UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

BOWATER INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

Delaware		62-0721803
(State of Incorporation)		(I.R.S. Employer Identification No.)

55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602

(Address of principal executive offices)(Zip Code)

(864) 271-7733

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ No o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 4, 2005.

Class		Outstanding at November 4, 2005
Common Stock, $1.00 Par Value		55,923,300 Shares

 

 

BOWATER INCORPORATED
I N D E X

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

BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in millions of US dollars except per-share amounts)

		Three Months Ended								Nine Months Ended
		September 30,									September 30,
		2005				2004				2005				2004
Sales		$	872.9			$	834.0			$	2,607.4			$	2,367.3
Cost of sales, excluding depreciation, amortization and cost of timber harvested			630.5				586.9				1,880.6				1,731.7
Depreciation, amortization and cost of timber harvested			82.5				83.0				245.9				254.1
Distribution costs			83.8				85.2				256.1				241.6
Selling and administrative expense			41.0				39.9				121.0				108.7
Impairment of assets			—				—				11.9				—
Net gain on sale of assets			9.9				1.7				30.7				5.9
Operating income			45.0				40.7				122.6				37.1
Other expense (income):
Interest income			(1.0	)			(1.1	)			(3.2	)			(3.2	)
Interest expense, net of capitalized interest			50.0				48.4				149.5				146.5
Other, net			(0.9	)			(1.3	)			(3.8	)			(6.4	)
			48.1				46.0				142.5				136.9
Loss 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				1.4
Minimum 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

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED
CONSOLIDATED BALANCE SHEET
(Unaudited, in millions of US dollars except per-share amounts)

		September 30,				December 31,
		2005				2004
ASSETS
Current Assets:
Cash and cash equivalents		$	23.3			$	29.7
Accounts receivable, net			432.9				377.0
Inventories			353.3				327.9
Unrealized gain on hedged transactions			46.6				100.2
Other current assets			57.5				67.9
Total current assets			913.6				902.7
Timber and timberlands			186.2				186.2
Fixed assets, net			3,125.3				3,301.1
Goodwill			828.2				828.2
Other assets			233.5				240.7
Total assets		$	5,286.8			$	5,458.9
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt		$	20.6			$	14.0
Short-term bank debt			27.0				73.0
Accounts payable and accrued liabilities			496.7				458.4
Dividends payable			11.2				11.2
Total current liabilities			555.5				556.6
Long-term debt, net of current installments			2,403.0				2,427.9
Pension, other postretirement benefits and other long-term liabilities			494.9				495.2
Deferred income taxes			354.8				403.4
Minority interests in subsidiaries			68.3				68.5
Shareholders’ 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				67.4
Exchangeable 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				69.7
Additional paid-in capital			1,621.6				1,618.3
Retained earnings			213.5				266.5
Unearned 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				1,507.3
Total liabilities and shareholders’ equity		$	5,286.8			$	5,458.9

See accompanying notes to consolidated financial statements.

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)

																						Accumulated
		Common								Additional Paid In								Unearned				Other Comprehensive
(In millions, except share amounts)		Stock				Exchangeable Shares				Capital				Retained Earnings				Compensation				Loss				Treasury Stock
Balance 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)			—				—				—				—				—				—				0.1
Balance at September 30, 2005		$	67.5			$	68.1			$	1,621.6			$	213.5			$	—			$	(74.6	)		$	(485.8	)

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in millions of US dollars except per-share amounts)

		Nine Months Ended
		September 30,				September 30,
		2005				2004
Cash 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				254.1
Impairment of assets			11.9				—
Deferred income taxes			(6.9	)			(55.4	)
Amortization of unearned compensation on restricted stock			0.1				0.7
Minority 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				57.1
Income taxes payable			—				(26.2	)
Other, net			(20.9	)			(7.5	)
Net cash provided by operating activities			143.3				85.7
Cash 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				10.3
Net 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				540.5
Short-term financing repayments			(461.0	)			(683.1	)
Long-term financing			—				245.9
Payments of long-term debt			(14.3	)			(113.8	)
Stock options exercised			1.9				5.1
Net 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				19.4
End of year		$	23.3			$	15.1
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, including capitalized interest of $0.6 and $0		$	107.5			$	121.9
Income taxes		$	1.0			$	33.9

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

1.		Summary of Significant Accounting Policies
		Basis of Presentation
		The 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 Compensation
		Bowater 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 ended
		September 30,								September 30,
(Unaudited, in millions, except per-share amounts)		2005				2004				2005				2004
Net loss as reported:		$	(16.0	)		$	(18.1	)		$	(18.7	)		$	(51.9	)
Add: Stock-based compensation expense included in
net loss, net of related tax effects			—				0.1				—				0.5
Deduct: 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	)

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 Ended
		September 30,
		2005				2004
Assumptions:
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				6.8
Weighted 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 Impairment
		During 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				2004
At lower of cost or market:
Raw materials		$	92.2			$	87.9
Work in process			28.2				23.1
Finished goods			127.1				112.7
Mill stores and other supplies			116.6				114.9
			364.1				338.6
Excess of current cost over LIFO inventory value			(10.8	)			(10.7	)
		$	353.3			$	327.9

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 Ended
		September 30,								September 30,
(Unaudited, in millions)		2005				2004				2005				2004
Foreign 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 Loss
		The components of “Accumulated other comprehensive loss” in the Consolidated Balance Sheet are as follows:

		September 30,				December 31,
(Unaudited, in millions)		2005				2004
Pension plan additional minimum liabilities (1)		$	(114.0	)		$	(113.1	)
Foreign currency translation (2)			10.5				8.2
Unrealized 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.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

7.		Loss Per Share
		Basic 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 ended
		September 30,								September 30,
(Unaudited, in millions, except per-share amounts)		2005				2004				2005				2004
Basic 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				57.2
Basic 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				57.2
Effect of dilutive securities:
Options			—				—				—				—
Diluted weighted average shares outstanding			57.4				57.2				57.4				57.2
Diluted 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 Expense
		The 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 ended
		September 30,								September 30,
(Unaudited, in millions)		2005				2004				2005				2004
Components of net periodic benefit cost:
Service cost		$	9.2			$	8.6			$	27.7			$	27.7
Interest cost			29.4				27.2				86.6				81.8
Expected return on plan assets			(28.5	)			(27.0	)			(84.8	)			(81.2	)
Amortization of prior service cost			1.0				0.5				1.9				1.5
Recognized net actuarial loss			4.1				3.3				12.2				9.7
Net periodic benefit cost		$	15.2			$	12.6			$	43.6			$	39.5

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

Other Postretirement Plans:

		Three months ended								Nine months ended
		September 30,								September 30,
(Unaudited, in millions)		2005				2004				2005				2004
Components of net periodic benefit cost:
Service cost		$	1.0			$	1.0			$	3.3			$	3.4
Interest cost			4.3				4.0				13.0				12.9
Amortization of prior service cost			(1.4	)			(1.5	)			(4.1	)			(4.6	)
Recognized net actuarial loss			2.1				2.0				6.4				7.3
Curtailment 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 Contingencies
		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.
		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 Instruments
		Bowater 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.

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 ended
		September 30,								September 30,
(Unaudited, in millions)		2005				2004				2005				2004
Gains 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				23.9
Net increase (decrease) in “Accumulated other
comprehensive 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 Of
		National								Fair					U.S.$/CDN$
September 30, 2005		Amount of				Carrying				Market				Exchange
(Unaudited, in millions of U.S. dollars)		Derivatives				Amount				Value				Rates
Foreign Currency Exchange Agreements
Buy Currency:
Canadian dollar
Due in 2005		$	112.0			$	17.5			$	17.5				.7489-.7291
Due 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.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

11.		Off-Balance Sheet Debt Guarantees
		Bowater 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 Information
		Below 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 division
		The 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

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 division
		The 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 division
		The Canadian Forest Products Division operates four paper manufacturing sites in Canada. The division manages 0.4 million acres of owned or leased timberland and 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 division
		The Pulp Division markets and distributes market pulp produced by other divisions. Financial results for the production and sale of market pulp are included in the Newsprint Division or the Coated and Specialty Papers Division, depending upon which site manufactures the product. The Pulp Division’s selling and administrative expenses are included in “Corporate and Other Eliminations.” Accordingly, no separate results are reported for this division.
		Factors management used to identify our segments:
		Bowater’s reportable segments are business units responsible for the marketing and sales of different products. They are managed separately because of the different products they are responsible for manufacturing and distributing.
		The line entitled “Segment income (loss)” in the following tables is equal to “Operating income (loss)” as presented in our Consolidated Statement of Operations. In addition, none of the income or loss items following “Operating income” in our Consolidated Statement of Operations are allocated to our segments, since they are reviewed separately by Bowater’s management.

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 Gain
						and				Canadian				on Fixed
Three Months Ended						Specialty				Forest				Assets				Corporate/
September 30, 2005		Newsprint				Papers				Products				and Land				Other
(Unaudited, in millions)		Division				Division				Division				Sales				Eliminations				Total
Sales- external customers		$	312.4			$	286.3			$	277.1			$	—			$	(2.9	)		$	872.9
Segment income (loss)			23.3				16.6				(1.8	)			9.9				(3.0	)			45.0
Total assets at 9/30/05			2,038.8				1,376.4				1,385.9				—				485.7				5,286.8

						Coated								Net Gain
						and				Canadian				on Fixed
Three Months Ended						Specialty				Forest				Assets				Corporate/
September 30, 2004		Newsprint				Papers				Products				and Land				Other
(Unaudited, in millions)		Division				Division				Divison				Sales				Eliminations				Total
Sales- external customers		$	296.8			$	274.5			$	264.7			$	—			$	(2.0	)		$	834.0
Segment income (loss)			6.0				10.8				11.9				1.7				10.3				40.7
Total assets at 9/30/04			2,100.9				1,445.9				1,400.1				—				511.8				5,458.7

						Coated								Net Gain
						and				Canadian				on Fixed
Nine Months Ended						Specialty				Forest				Assets				Corporate/
September 30, 2005		Newsprint				Papers				Products				and Land				Other
(Unaudited, in millions)		Division				Division				Division				Sales				Eliminations				Total
Sales- external customers		$	949.9			$	851.3			$	816.8			$	—			$	(10.6	)		$	2,607.4
Segment income			52.8				26.2				4.9				30.7				8.0				122.6

						Coated								Net Gain
						and				Canadian				on Fixed
Nine Months Ended						Specialty				Forest				Assets				Corporate/
September 30, 2004		Newsprint				Papers				Products				and Land				Other
(Unaudited, in millions)		Division				Division				Division				Sales				Eliminations				Total
Sales- external customers		$	869.9			$	781.7			$	723.8			$	—			$	(8.1	)		$	2,367.3
Segment income (loss)			3.7				(2.2	)			(6.7	)			5.9				36.4				37.1

BOWATER INCORPORATED AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Organization

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. For further information regarding our segments, see Note 12 (Segment Information) of the Notes to the Consolidated Financial Statements included in this quarterly report.

Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data

Statements that are not reported financial results or other historical information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, for example, statements about our business outlook, assessment of market conditions, strategies, future plans, future sales, prices for our major products, inventory levels, capital spending and tax and exchange rates. These forward-looking statements are not guarantees of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. In addition to specific factors described in connection with any particular forward-looking statement, factors that could cause actual results to differ materially include, but are not limited to, those described under the caption “Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data” in Bowater’s annual report on Form 10-K for the year ended December 31, 2004, and from time to time, in Bowater’s other filings with the Securities and Exchange Commission. In addition, other risks could adversely affect us, as it is not possible for us to predict or assess all risks. We disclaim any obligation to publicly update or revise any forward-looking statements even if our situation changes in the future.

Information about industry or general economic conditions contained in this report are derived from third party sources (e.g., trade publications) that Bowater believes are widely accepted and accurate; however, Bowater has not independently verified this information and cannot provide assurances of its accuracy.

Accounting Policies and Estimates

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition on our unaudited Consolidated Financial Statements included in this quarterly report. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in Bowater’s annual report on Form 10-K for the year ended December 31, 2004. Bowater’s critical accounting policies and estimates are described under the caption “Critical Accounting Policies and Estimates” in Item 7 of Bowater’s annual report on Form 10-K for the year ended December 31, 2004.

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates, assumptions and judgments and rely on projections of future results of operations and cash flows. We base our estimates and assumptions on historical data and other assumptions that we believe are reasonable under the circumstances. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities in our financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period.

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

Our judgments are based on our assessment as to the effect certain estimates, assumptions of future trends or events may have on the financial condition and results of operations reported in our Consolidated Financial Statements. It is important that the reader of our financial statements understand that actual results could differ materially from these estimates, assumptions, projections and judgments.

Overview of Financial Performance

Our net loss for the third quarter of 2005 was $16.0 million, as compared to a net loss of $18.1 million for the same period in 2004. Our third quarter cash flow from operating activities exceeded our capital spending and dividends by $40.9 million, resulting in debt reduction of $75.5 million, or net of cash, $47.8 million. In the third quarter of 2005, we spent approximately $40 million on capital projects. Our total debt to capitalization ratio, calculated in accordance with our revolving credit facility, decreased slightly to 59.9%.

During the third quarter of 2005, prices increased for newsprint and coated and specialty papers, but declined for market pulp and lumber. Shipments for all of our product lines decreased compared to the second quarter of 2005. Our sales in the third quarter of 2005 were $872.9 million, a 4.7% increase from the third quarter of 2004 and a 2.7% decrease from the second quarter of 2005. Compared to the third quarter of 2004, our costs during the third quarter were higher primarily due to the stronger Canadian dollar, which increased from an average rate of US$0.76 to US$0.83, lower production volumes, higher maintenance costs, and higher energy costs related to hurricane Katrina. As compared to the third quarter of 2004, our unit manufacturing costs were up 9% in newsprint, 15% in market pulp, 5% in coated and specialty papers and 3% in lumber. “Consolidated Results of Operations” on page 18 provides more information regarding changes in our manufacturing costs during the third quarter of 2005.

Newsprint demand in North America declined 6.8% in the third quarter of 2005 compared to the same period last year, reflecting continuing conservation measures taken by publishers, reduced North American newspaper circulation and substitution by other uncoated mechanical grades. Coated mechanical demand in North America declined 6.9% due primarily to capacity constraints related to industry work stoppages as compared to the same period of 2004. Uncoated mechanical demand decreased by 5.9% and supercalendered high gloss specialty paper demand decreased by 3.8%. Global market pulp demand increased 5%.

Outlook

Prices for our products have improved substantially over the past several years; however, these gains have been largely offset by increased costs in 2005 primarily from the continuing strengthening of the Canadian dollar, including reduced benefits from our Canadian dollar hedging transactions, and higher energy costs. In order to mitigate a portion of the increased costs, we are billing freight and energy surcharges of $20 per ton for our coated and supercalendar grades, and $5 on all of our other uncoated mechanical grades for the fourth quarter. We will continue to focus on enhancing our product mix and examining our costs. We recently announced a cost reduction program that we expect to reduce annual operating costs by $80 million and to fully implement by the end of 2006. In addition to this cost reduction program, we announced our intention to sell certain assets that are expected to generate proceeds in excess of $300 million over the same period. The assets consist mostly of North American timberland assets. As these plans are implemented, the carrying value of these timberland assets will be reclassified to assets held for sale on our balance sheet. We do not expect that the reclassification of these timberland assets will have a negative impact on our current carrying value.

We believe that North American newsprint demand could continue to decline over the next few years. Our newsprint capacity will also decline as we continue to shift production to coated and specialty grades. As previously announced, our Board of Directors approved an $80 million investment to convert approximately 200,000 metric tons of annual newsprint production at our Calhoun mill to higher-margin specialty grades. The conversion project is in process and is expected to be completed by mid-2006. The specialty grades to be produced will focus on the growing direct mail and related advertising markets. After the project is completed, we anticipate

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

that the Calhoun site, which once produced 730,000 metric tons of newsprint annually, will produce 465,000 short tons of specialty grades and 300,000 metric tons of newsprint annually.

In addition to the conversion at Calhoun, we have an opportunity to convert newsprint production to high margin light-weight coated grades at our Thunder Bay mill. Any implementation of this initiative would take into account our financial flexibility and debt reduction efforts as well as the long-term competitive outlook of the site. In consideration of our third quarter results and the challenges of the current business environment, timing for a final decision on this project remains uncertain.

We believe our operations are positioned to deliver quality products and that capital reinvestment in the business can be held to acceptable levels. We expect to spend $160 — $170 million in 2005, compared to projected depreciation expense of $330 million.

Consolidated Results of Operations

		Three Months Ended												Nine Months Ended
		September 30,																September 30,
(In millions)		2005				2004				Change				2005				2004				Change
Sales		$	872.9			$	834.0			$	38.9			$	2,607.4			$	2,367.3			$	240.1
Operating income			45.0				40.7				4.3				122.6				37.1				85.5
Significant items that increased (decreased) operating income:
Product pricing										$	61.8											$	250.6
Distribution 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 increased in the third quarter of 2005 as compared to the third quarter of 2004 due primarily to higher transaction prices for newsprint and coated and specialty papers and increased shipments of coated papers, partially offset by lower transaction prices for pulp and lumber and lower shipments of newsprint, specialty papers and pulp as further noted in the “Product Line Information” section.

Operating income increased in the third quarter of 2005 as compared to the third quarter of 2004. The above table analyzes the major items that increased operating income. A brief explanation of these major items follows:

Product pricing for our newsprint and coated and specialty papers product groups was higher in the third quarter of 2005 as compared to the third quarter of 2004. Please refer to the discussion of “Product Line Information” for a more detailed analysis of product pricing and shipments.

Manufacturing costs were higher in the third quarter of 2005 as compared to the third quarter of 2004 resulting primarily from a stronger Canadian dollar ($40.3 million), higher energy costs ($11.9 million), lower volumes ($9.0 million), and higher chemical costs ($3.2 million). These cost increases were partially offset by lower labor and fringe costs ($3.6 million) and lower recycled fiber costs ($1.5 million).

Net gain on fixed assets and land sales relates primarily to land sales and the disposition of fixed assets. The increase is due to higher land sales in the third quarter of 2005 compared to the third quarter of 2004.

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 increased in the first nine months of 2005 as compared to the first nine months of 2004 due primarily to higher transaction prices for all products and increased shipments of coated and specialty papers and lumber as further noted in the “Product Line Information” section.

Operating income increased in the first nine months of 2005 as compared to the first nine months of 2004. The above table analyzes the major items that increased operating income. A brief explanation of these major items follows:

Product pricing for all of our major product groups was higher in the first nine months of 2005 as compared to the first nine months of 2004. Please refer to the discussion of “Product Line Information” for a more detailed analysis of product pricing and shipments.

Distribution costs were higher in the first nine months of 2005 as compared to the first nine months of 2004 as a result of increased shipments to export markets and increased fuel costs.

Manufacturing costs were higher in the first nine months of 2005 as compared to the first nine months of 2004 resulting primarily from a stronger Canadian dollar ($101.0 million), higher costs for energy ($20.5 million), chemicals ($11.0 million), wood ($10.3 million), repair materials ($4.8 million), and recycled fiber ($2.5 million). These cost increases were partially offset by lower depreciation expense ($9.0 million) and improved volumes ($2.2 million).

Asset impairment charge associated with the permanent shut of line No. 1 at our Benton Harbor facility was recognized during the second quarter of 2005.

Selling and administrative expenses were higher in the first nine months of 2005 as compared to the first nine months of 2004 due to lower capital tax refunds ($4.3 million), higher employee-related expenses ($4.0 million), and higher professional fees and other expenses ($4.0 million).

Net gain on fixed assets and land sales relates primarily to land sales and the disposition of fixed assets. The increase is due to higher land sales in the first nine months of 2005 compared to the first nine months of 2004.

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

Division/Segments and Product Line Information

Bowater is organized by division. Bowater also provides product line disclosures for informational purposes to our analysts and investors. The divisions have operational responsibility over their group of operating assets. The divisions also have sales responsibilities that overlap several of the Company’s operating divisions/segments. The matrix below depicts the various products that are manufactured by each of the Company’s operating divisions/segments and corresponding sales dollars for the nine months ended September 30, 2005, and depicts the division that is responsible for the sale of the product line for the entire company.

(In millions)

						Coated &				Canadian
						Specialty				Forest								Corporate and
		Newsprint				Papers				Products				Pulp				Other
Product Line		Division				Division				Division				Division				Eliminations				Total
Newsprint		$	646.1	*		$	111.0			$	298.0			$	—			$	—			$	1,055.1
Coated & Specialties			138.3				479.0	*			205.1				—				(0.3	)			822.1
Pulp			150.5				261.1				—				—	*			(3.4	)			408.2
Lumber			—				—				298.0	*			—				—				298.0
Other			15.0				0.2				15.7				—				(6.9	)			24.0
		$	949.9			$	851.3			$	816.8			$	—			$	(10.6	)		$	2,607.4

Product Line Information

Presented below is a discussion of each significant product line followed by a discussion of the results of each of the reported divisions.

In general, our products are globally-traded commodities. Pricing and the level of shipments of these products will continue to be influenced by the balance between supply and demand as affected by global economic conditions, changes in consumption and capacity, the level of customer and producer inventories and fluctuations in currency exchange rates.

Newsprint – Product Line

		Three months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
Sales (in millions)		$	347.9			$	336.9			$	1,055.1			$	987.2
Average prices (per metric ton)		$	591			$	532			$	576			$	520
Shipments (thousands of metric tons)			588.3				633.3				1,833.1				1,899.6
Downtime (thousands of metric tons)			71.3				43.0				154.4				135.1
Inventory at end of period (thousands of metric tons)			100.9				85.7				100.9				85.7

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

Our average newsprint transaction price for all markets was 11.1% higher in the third quarter of 2005 compared to the third quarter of 2004. The increase reflects the realization of price increases in the North American and International markets. Newsprint shipments were 7.1% lower in the third quarter of 2005. Inventory increased 17.7% during the third quarter of 2005 compared to the same period in 2004 primarily due to increased export shipments and transportation delays associated with recent hurricane activity in the southern United States.

During the third quarter of 2005, we took approximately 56,000 tons of market downtime at our Thunder Bay mill, which included approximately 20,000 tons related to a 19-day outage in July 2005 as a result of high wood and energy costs. We plan to take approximately 53,000 metric tons of market and maintenance downtime in the fourth quarter of 2005, which primarily includes market downtime of approximately 37,000 metric tons attributable to an idled newsprint machine at our Thunder Bay mill (since late June 2003) and maintenance downtime of approximately 10,000 metric tons at our Mokpo, Korea facility. We expect the market downtime at our Thunder Bay mill to continue until market conditions improve. We will continue to match production to orders.

We recently informed our North American customers of a $35 per metric ton price increase, effective October 1, 2005.

Newsprint Third Party Data: In the three months ended September 30, 2005, total U.S. demand and consumption of newsprint decreased 6.8% and 6.3%, respectively as compared to the same period last year. North American net exports of newsprint increased 5.5% from 2004 levels. Total inventories (North American mills and users) at September 30, 2005 were 1.3 million metric tons, approximately 113,000 metric tons, or 8%, lower than September 30, 2004. At September 30, 2005 the days of supply at the U.S. daily newspapers was 40 days, down from 41 days at September 30, 2004. The North American operating rate was 94% for the three months ended September 30, 2005. Newspaper advertising linage declined 3.0% in August as compared to August 2004.

Nine months ended September 30, 2005, versus September 30, 2004

Our average newsprint transaction price for all markets was 10.8% higher in the first nine months of 2005 compared to the first nine months of 2004. The increase reflects the realization of price increases in the North American and International markets. Our newsprint shipments decreased by 3.5% in the first nine months of 2005 primarily due to increases in specialty papers production on our newsprint machines. Our newsprint shipments to international markets have increased 20% during the first nine months of 2005 compared to the same period of 2004.

Newsprint Third Party Data: In the first nine months of 2005, total U.S. demand and consumption of newsprint decreased 6.7% and 5.2%, respectively as compared to the same period last year. North American net exports of newsprint increased 7.4% from 2004 levels. Newspaper advertising linage declined 1.5% in the first eight months of 2005 compared to the same period last year.

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 ended
		September 30,								September 30,
		2005				2004				2005				2004
Sales (in millions)		$	290.6			$	244.6			$	822.1			$	664.8
Average prices (per short ton)		$	730			$	628			$	702			$	602
Shipments (thousands of short tons)			397.9				389.8				1,170.5				1,104.9
Downtime (thousands of short tons)			20.8				22.3				69.2				77.2
Inventory 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

Our average transaction price for coated paper was 19.3% higher in the third quarter of 2005 compared to the third quarter of 2004 due to the realization of price increases in 2004 and 2005, as well as the addition of higher value, ultra-light weight coated grades to our mix. Our coated mechanical papers shipments increased 8.2% in the third quarter of 2005 as compared to the third quarter of 2004 due to improved production efficiencies and increases in our orders that were influenced by labor disputes at competitors’ mills, which have been subsequently resolved. Our average transaction price for specialty papers was 11.4% higher in the third quarter of 2005 compared to the third quarter of 2004 due to the realization of price increases in 2004 and 2005. Our shipments of specialty papers decreased 3.6% in the third quarter of 2005 compared to the third quarter of 2004 due to the timing of shipments and invoicing. Market downtime in the third quarter of 2005 was taken at our Nuway facilities as we ran these sites on a four-day-per-week schedule.

We recently announced a price increase of $35 per short ton for all of our low-bright, uncoated mechanical grades for our North American customers, effective November 1, 2005.

Coated and Specialty Papers Third Party Data: U.S. consumer magazine advertising pages decreased 0.3% in the three months ended September 30, 2005 compared to the three months ended September 30, 2004. North American demand for coated mechanical papers decreased 6.9% in the three months ended September 30, 2005 compared to the same period in 2004. North American demand for supercalendered high gloss papers and other uncoated mechanical papers was down 3.8% and down 6.0% respectively, in the three months ended September 30, 2005 compared to the same period in 2004.

Nine months ended September 30, 2005, versus September 30, 2004

Our average transaction price for coated paper was 19.8% higher in the first nine months of 2005 compared to the first nine months of 2004 due to the realization of price increases in 2004 and 2005, as well as the addition of higher value, ultra-light weight coated grades to our mix. Our coated mechanical papers shipments increased 7.8% in the first nine months of 2005 as compared to the first nine months of 2004 due to improved production yields and increases in our orders that were influenced by labor disputes at our competitors’ mills. Our average transaction price for specialty papers was 12.6% higher in the first nine months of 2005 compared to the first nine months of 2004 due to the realization of price increases and increased sales of higher-brightness, higher-value grades. Our shipments of specialty papers increased 4.1% in the first nine months of 2005 compared to the first nine months of 2004 due in part to customers downgrading from traditional freesheet grades produced by our competitors to our new high-bright uncoated papers and other customers upgrading from newsprint to specialties. Market downtime in the first nine months of 2005 was taken at our Nuway facilities.

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

Coated and Specialty Papers Third Party Data: U.S. magazine advertising pages increased 1.0% in the first nine months of 2005 compared to the first nine months of 2004. North American demand for coated mechanical papers decreased 3.0% in the first nine months of 2005 compared to the first nine months of 2004. North American demand for supercalendered high gloss papers and other uncoated mechanical papers was up 5.3% and up 2.5%, respectively, in the first nine months of 2005 compared to the first nine months of 2004.

Market Pulp — Product Line

		Three months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
Sales (in millions)		$	127.4			$	135.3			$	408.2			$	411.5
Average prices (per metric ton)		$	518			$	527			$	536			$	515
Shipments (thousands of metric tons)			245.9				256.5				761.9				799.2
Downtime (thousands of metric tons)			18.8				7.7				42.3				31.3
Inventory 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

Our average transaction price for market pulp was 1.7% lower in the third quarter of 2005 compared to the third quarter of 2004. Shipments were lower during the third quarter of 2005 as a result of increased internal consumption and increased maintenance downtime. Our market pulp inventories ended the third quarter of 2005 at 23 days supply. Generally, our inventories are below the industry average because our mills are geographically closer to the markets they serve. In the third quarter, we took approximately 18,800 metric tons of maintenance downtime at our Calhoun, Coosa Pines and Thunder Bay facilities. In the fourth quarter of 2005, our Coosa Pines mill will be down for scheduled maintenance, removing approximately 20,000 metric tons of production. We have increased our market pulp inventory prior to the shut.

Due to improved market conditions we informed our paper-grade North American softwood customers of a $20 per metric ton price increase, effective October 1, 2005.

Market Pulp Third Party Data: World demand for market pulp increased 5% in the three months ended September 30, 2005 compared to the same period last year. World producers shipped at 92% of capacity during the three months ended September 30, 2005 compared to 91% during the same period in 2004.

Nine months ended September 30, 2005, versus September 30, 2004

Our average transaction price for market pulp was 4.1% higher in the first nine months of 2005 compared to the first nine months of 2004. The increase reflects the realization of price increases brought about by improved world supply and demand during 2004 and the first quarter of 2005 offset by a slowing demand in the third quarter of 2005. Temporary and permanent supply reductions coupled with improved demand from paper makers combined to help improve market conditions in the first nine months of 2005 compared to the first nine months of 2004 despite the slowing market demand in the third quarter of 2005. Shipments were lower during the first nine months of 2005 as a result of increased maintenance downtime and increased internal consumption. Maintenance downtime at our Calhoun, Catawba, Coosa Pines and Thunder Bay facilities resulted in the removal of approximately 42,000 metric tons of pulp from production during the first nine months of 2005.

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

Market Pulp Third Party Data: World demand for market pulp increased 1.4% in the first nine months of 2005 compared to the same period last year. World producers shipped at 92% of capacity during the first nine months of 2005 compared to 93% for the same period in 2004. World producer inventories have decreased to 33 days supply as of September 30, 2005, which is 7 days less than the corresponding period in 2004.

Lumber – Product Line

		Three months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
Sales (in millions)		$	95.9			$	107.4			$	298.0			$	281.0
Average prices (per metric ton)		$	348			$	395			$	364			$	360
Shipments (thousands of metric tons)			275.6				271.5				819.1				780.8
Downtime (thousands of metric tons)			41.3				74.1				159.2				224.0
Inventory at end of period (thousands of metric tons)			50.5				64.0				50.5				64.0