plan at an
exercise price of $32 per share. The options generally become exercisable over a period of two
years and expire 10 years from date of grant.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. This permanent shut will not have a negative impact
on our current operations as the original line had been idled since the third quarter of 2002.
For segment reporting purposes, this impairment charge is included in our Coated and Specialty
Papers Division.4.
    
    Inventories
 September 30,
    
    December 31,(Unaudited, in millions)
    
    2005
    
    2004At lower of cost or market:Raw materials
    
    $
    92.2
    
    
    $
    87.9Work in process
    
    
    28.2
    
    
    
    23.1Finished goods
    
    
    127.1
    
    
    
    112.7Mill stores and other supplies
    
    
    116.6
    
    
    
    114.9364.1
    
    
    
    338.6Excess of current cost over LIFO inventory value
    
    
    (10.8
    )
    
    
    (10.7
    )$
    353.3
    
    
    $
    327.9
 8




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 5.
    
    Other (Income) ExpenseOther, net in the Consolidated Statement of Operations includes the following:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2005
    
    2004
    
    2005
    
    2004Foreign exchange (gain) loss
    
    $
    1.8
    
    
    $
    1.2
    
    
    $
    3.6
    
    
    $
    (0.1
    )Income from joint venture
    
    
    (1.3
    )
    
    
    (1.7
    )
    
    
    (3.1
    )
    
    
    (3.2
    )Miscellaneous income
    
    
    (1.4
    )
    
    
    (0.8
    )
    
    
    (4.3
    )
    
    
    (3.1
    )$
    (0.9
    )
    
    $
    (1.3
    )
    
    $
    (3.8
    )
    
    $
    (6.4
    )
 6.
    
    Accumulated Other Comprehensive LossThe components of Accumulated other comprehensive loss in the Consolidated Balance Sheet are
as follows:
 September 30,
    
    December 31,(Unaudited, in millions)
    
    2005
    
    2004Pension plan additional minimum liabilities (1)
    
    $
    (114.0
    )
    
    $
    (113.1
    )Foreign currency translation (2)
    
    
    10.5
    
    
    
    8.2Unrealized gain on hedging transactions (3)
    
    
    28.9
    
    
    
    76.3$
    (74.6
    )
    
    $
    (28.6
    )
 (1)
    
    Net of deferred tax benefit of $66.0 million and $65.5 million, respectively.(2)
    
    No tax effect is recorded for foreign currency translation since the foreign net assets
translated are deemed permanently invested.(3)
    
    Net of deferred tax expense of $17.7 million and $46.7 million, respectively.
 9




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 7.
    
    Loss Per ShareBasic and diluted loss per share are based on net loss and do not include any impact from Other
comprehensive loss.
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(Unaudited, in millions, except per-share amounts)
    
    2005
    
    2004
    
    2005
    
    2004Basic computation:Basic loss available to common shareholders
    
    $
    (16.0
    )
    
    $
    (18.1
    )
    
    $
    (18.7
    )
    
    $
    (51.9
    )Basic weighted average shares outstanding
    
    
    57.4
    
    
    
    57.2
    
    
    
    57.4
    
    
    
    57.2Basic loss per common share
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.33
    )
    
    $
    (0.91
    )Diluted computation:Diluted loss available to common shareholders
    
    $
    (16.0
    )
    
    $
    (18.1
    )
    
    $
    (18.7
    )
    
    $
    (51.9
    )Basic weighted average shares outstanding
    
    
    57.4
    
    
    
    57.2
    
    
    
    57.4
    
    
    
    57.2Effect of dilutive securities:Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    57.4
    
    
    
    57.2
    
    
    
    57.4
    
    
    
    57.2Diluted loss per common share
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.33
    )
    
    $
    (0.91
    )
 The dilutive effect of options outstanding is calculated using the treasury stock method.
Options for approximately 5.1 million shares outstanding at September 30, 2005, and 4.7 million
shares outstanding at September 30, 2004 were excluded in the calculation of diluted earnings
per share as the impact would have been anti-dilutive.8.
    
    Pension and Postretirement ExpenseThe components of net periodic benefit costs relating to Bowaters pension and other
postretirement plans are as follows for the three and nine-months ended September 30, 2005 and
2004:Pension Plans:
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2005
    
    2004
    
    2005
    
    2004Components of net periodic benefit cost:Service cost
    
    $
    9.2
    
    
    $
    8.6
    
    
    $
    27.7
    
    
    $
    27.7Interest cost
    
    
    29.4
    
    
    
    27.2
    
    
    
    86.6
    
    
    
    81.8Expected return on plan assets
    
    
    (28.5
    )
    
    
    (27.0
    )
    
    
    (84.8
    )
    
    
    (81.2
    )Amortization of prior service cost
    
    
    1.0
    
    
    
    0.5
    
    
    
    1.9
    
    
    
    1.5Recognized net actuarial loss
    
    
    4.1
    
    
    
    3.3
    
    
    
    12.2
    
    
    
    9.7Net periodic benefit cost
    
    $
    15.2
    
    
    $
    12.6
    
    
    $
    43.6
    
    
    $
    39.5
 10




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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 Other Postretirement Plans:
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2005
    
    2004
    
    2005
    
    2004Components of net periodic benefit cost:Service cost
    
    $
    1.0
    
    
    $
    1.0
    
    
    $
    3.3
    
    
    $
    3.4Interest cost
    
    
    4.3
    
    
    
    4.0
    
    
    
    13.0
    
    
    
    12.9Amortization of prior service cost
    
    
    (1.4
    )
    
    
    (1.5
    )
    
    
    (4.1
    )
    
    
    (4.6
    )Recognized net actuarial loss
    
    
    2.1
    
    
    
    2.0
    
    
    
    6.4
    
    
    
    7.3Curtailment gain
    
    
    (5.5
    )
    
    
    
    
    
    
    (5.5
    )
    
    
    Net periodic benefit cost
    
    $
    0.5
    
    
    $
    5.5
    
    
    $
    13.1
    
    
    $
    19.0
 The curtailment gain of $5.5 million is associated with changes to certain post-retirement
benefits in Canada. For segment reporting purposes, this curtailment gain is included in our
Coated and Specialty Papers Division.9.
    
    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.There have been no material developments to the legal proceedings described in our annual
report on Form 10-K filed on March 16, 2005.10.
    
    Financial InstrumentsBowater utilizes certain derivative instruments to enhance its ability to manage risk relating
to cash flow exposure. Derivative instruments are entered into for periods consistent with
related underlying cash flow exposures and do not constitute positions independent of those
positions. We do not enter into contracts for speculative purposes; however, we do, from time
to time enter into commodity and certain forward contracts that are not accounted for as
accounting hedges. On the date in which the derivative contract is entered, we designate the
derivative as a cash flow hedge.We pay a significant portion of the operating expenses of our Canadian mill sites in Canadian
dollars. To reduce our exposure to United States and Canadian dollar exchange rate
fluctuations, we have entered into and designated Canadian dollar forward contracts to hedge
certain of our forecasted Canadian dollar cash outflows at the Canadian mill operations.
 11




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 The components of the cash flow hedges included in Accumulated other comprehensive loss for
the three and nine-months ended September 30, 2005 and 2004 are as follows:
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(Unaudited, in millions)
    
    2005
    
    2004
    
    2005
    
    2004Gains reclassified to earnings on matured cash flow hedges
    
    $
    (21.7
    )
    
    $
    (33.0
    )
    
    $
    (78.5
    )
    
    $
    (91.3
    )Unrealized gain for change in value on
unmatured cash flow hedges
    
    
    16.5
    
    
    
    55.2
    
    
    
    2.1
    
    
    
    28.2(5.2
    )
    
    
    22.2
    
    
    
    (76.4
    )
    
    
    (63.1
    )Change in accrued income taxes
    
    
    1.9
    
    
    
    (8.4
    )
    
    
    29.0
    
    
    
    23.9Net increase (decrease) in Accumulated othercomprehensive loss
    
    $
    (3.3
    )
    
    $
    13.8
    
    
    $
    (47.4
    )
    
    $
    (39.2
    )
 We formally document all relationships between hedging instruments and hedged items, as
well as our risk-management objectives and strategies for undertaking various hedge
transactions. We link all hedges that are designated as cash flow hedges to forecasted
transactions. The maximum time period we have hedged transactions is two years. We also
assess, both at the inception of the hedge and on an on-going basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. When it is determined that a derivative is not highly effective as a hedge, we
discontinue hedge accounting prospectively. Hedge ineffectiveness associated with these
Canadian dollar forward contracts was not material for the three and nine months ended September
30, 2005.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.
 Net Asset
    
    Range OfNational
    
    
    
    
    
    Fair
    
    
    U.S.$/CDN$September 30, 2005
    
    Amount of
    
    Carrying
    
    Market
    
    Exchange(Unaudited, in millions of U.S. dollars)
    
    Derivatives
    
    Amount
    
    Value
    
    RatesForeign Currency Exchange AgreementsBuy Currency:Canadian dollarDue in 2005
    
    $
    112.0
    
    
    $
    17.5
    
    
    $
    17.5
    
    
    
    .7489-.7291Due in 2006
    
    
    183.0
    
    
    
    29.1
    
    
    
    29.1
    
    
    
    .7609-.7124$
    295.0
    
    
    $
    46.6
    
    
    $
    46.6
 In order to reduce our exposure to exchange rate fluctuations on our Canadian dollar denominated
long-term debt, we periodically enter into Canadian dollar forward contracts. These economic
hedge contracts are marked to market through earnings. The contracts are settled quarterly and
gains or losses are included in Other, net in our Consolidated Statement of Operations. The
Canadian dollar forward contracts in effect during the first quarter matured on March 30, 2005.
We recognized a gain of $0.9 million for the nine-months ended September 30, 2005, as a result
of these contracts. We have not entered into any new Canadian dollar forward contracts since the
fourth quarter of 2004.The counterparties to our derivative financial instruments are substantial and creditworthy
multi-national financial institutions and no one financial institution has more than 23% of our
derivative financial instruments. Therefore, the risk of counterparty nonperformance is
considered to be remote.
 12




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 11.
    
    Off-Balance Sheet Debt GuaranteesBowater has off-balance sheet debt guarantees of approximately $32.5 million at September 30,
2005, with $23.6 million related to Ponderay Newsprint Company and $8.9 million related to
Timber Note Holdings LLC, one of our Qualified Special Purpose Entities (QSPEs).Bowater has a 40% interest in Ponderay Newsprint Company, an unconsolidated partnership.
Ponderay has a credit facility which is comprised of a term loan and a revolving credit
facility. The term loan balance at September 30, 2005, was $59.0 million and is guaranteed by
the partners of Ponderay. Bowater guarantees 40%, or $23.6 million of this term loan. The
revolving credit facility has commitments from the lender for $25 million. This revolving
credit facility is not guaranteed by the partners. At September 30, 2005, there is a $10
million letter of credit reducing this commitment. There are no other drawings on this
facility. Ponderays outstanding balance on the term loan is reduced annually by its excess
cash flows as defined in the credit facility and, although the final balance is due at maturity
on April 12, 2006, Ponderay is in the process of renewing this facility. The term loan cannot
be increased once paid down, therefore, Bowaters guarantee is reduced as the outstanding
balance is reduced. Bowater would be required to perform on the guarantee if Ponderay were to
default on its credit facility and Ponderays assets, which collateralize the debt, were
insufficient to pay off the credit facility. Ponderay was in compliance with all its debt
covenants as of September 30, 2005. Ponderays total assets and liabilities at September 30,
2005, were approximately $158.9 million and $78.8 million (which includes the above mentioned
debt), respectively.In connection with Bowaters 1999 land sale and note monetization, we guarantee 25% of the
outstanding investor notes principal balance of Timber Note Holdings LLC, one of our QSPEs.
Bowater currently guarantees approximately $8.9 million of the investor notes principal balance.
This guarantee is proportionately reduced by annual principal repayments on the investor notes
(annual minimum repayments of $2.0 million) through 2008. The remaining investor notes
principal amount is to be repaid in 2009. Timber Note Holdings LLC has assets of approximately
$40.0 million and obligations of approximately $35.7 million, which include the investor notes.
Bowater would be required to perform on the guarantee if the QSPE were to default on the
investor notes or if there were a default on the notes receivable.12.
    
    Segment InformationBelow is a description of the types of products and services from which each reportable segment
derives its revenues:Effective January 1, 2005, Bowater is organized into four divisions: the Newsprint Division, the
Coated and Specialty Papers Division, the Canadian Forest Products Division, and the Pulp
Division. The fifth division that existed in 2004, the Forest Products Division, was merged
into the Newsprint and Canadian Forest Products Divisions and the Thunder Bay mill was moved
from the Newsprint Division to the Coated and Specialty Papers 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. Prior year
results have been restated to facilitate comparisons to the 2005 presentation.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 1.0
million acres of owned or leased timberland in the United
 13




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 States and the Canadian province of
Nova Scotia on which we have cutting rights. Effective January 1, 2005 the Thunder Bay mill
became part of the Coated and Specialty Papers Division.coated and specialty papers divisionThe Coated and Specialty Papers Division operates a manufacturing site that produces coated and
uncoated specialty papers and market pulp and two Nuway coating facilities, all three located in
the United States. This division also operates a manufacturing site in Canada which produces
newsprint, specialty papers and market pulp. Effective January 1, 2005, the Thunder Bay mill
became part of the Coated and Specialty Papers Division. This division has primary
responsibility for the marketing and sales of the full spectrum of coated and uncoated specialty
papers manufactured by Bowater. The division also manages 8.4 million acres of Crown-owned land
in the Canadian province of Ontario on which we have cutting rights.canadian forest products divisionThe Canadian Forest Products Division operates four paper manufacturing sites in Canada. The
division manages 0.4 million acres of owned or leased timberland and approximately 21.2 million
acres of Crown-owned land in the Canadian provinces of Quebec and New Brunswick on which we have
cutting rights. The division also operates twelve sawmills, supplies wood to four paper mills
and seven sawmills, and is responsible for the marketing and sales of its timber and lumber
production. Effective January 1, 2005, the sawmill operations of the Forest Products Division
were merged into the Canadian Forest Products Division.pulp divisionThe Pulp Division markets and distributes market pulp produced by other divisions. Financial
results for the production and sale of market pulp are included in the Newsprint Division or the
Coated and Specialty Papers Division, depending upon which site manufactures the product. The
Pulp Divisions selling and administrative expenses are included in Corporate and Other
Eliminations. Accordingly, no separate results are reported for this division.Factors management used to identify our segments:Bowaters reportable segments are business units responsible for the marketing and sales of
different products. They are managed separately because of the different products they are
responsible for manufacturing and distributing.The line entitled Segment income (loss) in the following tables is equal to Operating income
(loss) as presented in our Consolidated Statement of Operations. In addition, none of the
income or loss items following Operating income in our Consolidated Statement of Operations
are allocated to our segments, since they are reviewed separately by Bowaters management.
 14




---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements  Unaudited
 The following tables summarize information about segment profit and loss for the three and
nine-month periods ended September 30, 2005 and 2004 and segment assets as of September 30, 2005
and 2004:
 Coated
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Assets
    
    Corporate/September 30, 2005
    
    Newsprint
    
    Papers
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales- external customers
    
    $
    312.4
    
    
    $
    286.3
    
    
    $
    277.1
    
    
    $
    
    
    
    $
    (2.9
    )
    
    $
    872.9Segment income (loss)
    
    
    23.3
    
    
    
    16.6
    
    
    
    (1.8
    )
    
    
    9.9
    
    
    
    (3.0
    )
    
    
    45.0Total assets at 9/30/05
    
    
    2,038.8
    
    
    
    1,376.4
    
    
    
    1,385.9
    
    
    
    
    
    
    
    485.7
    
    
    
    5,286.8
 Coated
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    on FixedThree Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Assets
    
    Corporate/September 30, 2004
    
    Newsprint
    
    Papers
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Divison
    
    Sales
    
    Eliminations
    
    TotalSales- external customers
    
    $
    296.8
    
    
    $
    274.5
    
    
    $
    264.7
    
    
    $
    
    
    
    $
    (2.0
    )
    
    $
    834.0Segment income (loss)
    
    
    6.0
    
    
    
    10.8
    
    
    
    11.9
    
    
    
    1.7
    
    
    
    10.3
    
    
    
    40.7Total assets at 9/30/04
    
    
    2,100.9
    
    
    
    1,445.9
    
    
    
    1,400.1
    
    
    
    
    
    
    
    511.8
    
    
    
    5,458.7
 Coated
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    on FixedNine Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Assets
    
    Corporate/September 30, 2005
    
    Newsprint
    
    Papers
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales- external customers
    
    $
    949.9
    
    
    $
    851.3
    
    
    $
    816.8
    
    
    $
    
    
    
    $
    (10.6
    )
    
    $
    2,607.4Segment income
    
    
    52.8
    
    
    
    26.2
    
    
    
    4.9
    
    
    
    30.7
    
    
    
    8.0
    
    
    
    122.6
 Coated
    
    
    
    
    
    Net Gainand
    
    Canadian
    
    on FixedNine Months Ended
    
    
    
    
    
    Specialty
    
    Forest
    
    Assets
    
    Corporate/September 30, 2004
    
    Newsprint
    
    Papers
    
    Products
    
    and Land
    
    Other(Unaudited, in millions)
    
    Division
    
    Division
    
    Division
    
    Sales
    
    Eliminations
    
    TotalSales- external customers
    
    $
    869.9
    
    
    $
    781.7
    
    
    $
    723.8
    
    
    $
    
    
    
    $
    (8.1
    )
    
    $
    2,367.3Segment income (loss)
    
    
    3.7
    
    
    
    (2.2
    )
    
    
    (6.7
    )
    
    
    5.9
    
    
    
    36.4
    
    
    
    37.1
 15




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Item 2. 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
   16




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview of Financial Performance
    Outlook
   17




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
    Consolidated Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    
    
    September 30,(In millions)
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangeSales
    
    $
    872.9
    
    
    $
    834.0
    
    
    $
    38.9
    
    
    $
    2,607.4
    
    
    $
    2,367.3
    
    
    $
    240.1Operating income
    
    
    45.0
    
    
    
    40.7
    
    
    
    4.3
    
    
    
    122.6
    
    
    
    37.1
    
    
    
    85.5Significant items that increased (decreased) operating income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    61.8
    
    
    
    
    
    
    
    
    
    
    $
    250.6Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    (11.7
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (63.8
    )
    
    
    
    
    
    
    
    
    
    
    (154.0
    )Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.9
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    
    
    
    
    (12.3
    )Net gain on fixed assets and land sales
    
    
    
    
    
    
    
    
    
    
    8.2
    
    
    
    
    
    
    
    
    
    
    
    24.8$
    4.3
    
    
    
    
    
    
    
    
    
    
    $
    85.5
 Three months ended September 30, 2005 versus September 30, 2004
 
 Sales
 Operating income
 Product pricing
 Manufacturing costs
 Net gain on fixed assets and land sales
 18




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##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Nine months ended September 30, 2005 versus September 30, 2004
 
 Sales
 Operating income
 Product pricing
 Distribution costs
 Manufacturing costs
 Asset impairment charge
 Selling and administrative expenses
 Net gain on fixed assets and land sales
 19




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Division/Segments and Product Line Information
  (In millions)
 Coated &
    
    CanadianSpecialty
    
    Forest
    
    
    
    
    
    Corporate andNewsprint
    
    Papers
    
    Products
    
    Pulp
    
    OtherProduct Line
    
    Division
    
    Division
    
    Division
    
    Division
    
    Eliminations
    
    TotalNewsprint
    
    $
    646.1
    *
    
    $
    111.0
    
    
    $
    298.0
    
    
    $
    
    
    
    $
    
    
    
    $
    1,055.1Coated & Specialties
    
    
    138.3
    
    
    
    479.0
    *
    
    
    205.1
    
    
    
    
    
    
    
    (0.3
    )
    
    
    822.1Pulp
    
    
    150.5
    
    
    
    261.1
    
    
    
    
    
    
    
    
    *
    
    
    (3.4
    )
    
    
    408.2Lumber
    
    
    
    
    
    
    
    
    
    
    298.0
    *
    
    
    
    
    
    
    
    
    
    
    298.0Other
    
    
    15.0
    
    
    
    0.2
    
    
    
    15.7
    
    
    
    
    
    
    
    (6.9
    )
    
    
    24.0$
    949.9
    
    
    $
    851.3
    
    
    $
    816.8
    
    
    $
    
    
    
    $
    (10.6
    )
    
    $
    2,607.4
 *
    
    Indicates division responsible for the sale of product line for the entire company Product Line Information
   Newsprint  Product Line
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Sales (in millions)
    
    $
    347.9
    
    
    $
    336.9
    
    
    $
    1,055.1
    
    
    $
    987.2Average prices (per metric ton)
    
    $
    591
    
    
    $
    532
    
    
    $
    576
    
    
    $
    520Shipments (thousands of metric tons)
    
    
    588.3
    
    
    
    633.3
    
    
    
    1,833.1
    
    
    
    1,899.6Downtime (thousands of metric tons)
    
    
    71.3
    
    
    
    43.0
    
    
    
    154.4
    
    
    
    135.1Inventory at end of period (thousands of metric tons)
    
    
    100.9
    
    
    
    85.7
    
    
    
    100.9
    
    
    
    85.7
 20




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Three months ended September 30, 2005, versus September 30, 2004
 
    Newsprint Third Party Data:
 Nine months ended September 30, 2005, versus September 30, 2004
 
  Newsprint Third Party Data:
 21




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Coated and Specialty Papers  Product Line
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Sales (in millions)
    
    $
    290.6
    
    
    $
    244.6
    
    
    $
    822.1
    
    
    $
    664.8Average prices (per short ton)
    
    $
    730
    
    
    $
    628
    
    
    $
    702
    
    
    $
    602Shipments (thousands of short tons)
    
    
    397.9
    
    
    
    389.8
    
    
    
    1,170.5
    
    
    
    1,104.9Downtime (thousands of short tons)
    
    
    20.8
    
    
    
    22.3
    
    
    
    69.2
    
    
    
    77.2Inventory at end of period
(thousands of short tons)
    
    
    50.4
    
    
    
    45.0
    
    
    
    50.4
    
    
    
    45.0
 Three months ended September 30, 2005, versus September 30, 2004
 
   Coated and Specialty Papers Third Party Data:
 Nine months ended September 30, 2005, versus September 30, 2004
 
  22




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Coated and Specialty Papers Third Party Data:
 Market
Pulp  Product Line
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Sales (in millions)
    
    $
    127.4
    
    
    $
    135.3
    
    
    $
    408.2
    
    
    $
    411.5Average prices (per metric ton)
    
    $
    518
    
    
    $
    527
    
    
    $
    536
    
    
    $
    515Shipments (thousands of metric tons)
    
    
    245.9
    
    
    
    256.5
    
    
    
    761.9
    
    
    
    799.2Downtime (thousands of metric tons)
    
    
    18.8
    
    
    
    7.7
    
    
    
    42.3
    
    
    
    31.3Inventory at end of period (thousands of metric tons)
    
    
    67.8
    
    
    
    62.2
    
    
    
    67.8
    
    
    
    62.2
 Three months ended September 30, 2005, versus September 30, 2004
 
   Market Pulp Third Party Data:
 Nine months ended September 30, 2005, versus September 30, 2004
 
  23




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Market Pulp Third Party Data:
 Lumber  Product Line
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Sales (in millions)
    
    $
    95.9
    
    
    $
    107.4
    
    
    $
    298.0
    
    
    $
    281.0Average prices (per metric ton)
    
    $
    348
    
    
    $
    395
    
    
    $
    364
    
    
    $
    360Shipments (thousands of metric tons)
    
    
    275.6
    
    
    
    271.5
    
    
    
    819.1
    
    
    
    780.8Downtime (thousands of metric tons)
    
    
    41.3
    
    
    
    74.1
    
    
    
    159.2
    
    
    
    224.0Inventory at end of period (thousands of metric tons)
    
    
    50.5
    
    
    
    64.0
    
    
    
    50.5
    
    
    
    64.0
 Three months ended September 30, 2005, versus September 30, 2004
 
  Third party data:
 Nine months ended September 30, 2005, versus September 30, 2004
 
    24




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Third party data:
 Divisional Performance
 Newsprint Division
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeSales
    
    $
    312.4
    
    
    $
    296.8
    
    
    $
    15.6
    
    
    $
    949.9
    
    
    $
    869.9
    
    
    $
    80.0Segment income
    
    
    23.3
    
    
    
    6.0
    
    
    
    17.3
    
    
    
    52.8
    
    
    
    3.7
    
    
    
    49.1Significant items that increased (decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    28.3
    
    
    
    
    
    
    
    
    
    
    $
    87.8Distribution costs
    
    
    
    
    
    
    
    
    
    
    (1.8
    )
    
    
    
    
    
    
    
    
    
    
    (6.6
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (9.9
    )
    
    
    
    
    
    
    
    
    
    
    (33.4
    )Selling and administrative expenses
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    1.3$
    17.3
    
    
    
    
    
    
    
    
    
    
    $
    49.1
 Three months ended September 30, 2005, versus September 30, 2004
 
   Nine months ended September 30, 2005, versus September 30, 2004
 
  25




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
  Coated and Specialty Papers Division
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeSales
    
    $
    286.3
    
    
    $
    274.5
    
    
    $
    11.8
    
    
    $
    851.3
    
    
    $
    781.7
    
    
    $
    69.6Segment income (loss)
    
    
    16.6
    
    
    
    10.8
    
    
    
    5.8
    
    
    
    26.2
    
    
    
    (2.2
    )
    
    
    28.4Significant
items that increased (decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    26.7
    
    
    
    
    
    
    
    
    
    
    $
    99.5Distribution costs
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    (3.2
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (20.2
    )
    
    
    
    
    
    
    
    
    
    
    (55.3
    )Asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.9
    )Selling and
administrative expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.7
    )$
    5.8
    
    
    
    
    
    
    
    
    
    
    $
    28.4
 Three months ended September 30, 2005, versus September 30, 2004
 
   Nine months ended September 30, 2005, versus September 30, 2004
 
   26




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Canadian Forest Products Division
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeSales
    
    $
    277.1
    
    
    $
    264.7
    
    
    $
    12.4
    
    
    $
    816.8
    
    
    $
    723.8
    
    
    $
    93.0Segment income (loss)
    
    
    (1.8
    )
    
    
    11.9
    
    
    
    (13.7
    )
    
    
    4.9
    
    
    
    (6.7
    )
    
    
    11.6Significant items that increased (decreased) segment income:Product pricing
    
    
    
    
    
    
    
    
    
    $
    6.9
    
    
    
    
    
    
    
    
    
    
    $
    63.8Distribution costs
    
    
    
    
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    (1.9
    )Manufacturing costs
    
    
    
    
    
    
    
    
    
    
    (21.1
    )
    
    
    
    
    
    
    
    
    
    
    (48.2
    )Selling and
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    
    
    
    
    (2.1
    )$
    (13.7
    )
    
    
    
    
    
    
    
    
    
    $
    11.6
 Three months ended September 30, 2005, versus September 30, 2004
 
   Nine months ended September 30, 2005, versus September 30, 2004
 
   27




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Net Gain on Fixed Assets and Land Sales and Corporate & Other Eliminations
  Three Months Ended September 30,
    
    Nine Months Ended September 30,(In millions)
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeNet gain on fixed assets and
land sales
    
    $
    9.9
    
    
    $
    1.7
    
    
    $
    8.2
    
    
    $
    30.7
    
    
    $
    5.9
    
    
    $
    24.8Corporate & other eliminations:Sales
    
    
    (2.9
    )
    
    
    (2.0
    )
    
    
    (0.9
    )
    
    
    (10.6
    )
    
    
    (8.1
    )
    
    
    (2.5
    )Segment income (loss)
    
    
    (3.0
    )
    
    
    10.3
    
    
    
    (13.3
    )
    
    
    8.0
    
    
    
    36.4
    
    
    
    (28.4
    )
 Net gain on fixed assets and land sales:
 Corporate & other eliminations
 Interest and Other Income and Expenses
    Income Taxes
  28




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
       29




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Liquidity and Capital Resources
  Nine MonthsEnded September 30,(In millions)
    
    2005
    
    2004Decrease in cash and cash equivalents
    
    $
    (6.4
    )
    
    $
    (4.3
    )Cash from operations
    
    
    143.3
    
    
    
    85.7Net loss
    
    
    (18.7
    )
    
    
    (51.9
    )Adjustments to net loss:Amortization of unearned compensation on restricted stock
    
    
    0.1
    
    
    
    0.7Depreciation and amortization
    
    
    245.9
    
    
    
    254.1Deferred income taxes
    
    
    (6.9
    )
    
    
    (55.4
    )Net gain on land sales
    
    
    (30.7
    )
    
    
    (5.9
    )Minority interests in net loss of subsidiaries
    
    
    (2.3
    )
    
    
    (3.2
    )Asset impairment
    
    
    11.9
    
    
    
    Working capital:Accounts receivable, net
    
    
    (55.9
    )
    
    
    (60.6
    )Inventories
    
    
    (26.2
    )
    
    
    (15.5
    )Income taxes receivable
    
    
    4.6
    
    
    
    Accounts payable and accrued liabilities
    
    
    42.4
    
    
    
    57.1Income taxes payable
    
    
    
    
    
    
    (26.2
    )Total working capital changes
    
    
    (35.1
    )
    
    
    (45.2
    )Cash used for investing activities
    
    
    (55.9
    )
    
    
    (50.0
    )Cash invested in fixed assets, timber and timberlands
    
    
    (89.6
    )
    
    
    (60.3
    )Disposition of fixed assets, timberlands and note monetizations
    
    
    33.7
    
    
    
    10.3Cash used for financing activities
    
    
    (93.8
    )
    
    
    (40.0
    )Short-term financing, net
    
    
    (47.1
    )
    
    
    (142.6
    )Long-term financing, net
    
    
    (14.3
    )
    
    
    132.1Dividends
    
    
    (34.3
    )
    
    
    (34.6
    )
 Cash From Operations
  30




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
  Cash Used for Investing Activities
  Cash Used for Financing Activities
   Credit Arrangements:
  WeightedAverageAmount
    
    Commitment
    
    Termination
    
    InterestShort-Term Bank Debt
    
    Commitment
    
    Outstanding
    
    Available (1)
    
    Date
    
    Rate(in millions except for dates and interest rates)Revolving credit facility (2)
    
    $
    435.0
    
    
    $
    6.0
    
    
    $
    332.7
    
    
    
    04/07
    
    
    
    8.25
    %364-day Accounts Receivable
Securitization Arrangement
(3)
    
    
    200.0
    
    
    
    21.0
    
    
    
    149.0
    
    
    
    12/05
    
    
    
    3.81
    %$
    635.0
    
    
    $
    27.0
    
    
    $
    481.7
    
    
    
    
    
    
    
    4.79
    %
 (1)
    
    The commitment available under the Revolving credit facility is subject to covenant
restrictions described on pages 32  33 of this Form 10-Q and is reduced by outstanding
letters of credit of $96.3 million.(2)
    
    Borrowings under the revolving credit facility incur interest based, at our option, on
specified market interest rates plus a margin tied to the credit rating of our long-term debt.(3)
    
    The amount that can be borrowed at any time under our 364-day accounts receivables
securitization arrangement depends on the amount and nature of the accounts receivable. The
interest rate is based on commercial paper issued by the lenders plus a margin. 31




---



##### 



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




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
  (Unaudited, in
millions)
    
    12/31/2004
    
    3/31/2005
    
    6/30/2005
    
    9/30/2005
    
    Rolling 4 QtrsNet income (loss)
    
    $
    (35.2
    )
    
    $
    0.9
    
    
    $
    (3.6
    )
    
    $
    (16.0
    )
    
    $
    (53.9
    )Provision for income tax expense (benefit)
    
    
    (10.1
    )
    
    
    (7.8
    )
    
    
    (5.6
    )
    
    
    14.5
    
    
    
    (9.0
    )Depreciation, amortization and cost of timber harvested
    
    
    81.1
    
    
    
    81.8
    
    
    
    81.6
    
    
    
    82.5
    
    
    
    327.0Interest expense, net of capitalized interest
    
    
    48.8
    
    
    
    50.2
    
    
    
    49.3
    
    
    
    50.0
    
    
    
    198.3Interest income
    
    
    (1.0
    )
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (4.2
    )EBITDA
    
    $
    83.6
    
    
    $
    124.0
    
    
    $
    120.6
    
    
    $
    130.0
    
    
    $
    458.2Adjustments:Severance
    
    
    8.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.7Minority interest in net income (loss) of subsidiaries
    
    
    (3.3
    )
    
    
    (1.2
    )
    
    
    0.5
    
    
    
    (1.6
    )
    
    
    (5.6
    )Foreign exchange (gain) loss
    
    
    (2.9
    )
    
    
    (1.5
    )
    
    
    3.3
    
    
    
    1.8
    
    
    
    0.7Asset impairment
    
    
    
    
    
    
    
    
    
    
    11.9
    
    
    
    
    
    
    
    11.9Income from joint venture
    
    
    (1.2
    )
    
    
    (0.7
    )
    
    
    (1.1
    )
    
    
    (1.3
    )
    
    
    (4.3
    )1.3
    
    
    
    (3.4
    )
    
    
    14.6
    
    
    
    (1.1
    )
    
    
    11.4EBITDA, as calculated according to our
credit facilitys guidelines
    
    $
    84.9
    
    
    $
    120.6
    
    
    $
    135.2
    
    
    $
    128.9
    
    
    $
    469.6
  (in millions, except ratios)
    
    September 30,2005Total debt
    
    $
    2,450.6Less: Revaluation of debt
    
    
    (69.9
    )Total debt, per credit facilities
    
    $
    2,380.7Capitalization:Total shareholders equity
    
    $
    1,410.3Total debt
    
    
    2,450.6Minority interest
    
    
    68.3Less: Revaluation of debt
    
    
    (69.9
    )Plus: Additional minimum pension liability, net of tax
    
    
    114.0Total capitalization, per credit facilities
    
    $
    3,973.3Total debt as a percentage of total capitalization in accordance with credit facilities
    
    
    59.9
    %Total debt as a percentage of total capitalization, in accordance with GAAP
    
    
    62.4
    %
   33




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
   Employees
    Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings
   34




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition and Results of Operations
 Canadian Dollar Hedging Program
  Recent Accounting Pronouncements
      ,
 35




---



##### 



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:
  36




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
 PART II  OTHER INFORMATION
 Item 1. Legal Proceedings.
 a.
    
    Bowater is involved in various legal proceedings relating to contracts, commercial
disputes, taxes, environmental issues, employment and workers compensation claims and other
matters. We periodically review the status of these proceedings with both inside and outside
counsel. We believe that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material adverse effect on the
results of operations in a given quarter or the year.
 b.
    
    There have been no material developments to the legal proceedings described in our
annual report on Form 10-K filed on March 16, 2005.
 c.
    
    On September 30, 2005, the Ministry of Justice of the Province of Quebec (MOJ) cited
one of our subsidiaries, Bowater Canadian Forest Products, Inc. (BCFPI), in connection with
effluent water quality of the Dolbeau mill. BCFPI is contesting the fine of CDN $387,240
levied by the MOJ. The Dolbeau mill has taken steps to improve its effluent quality and has
remained in compliance with provincial and federal effluent limits since January 1, 2005. We
expect BCFPI to reach a settlement with the MOJ in the first half of 2006.
 Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Memorandum of Agreement between Bowater Canadian Forest Products Inc. and Bowater Maritimes
Inc. and Bowater Mersey Paper Company Limited and the Communications, Energy and Paper Workers
Union of Canada (CEP), dated June 24, 200512.1
    
    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.
 37




---



##### 



BOWATER INCORPORATED AND SUBSIDIARIES
   BOWATER INCORPORATEDBy
    
    /s/ William G. HarveyWilliam G. HarveySenior Vice President and Chief Financial OfficerBy
    
    /s/ Michael F. NocitoMichael F. NocitoVice President and Controller
  38




---



##### 



INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Memorandum of Agreement between Bowater Canadian Forest Products Inc. and
Bowater Maritimes Inc. and Bowater Mersey Paper Company Limited and the Communications,
Energy and Paper Workers Union of Canada (CEP), dated June 24, 200512.1
    
    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.