Bowater Incorporated

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VBq41esd4Vb97s+49E2kH2p65x6a6B5i1U3qowdQmgMbIC/INuulVRJ1CBV/BioA SiOlVfUqoA5ZMDBSu9Nb9Q== 0000950144-06-010902.txt : 20061114 0000950144-06-010902.hdr.sgml : 20061114 20061114184624 ACCESSION NUMBER: 0000950144-06-010902 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061114 DATE AS OF CHANGE: 20061114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOWATER INC CENTRAL INDEX KEY: 0000743368 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 620721803 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08712 FILM NUMBER: 061217492 BUSINESS ADDRESS: STREET 1: 55 EAST CAMPERDOWN WAY STREET 2: P O BOX 1028 CITY: GREENVILLE STATE: SC ZIP: 29601 BUSINESS PHONE: 8642717733 MAIL ADDRESS: STREET 1: 55 EAST CAMPERDOWN WAY STREET 2: P O BOX 1028 CITY: GREENVILLE STATE: SC ZIP: 29602 10-Q 1 g04270e10vq.htm BOWATER INCORPORATED Bowater Incorporated

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-1872

BOWATER INCORPORATED

(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer þ Accelerated Filer o Non accelerated Filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 1, 2006.


Class		Outstanding at November 1, 2006


Common Stock, $1.00 Par Value		55,932,236 Shares

BOWATER INCORPORATED
I N D E X


		Page Number
PART I FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005		3

	Consolidated Balance Sheets at September 30, 2006 and December 31, 2005		4

	Consolidated Statements of Capital Accounts for the Nine Months Ended September 30, 2006 and 2005		5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005		6

	Notes to Consolidated Financial Statements		7 – 23

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24 – 43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44

Item 4.	Controls and Procedures		44

PART II OTHER INFORMATION

Item 1.	Legal Proceedings		45

Item 6.	Exhibits		46

SIGNATURES			47
Exhibit 4.1
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 12.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

BOWATER INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in millions of US dollars except per-share amounts)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005

Net sales	$	875.9		$	872.9		$	2,668.5		$	2,607.4
Costs and expenses:
Cost of sales, excluding depreciation, amortization and cost of timber harvested		650.7			630.5			2,028.6			1,880.6
Depreciation, amortization and cost of timber harvested		80.8			82.5			243.1			245.9
Distribution costs		83.4			83.8			249.8			256.1
Selling and administrative expenses		47.9			41.0			127.2			121.0
Impairment and other related charges		246.4			—			246.4			11.9
Net gain on disposition of assets		(54.0	)		(9.9	)		(154.5	)		(30.7	)

Operating (loss) income		(179.3	)		45.0			(72.1	)		122.6
Interest expense		(50.8	)		(50.0	)		(149.5	)		(149.5	)
Other income, net		4.9			1.9			9.7			7.0

Loss before income taxes, minority interests, and cumulative effect of accounting change		(225.2	)		(3.1	)		(211.9	)		(19.9	)

Income tax benefit (provision)		9.9			(14.5	)		(29.5	)		(1.1	)
Minority interests, net of tax		(0.8	)		1.6			(1.5	)		2.3

Loss before cumulative effect of accounting change		(216.1	)		(16.0	)		(242.9	)		(18.7	)

Cumulative effect of accounting change, net of tax		—			—			(2.6	)		—

Net loss	$	(216.1	)	$	(16.0	)	$	(245.5	)	$	(18.7	)



Loss per share:
Basic loss per common share:
Loss before cumulative effect of accounting change	$	(3.76	)	$	(0.28	)	$	(4.23	)	$	(0.33	)
Cumulative effect of accounting change, net of tax		—			—			(0.05	)		—

Net loss per share	$	(3.76	)	$	(0.28	)	$	(4.28	)	$	(0.33	)

Diluted loss per common share:
Loss before cumulative effect of accounting change	$	(3.76	)	$	(0.28	)	$	(4.23	)	$	(0.33	)
Cumulative effect of accounting change, net of tax		—			—			(0.05	)		—

Net loss per share	$	(3.76	)	$	(0.28	)	$	(4.28	)	$	(0.33	)

Average number of shares outstanding (in millions):
Basic and diluted		57.4			57.4			57.4			57.4


Dividends declared per common share	$	0.20		$	0.20		$	0.60		$	0.60

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED

CONSOLIDATED BALANCE SHEETS

(Unaudited, in millions of US dollars except per-share amounts)



	September 30,			December 31,
	2006			2005

ASSETS
Current Assets:
Cash and cash equivalents	$	120.8		$	30.1
Accounts receivable, net		461.5			410.1
Inventories		356.0			365.8
Timberlands held for sale		7.9			123.1
Other current assets		29.9			61.2

Total current assets		976.1			990.3

Timber and timberlands		75.8			85.4
Fixed assets, net		2,915.7			3,049.1
Goodwill		592.9			794.1
Other assets		249.5			233.5

Total assets	$	4,810.0		$	5,152.4


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt	$	15.1		$	22.2
Short-term bank debt		—			55.0
Accounts payable and accrued liabilities		515.2			487.3
Dividends payable		11.2			11.2

Total current liabilities		541.5			575.7

Long-term debt, net of current installments		2,366.3			2,400.0
Pension, other postretirement benefits and other long-term liabilities		547.3			572.9
Deferred income taxes		371.2			329.4
Minority interests in subsidiaries		62.5			58.9
Commitments and contingencies
Shareholders’ equity:
Common Stock, $1 par value. Authorized 100,000,000 shares; issued 67,528,308 and 67,529,294 shares at September 30, 2006 and December 31, 2005, respectively		67.5			67.5
Exchangeable Shares, no par value. Unlimited shares authorized; 1,434,130 and 1,434,445 shares outstanding September 30, 2006 and December 31, 2005		68.1			68.1
Additional paid-in capital		1,626.8			1,621.6
Retained (deficit) earnings		(180.1	)		100.1
Accumulated other comprehensive loss		(175.3	)		(156.0	)
Treasury stock at cost, 11,601,601 and 11,605,074 shares at September 30, 2006 and December 31, 2005, respectively		(485.8	)		(485.8	)

Total shareholders’ equity		921.2			1,215.5

Total liabilities and shareholders’ equity	$	4,810.0		$	5,152.4

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED

CONSOLIDATED STATEMENTS OF CAPITAL ACCOUNTS

(Unaudited, in millions of US dollars except share amounts)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006



										Accumulated
					Additional		Retained			Other						Total
	Common		Exchangeable		Paid In		(Deficit)			Comprehensive			Treasury			Shareholders’
	Stock		Shares		Capital		Earnings			Loss			Stock			Equity

Balance at December 31, 2005	$	67.5	$	68.1	$	1,621.6	$	100.1		$	(156.0	)	$	(485.8	)	$	1,215.5


Dividends on Common Stock ($0.60 per share)		—		—		—		(34.7	)		—			—			(34.7	)

Retraction of exchangeable shares (315 shares issued and exchangeable shares retracted)		—		—		0.1		—			—			—			0.1

Stock-based compensation costs for equity awards		—		—		5.1					—			—			5.1

Treasury stock used for dividend reinvestment plans and to pay employee and director benefits (3,473 shares)		—		—		—		—			—			—			—

Comprehensive loss:

Net loss		—		—		—		(245.5	)		—			—			(245.5	)


Minimum pension liability		—		—		—		—			(5.1	)		—			(5.1	)


Foreign currency translation		—		—		—		—			4.0			—			4.0

Change in unrealized gain on hedged transactions, net of tax of $11.1		—		—		—		—			(18.2	)		—			(18.2	)

Total comprehensive loss																	(264.8	)

Balance at September 30, 2006	$	67.5	$	68.1	$	1,626.8	$	(180.1	)	$	(175.3	)	$	(485.8	)	$	921.2

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005



												Accumulated
						Additional						Other						Total
	Common		Exchangeable			Paid In			Retained			Comprehensive			Treasury			Shareholders’
	Stock		Shares			Capital			Earnings			Loss			Stock			Equity

Balance at December 31, 2004	$	67.4	$	69.7		$	1,618.2		$	266.5		$	(28.6	)	$	(485.9	)	$	1,507.3

Dividends on Common Stock ($0.60 per share)		—		—			—			(34.3	)		—			—			(34.3	)

Retraction of exchangeable shares (31,913 shares issued and exchangeable shares retracted)		—		(1.6	)		1.6			—			—			—			—

Stock options exercised (69,000 shares)		0.1		—			1.8			—			—			—			1.9

Tax benefit on exercise of stock options		—		—			0.3			—			—			—			0.3

Amortization of unearned compensation		—		—			0.1			—			—			—			0.1

Restricted stock units cancellation (10,203 shares)		—		—			(0.4	)		—			—			—			(0.4	)

Treasury stock used for dividend reinvestment plans and to pay employee and director benefits (2,615 shares)																0.1			0.1

Comprehensive loss:

Net loss		—		—						(18.7	)		—			—			(18.7	)

Minimum pension liability, net of tax of $0.5		—		—						—			(0.9	)		—			(0.9	)

Foreign currency translation		—		—			—			—			2.3			—			2.3

Change in unrealized gain on hedged transactions, net of tax of $29.0		—		—			—			—			(47.4	)		—			(47.4	)


Total comprehensive loss																			(64.7	)

Balance at September 30, 2005	$	67.5	$	68.1		$	1,621.6		$	213.5		$	(74.6	)	$	(485.8	)	$	1,410.3

See accompanying notes to consolidated financial statements

BOWATER INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions of US dollars except per-share amounts)



	Nine Months Ended September 30,
	2006			2005

Cash flows from operating activities:
Net loss	$	(245.5	)	$	(18.7	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax		2.6			—
Stock-based compensation		1.8			0.1
Depreciation, amortization and cost of timber harvested		243.1			245.9
Impairment and other related charges		246.4			11.9
Deferred income tax provision (benefit)		21.6			(6.9	)
Minority interests, net of tax		1.5			(2.3	)
Pension contributions, net of pension benefit costs		(25.9	)		(22.7	)
Net gain on disposition of assets		(154.5	)		(30.7	)
Changes in working capital:
Accounts receivable		(51.4	)		(55.9	)
Inventories		6.8			(26.2	)
Income tax receivables and payables		11.2			4.6
Accounts payable and accrued liabilities		21.2			42.4
Other, net		(10.6	)		1.8

Net cash provided by operating activities		68.3			143.3

Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands		(138.0	)		(89.6	)
Dispositions of assets, including timber and timberlands		296.5			33.7

Net cash provided by (used for) investing activities		158.5			(55.9	)

Cash flows from financing activities:
Cash dividends, including minority interests		(34.7	)		(34.3	)
Short-term financing		370.9			413.9
Short-term financing repayments		(432.5	)		(461.0	)
Repurchase of long-term debt		(17.5	)		—
Payments of long-term debt		(22.3	)		(14.3	)
Stock options exercised		—			1.9

Net cash used for financing activities		(136.1	)		(93.8	)

Net increase (decrease) in cash and cash equivalents		90.7			(6.4	)
Cash and cash equivalents:
Beginning of year		30.1			29.7

End of period	$	120.8		$	23.3

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, including capitalized interest of $2.8 and $0.6	$	129.6		$	124.4
Income taxes	$	6.8		$	1.0

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,” also referred to as “we” or “our”). The consolidated balance sheet as of September 30, 2006, and the related statements of operations, capital accounts and cash flows for the periods ended September 30, 2006 and 2005 are unaudited. In our opinion, all adjustments (consisting of normal recurring adjustments) necessary for fair presentation of the interim financial statements have been made. The results of the interim period ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes and critical accounting policies and estimates included in our most recent Annual Report on Form 10-K. Certain prior-year amounts in the financial statements and the notes have been reclassified to conform to the 2006 presentation. In the first quarter of 2006, we adjusted the amount of goodwill allocated to the timberlands held for sale. As a result, goodwill allocated to timberlands held for sale decreased by $12.7 million and goodwill increased by the same amount compared to the amounts previously reported in our 2005 consolidated financial statements and related notes. The reclassifications had no effect on total shareholders’ equity or net loss.

We adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (“SFAS 154”), as of January 1, 2006. SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The adoption of SFAS 154 did not have any effect on our consolidated financial position, results of operations or cash flows.

We adopted SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS 151”), as of January 1, 2006. SFAS 151 clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The effect of adopting SFAS 151 was immaterial to our financial position and results of operations.

We adopted SFAS No. 123R, Share-based Payment (“SFAS 123R”), on January 1, 2006. See Note 2 for further information regarding the impact on our financial position and results of operations.

2. Stock-based Compensation

We maintain incentive stock plans that provide for grants of stock options, equity participation rights (“EPRs”) and restricted stock units to our directors, officers and key employees. We also maintain a Mid-Term Incentive Plan (“MTIP”) that is tied to the performance of our common stock. These plans are described more fully below.

Adoption of New Accounting Guidance and Transition

Prior to January 2006, we accounted for these plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, (“APB 25”) as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Under APB 25:

•

Compensation expense was generally not recognized for stock options if the exercise price equaled or exceeded the market value of the underlying common stock on the date of grant. As of December 31, 2005, all existing and outstanding stock options were fully vested.

BOWATER INCORPORATED

Notes to Consolidated Financial Statements – Unaudited

	•		The restricted stock units granted were measured at fair value, which was determined as the average of the high and low trading price of the stock on the date of the grant, and amortized over the vesting period. As of December 31, 2005, all restricted stock unit grants awarded prior to that date were fully amortized.

	•		A liability for the EPRs was recorded based on its intrinsic value. At December 31, 2005, the EPRs base price was higher than Bowater’s stock price on that date; therefore, no liability was recorded.

	•		A liability for the MTIP was recorded when the performance criteria were met. At December 31, 2005, we did not meet the performance criteria of the MTIP cycles outstanding; therefore, no liability was recorded.

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R using the modified-prospective transition method. Under that method, compensation cost recognized in 2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognize compensation costs on a straight-line basis over the requisite service period for the award in accordance with the provisions of SFAS 123R.

Prior to the adoption of SFAS 123R, we presented the tax benefit of deductions arising from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires that we classify the cash flows resulting from the tax benefit that arises when the tax deductions exceed the compensation cost recognized for equity awards (excess tax benefits) as financing cash flows. There were no excess tax benefits arising from equity awards for the three and nine months ended September 30, 2006.

The adoption of SFAS 123R resulted in a cumulative effect of accounting change of $2.6 million, net of tax, (or $0.05 per share) that we recorded in the first quarter of 2006. This cumulative charge represents the fair value of the EPR obligation at January 1, 2006, net of tax. The assumptions used to calculate the fair value at January 1, 2006 are included in the Equity Participation Rights section of this note.

Pro Forma Information under SFAS 123 for Periods Prior to 2006

Results for periods prior to adoption of SFAS 123R have not been restated. The table below illustrates the pro forma effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS 123 to Bowater’s stock-based compensation plans in prior periods.



	Three Months Ended			Nine Months Ended
	September 30,			September 30,
(Unaudited, in millions, except per - share amounts)	2005			2005

Net loss as reported:	$	(16.0	)	$	(18.7	)
Add: Stock-based compensation expense included in net loss, net of tax		—			—
Deduct : Stock-based compensation expense determined under fair value method, net of tax		(1.4	)		(4.3	)

Pro forma net loss	$	(17.4	)	$	(23.0	)


Loss per share:
Basic, as reported	$	(0.28	)	$	(0.33	)
Basic, pro forma		(0.30	)		(0.40	)

Diluted, as reported	$	(0.28	)	$	(0.33	)
Diluted, pro forma		(0.30	)		(0.40	)

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

For purpose of the above disclosure, the fair value of each option granted in the three and nine months ended September 30, 2005 was estimated on the date of grant using the Black-Scholes-Merton (BSM) option-pricing model with the weighted average assumptions below.



Assumptions:
Expected dividend yield		2.2	%
Expected volatility		29.0	%
Risk-free interest rate		4.0	%
Expected life (in years)		7.2

Weighted average fair value of each option	$	11.16

We estimated the expected dividend yield, expected volatility and expected life of each stock option based upon historical experience. The risk-free rate of interest was based on a zero-coupon U.S. Treasury instrument with a remaining term approximating the expected life of the stock option. Forfeitures were recognized as they occurred.

Expense Information under SFAS 123R

The following table details the stock-compensation expense recorded in the Consolidated Statements of Operations by award:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Unaudited, in millions)	2006			2005		2006			2005

Stock Options	$	0.2		$	—	$	0.4		$	—
Restricted Stock Units		2.9			—		4.8			0.1
EPRs		(0.5	)		—		(3.4	)		—
MTIP		—			—		—			—

Stock-based compensation expense	$	2.6		$	—	$	1.8		$	0.1

The following table details the tax (benefit) provision by award:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Unaudited, in millions)	2006			2005		2006			2005

Stock Options	$	—		$	—	$	(0.1	)	$	—
Restricted Stock Units		(0.7	)		—		(1.1	)		(0.1	)
EPRs		0.1			—		0.8			—
MTIP		—			—		—			—

Tax benefit	$	(0.6	)	$	—	$	(0.4	)	$	(0.1	)

As required by SFAS 123R, we now estimate forfeitures of employee stock awards and recognize compensation cost only for those awards expected to vest. Forfeiture rates are determined based on historical experience. Estimated forfeitures are adjusted to actual forfeiture experience as needed. Compensation expense for performance-based awards is recognized when it is probable that the performance criteria will be met.

Stock Plans

We currently have awards outstanding under four stock-based compensation plans: the 1997 Stock Option Plan, the 2000 Stock Option Plan, the 2002 Stock Option Plan, and the 2006 Stock Option and Restricted Stock Plan. All of these plans were approved by our shareholders. These plans authorized the grant of up to 8.4 million shares of our common stock in the form of incentive stock options, non-qualified stock options, restricted stock

BOWATER INCORPORATED

Notes to Consolidated Financial Statements – Unaudited

units and equity participation rights. At September 30, 2006, approximately 2.4 million shares were available for grant under these Plans.

Stock Options

Stock options granted generally become exercisable over a period of two to three years. Unless terminated earlier in accordance with their terms, all options expire 10 years from the date of grant. Our Board of Directors approved the issuance of 350,630 stock options in May 2006, which either cliff vest after 32 months (100,630 shares) or vest ratably over 36 months (250,000 shares).

A summary of option activity under our stock plans as of September 30, 2006, and the changes during the nine months ended September 30, 2006, is presented below:

Weighted

Average

Aggregate

Number Of

Average

Remaining

Intrinsic

Shares

Exercise

Contractual

Value

(Unaudited)

(000’s)

Price

Life (years)

($000)

Outstanding at December 31, 2005

5,067

Granted during the period

351

Exercised during the period

—

Canceled during the period

(409

)

Outstanding at September 30, 2006

5,009

5.2

—

Exercisable at September 30, 2006

4,672

4.9

—

In accordance with SFAS 123R, we estimated the fair value of each stock option on the date of grant using a BSM option-pricing formula, applying the following weighted-average assumptions, and amortize that value to expense over the option’s requisite service period using the straight-line attribution approach:



Assumptions:
Expected dividend yield	2.95	%
Expected volatility	32.1	%
Risk-free interest rate	5.1	%
Expected life (in years)	6.1

The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price on the measurement date. The expected life represents the period over which the share-based awards are expected to be outstanding; therefore, the expected life has been determined using historical experience. The risk-free rate of interest is based on a zero-coupon U.S. Treasury instrument with a remaining term approximating the expected life of the stock option. The expected volatility is based on an equal weighting of the historical volatility of our common stock (measured over a term approximating the expected life) and implied volatility from traded options on our common stock having a life of more than one year.

During the three and nine months ended September 30, 2006, all vested options had a strike price greater than the closing price of our common stock (i.e., were “out-of-the-money”). As a result, there were no stock option exercises during the first nine months of 2006. The total intrinsic value of stock options exercised was $0.9 million during the three and nine months ended September 30, 2005.

As of September 30, 2006, there was $2.4 million of unrecognized compensation cost related to stock option awards granted under our stock plans. The unrecognized cost is expected to be recognized over a weighted-average period of 2.5 years.

Restricted Stock Units

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

On May 10, 2006, we issued four separate grants of restricted stock units totaling 775,529 shares, of which 43,530 shares were performance-based awards. The performance-based awards cliff vest after 32 months. The remaining shares, which were service-based awards, cliff vest after 32 months (178,342 shares), 20 months (503,657 shares) or 12 months (50,000 shares). On August 7, 2006 and September 27, 2006, we issued grants of restricted stock units totaling 20,000 shares and 10,000 shares, respectively. These awards were all service-based awards that cliff vest after 36 months. No restricted stock units were granted in 2005.

A summary of the status of our restricted stock units as of September 30, 2006, and changes during the nine months ended September 30, 2006, is presented below:


	Number Of Shares			Weighted Average Fair
(Unaudited)	(000’s)			Value at Grant Date


Outstanding at December 31, 2005		—		$	—
Granted during the period		806			26
Vested during the period		(37	)		26
Forfeited during the period		(26	)		26

Outstanding at September 30, 2006		743		$	26

As of September 30, 2006, there was $16.1 million of unrecognized compensation cost related to restricted stock units granted under our stock plans. The unrecognized cost is expected to be recognized over a weighted-average period of 1.5 years.

We have a policy of issuing treasury shares to satisfy share option exercises and the vesting of restricted stock units. The right to dividends declared are accrued during the vesting period and paid in cash to the employee upon the vesting of the restricted stock units, in accordance with our stock plans.

Equity Participation Rights

EPRs confer the right to receive cash based on the appreciation of Bowater’s common stock price, but no right to acquire stock ownership. The rights have a vesting period of two years and, unless terminated earlier in accordance with their terms, expire 10 years after the grant date. The base price is the fair market value of our common stock on the day of grant. The rights may be redeemed only for cash, and the amount paid to the employee at the time of exercise is the difference between the base price and the average high/low of our common stock on the day of settlement. There have been no grants of EPRs since January 2003.

The EPR awards are classified as liability awards under SFAS 123R since the EPRs are cash settled. In accordance with SFAS 123R, liability awards are remeasured at fair value at each reporting period and the income or expense included in the consolidated statement of operations.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

Information with respect to rights granted under the EPR Plan as of September 30, 2006 is as follows:

Weighted

Average

Number of

Average

Remaining

Aggregate

Rights

Exercise

Contractual

Intrinsic

(Unaudited)

(000’s)

Price

Term

Value

Outstanding at December 31, 2005

2,173

Granted during the period

—

Settled during the period

—

Canceled during the period

(133

)

Outstanding at September 30, 2006

2,040

3.7

—

Exercisable at September 30, 2006

2,040

3.7

—

As of September 30, 2006, the fair value of our EPRs liability is $0.4 million. The fair value of each of our EPRs was estimated using a BSM option pricing model that uses the assumptions noted in the table below. The expected life of each EPR is based on a weighted-average of the observed historical exercise patterns and the midpoint of the remaining term of the EPR. Expected volatility is based on an equal weighting of the historical volatility of our common stock (measured over a term approximating the expected life) and implied volatility from traded options on our common stock having a life of more than six months or one year, as appropriate. The risk-free rate of interest is based on a zero-coupon U.S. Treasury instrument with a remaining term approximating the expected life of the EPR. The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price on the measurement date. These assumptions are evaluated and revised, as necessary, at each reporting date.

The fair value of each EPR was estimated using the BSM option-pricing model with the following assumptions:



	September 30,			January 1,
(Unaudited)	2006			2006


Assumptions:
Dividend yield		3.9	%		2.6	%
Expected volatility		30.8 - 32.7	%		30.0 - 33.0	%
Weighted average expected volatility		31.7	%		30.1	%
Risk-free interest rate		4.6 - 4.9	%		4.1 - 4.4	%
Expected EPR life in years		0.3 – 3.3			0.1 - 3.6
Weighted average fair value of EPRs	$	0.21		$	1.70
Fair value range of each EPR grant	$	0.00 – 0.81		$	0.01-4.60

Mid-Term Incentive Plan

In 2003, we implemented a MTIP with rolling three-year plan cycles. MTIP cycles currently outstanding include the 2004-2006 and the 2005-2007 years. Each MTIP cycle runs from January 1 to December 31. The MTIP is designed to link rewards of key executives to the performance of our common stock and to encourage the generation of cash flow from operations. Awards may be paid in any form, including, without limitation, cash, stock, restricted stock, phantom stock, stock options, and stock appreciation rights at the discretion of the Committee.

Participants can earn up to 90% of base salary with the allocation between performance and discretionary awards. For all MTIP cycles outstanding the allocation is 50% based on performance and 50% discretionary. Payouts under the MTIP will be made only to the extent that Bowater generates cash from operations in excess of normal dividends paid during the plan cycle sufficient to fund the awards. The performance award formula computes a payout percentage based on the total shareholder return (“TSR”) of Bowater’s common stock (taking into account changes in price and dividends paid) compared to a peer group. If Bowater’s TSR equals the peer group’s average TSR, participants may receive a payout of 16.67% of base salary. This amount increases

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

linearly to a maximum payout of 45% of base salary, if Bowater’s TSR equals or exceeds 90% of the highest TSR in the peer group. Payouts under the discretionary component of the plan (up to 50% of the maximum award) may be awarded at the end of the plan cycle.

The MTIP plans are classified as liability plans under SFAS 123R since we have typically paid the award in cash. In accordance with SFAS 123R, liability plans are remeasured at fair value at each reporting period and the related income or expense is included in the consolidated statement of operations. The fair value of each award is estimated each reporting period using a Monte Carlo Simulation approach in a risk-neutral framework and includes ranges of assumptions for stock price volatility, risk-free interest rates, and expected dividends. Expected volatility is based on an equal weighting of the historical volatility of our common stock and implied volatility from traded options on our common stock and ranged from 27% to 32%. The risk-free rate of interest is based on a zero-coupon U.S. Treasury instrument with a remaining term approximating the expected term of the MTIP and was approximately 5%. The expected dividend yield of 2% to 3% is based on the projected annual dividend payment per share divided by the stock price on the grant date. The fair value at January 1, 2006 and September 30, 2006 was nominal.

3. Impairment and Other Related Charges

Goodwill Impairment

During the third quarter, Bowater realigned its organizational structure from a divisional-based structure to a functional-based structure. Our reportable segments are now based on our primary product lines. As a result of current economic conditions and the current operating environment at our Thunder Bay site, including the asset impairment charge we took related to paper machine No. 3, and our organizational realignment, we performed an interim goodwill impairment test on our existing reporting units. We test our goodwill for impairment using a two-step methodology. As discussed below, this two-step methodology contains estimates and judgments that are subjective and difficult to apply, and thus they are inherently uncertain. Our management has reviewed these estimates with the Audit Committee of our Board of Directors.

The initial step of the goodwill impairment test involves a comparison of the fair value of each of our reporting units, as defined under Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” with its carrying amount. If a reporting unit’s carrying amount exceeds its fair value, then goodwill of the reporting unit is considered to be impaired, and a second step must be performed to measure the amount of the impairment. Fair value is determined with the assistance of an independent third party. In making our determination of fair value, we rely primarily on the discounted cash flow method. This method uses projections of cash flows from each of the reporting units. Several of the key assumptions include periods of operation, projections of product pricing, production levels, product costs, market supply and demand, foreign exchange rates, inflation, weighted average cost of capital and capital spending. We derive these assumptions used in our valuation models from several sources. Many of these assumptions are derived from our internal budgets which would include existing sales data based on current product lines and assumed production levels, manufacturing costs and product pricing. Our products are commodity products, therefore, pricing is inherently volatile and often follows a cyclical pattern; the average price over a commodity cycle forms the basis of our product pricing assumption. We derive our pricing estimates from information generated internally, from industry research firms and other published reports and forecasts. Since performing our prior year impairment test, exchange rates have continued to climb to historically high levels. Given the current exchange rate environment, we believe a potential buyer would now consider a shorter-term view of exchange rates. Therefore, in this analysis, foreign exchange rates are based on a 2007 forecast followed by a gradual reversion to a 5-year historical average.

In addition to the assumptions discussed above, we determined the fair value of our Thunder Bay reporting unit utilizing a probability-weighted approach which assumes that a potential buyer of the facility would consider alternative courses of action in estimating the discounted cash flows. Courses of action that were probability-weighted in our fair value estimation include operating the Thunder Bay facility as it is currently operated, restarting paper machine No. 3, which has been permanently shut by us, but could be fully operational to a potential buyer of the facility, and converting one of the other newsprint machines to production of coated paper grades.

As a result of the continued strengthening of the Canadian dollar and a reduction in our estimated probability that a third-party would restart paper machine No. 3 or convert another machine, our interim goodwill impairment test related to our Thunder Bay facility, under both our current operating scenario and our probability-weighted scenario, indicated that the carrying value of the facility’s assets exceeded their fair value. Therefore, we proceeded with the second step of the impairment analysis in order to measure the amount of the impairment loss. Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit is allocated to the assets and liabilities of the reporting unit as if it had been acquired in a business combination. The excess of the fair value of the reporting unit over the amounts allocated to assets and liabilities is the implied fair value of goodwill. Fair value of Thunder Bay’s tangible and intangible assets was determined with the assistance of an independent third party. Our preliminary estimate of the implied fair value of goodwill related to our Thunder Bay facility was approximately $296.0 million; therefore, we recorded a goodwill impairment charge of $200.0 million. This goodwill impairment charge remains subject to finalization of our valuation reports. Any adjustment to our preliminary estimate will be recorded in the fourth quarter. No intangible assets were initially identified as part of our fair value review and is subject to change and finalization in the fourth quarter.

Asset Impairment

In 2003, we idled newsprint production on paper machine No. 3 at our Thunder Bay facility. Based on the continued decline of North American newsprint consumption through the third quarter of 2006, we now have no plans to restart the machine. Accordingly, we recorded a non-cash asset impairment charge of $18.9 million to write down the value of this paper machine to its estimated fair value which was determined using the discounted cash flow method.

During the third quarter of 2006, we decided to close the Benton Harbor operation. This close resulted in a review of the facility’s long-lived assets for impairment. As a result, we recorded a non-cash asset impairment charge of $23.5 million. An additional $4.0 million was also recorded for lease costs, contract termination costs and severance. Inventory write-downs totaling $0.4 million were recorded in cost of sales.

During the second quarter of 2005, we decided to permanently shut the original line at the Benton Harbor operation. This permanent shut resulted in a non-cash asset impairment charge of $11.9 million during the nine months ended September 30, 2005.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

4. Inventories



	September 30,			December 31,
(Unaudited, in millions)	2006			2005

At lower of cost or market:
Raw materials	$	84.9		$	100.4
Work in process		19.2			30.5
Finished goods		141.4			131.8
Mill stores and other supplies		122.3			114.9

		367.8			377.6
Excess of current cost over LIFO inventory value		(11.8	)		(11.8	)

	$	356.0		$	365.8

5. Other Income, Net

“Other income, net” in the Consolidated Statements of Operations includes the following:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Unaudited, in millions)	2006			2005			2006			2005

Foreign exchange gain (loss)	$	0.7		$	(1.8	)	$	(2.3	)	$	(3.6	)
Interest income		2.0			1.0			4.1			3.2
Income from joint venture		1.0			1.3			5.2			3.1
Charges related to repurchase of debt (See Note 11)		(0.5	)		—			(0.5	)		—
Miscellaneous income, net		1.7			1.4			3.2			4.3

	$	4.9		$	1.9		$	9.7		$	7.0

6. Timberlands Held For Sale

We are currently marketing for sale approximately 35,000 acres of timberlands in the United States and Canada. The sale of these timberlands is expected to be completed in 2006. The $7.9 million of timberlands held for sale on the Consolidated Balance Sheets are carried at cost as we expect the proceeds of the timberland sales to exceed the carrying value. There are no liabilities associated with the timberlands held for sale.

During the three months ended September 30, 2006, we sold approximately 23,000 acres of timberlands and other assets for proceeds of $58.4 million. During the three months ended June 30, 2006, we sold approximately 472,000 acres of timberlands, our Baker Brook sawmill and other assets for proceeds of $201.3 million. During the three months ended March 31, 2006, we sold approximately 24,000 acres of timberlands and our Dégelis sawmill for proceeds of $34.6 million.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

7. Accumulated Other Comprehensive Loss

The components of “Accumulated other comprehensive loss” in the Consolidated Balance Sheets are as follows:



	September 30,			December 31,
(Unaudited, in millions)	2006			2005


Pension plan additional minimum liabilities (1) (2)	$	(191.2	)	$	(186.1	)
Foreign currency translation (3)		15.5			11.5
Unrealized gain on hedging transactions (4)		0.4			18.6

	$	(175.3	)	$	(156.0	)


(1)		Net of deferred tax benefit of $70.0 million and $66.8 million, respectively.

(2)		Net of minority interest.

(3)		No tax effect is recorded for foreign currency translation since the foreign net assets translated are deemed permanently invested.

(4)		Net of deferred tax expense of $0.3 million and $11.4 million, respectively.

8. Loss Per Share

The information required to compute net loss per basic and diluted share is as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Unaudited, in millions)	2006		2005		2006		2005

Basic weighted-average number of common shares outstanding		57.4		57.4		57.4		57.4
Effect of potentially dilutive securities:
Stock options		—		—		—		—
Restricted stock units		—		—		—		—

Diluted weighted-average number of common shares outstanding		57.4		57.4		57.4		57.4

No adjustments to net loss are necessary to compute net loss per basic and diluted share. The dilutive effect of potentially dilutive securities is calculated using the treasury stock method. Options to purchase 5.0 million shares for both the three and nine months ended September 30, 2006, and 5.1 million shares for both the three and nine months ended September 30, 2005, were excluded from the calculation of diluted loss per share as the impact would have been anti-dilutive. In addition, 0.7 million restricted stock units for the three and nine months ended September 30, 2006, were excluded from the calculation of diluted loss per share for the same reason.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

9. Pension and Postretirement Expense

The components of net periodic benefit costs relating to our pension and other postretirement (“OPEB”) plans are as follows for the three and nine-months ended September 30, 2006 and 2005:

Pension Plans:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Unaudited, in millions)	2006			2005			2006			2005


Components of net periodic benefit cost:
Service cost	$	10.5		$	9.2		$	32.4		$	27.7
Interest cost		29.9			29.4			89.1			86.6
Expected return on plan assets		(30.8	)		(28.5	)		(91.0	)		(84.8	)
Amortization of prior service cost		1.3			1.0			4.1			1.9
Curtailment/settlement loss		8.8			—			13.4			—
Recognized net actuarial loss		8.0			4.1			25.7			12.2

Net periodic benefit cost	$	27.7		$	15.2		$	73.7		$	43.6

OPEB Plans:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Unaudited, in millions)	2006			2005			2006			2005


Components of net periodic benefit cost:
Service cost	$	1.1		$	1.0		$	3.1		$	3.3
Interest cost		3.9			4.3			11.9			13.0
Amortization of prior service cost		(1.5	)		(1.4	)		(4.5	)		(4.1	)
Recognized net actuarial loss		2.1			2.1			6.1			6.4
Curtailment gain		(5.5	)		(5.5	)		(5.7	)		(5.5	)

Net periodic benefit cost	$	0.1		$	0.5		$	10.9		$	13.1

Since the measurement date of our pension and OPEB plans is 90 days prior to the start of our year, curtailment and settlement gains and losses that arise during the year are recorded on a 90-day lag.

During January 2006, Bowater announced its plans to permanently close the Thunder Bay “A” kraft pulp line in the second quarter of 2006 and eliminate approximately 225 positions. Impairment and severance related charges were recorded in the fourth quarter of 2005. In the first quarter of 2006, we recorded a pension plan curtailment loss of $4.6 million and an OPEB plan curtailment gain of $0.2 million in connection with the employee downsizing. Additionally, we recorded in the third quarter of 2006 a pension plan curtailment loss of approximately $0.9 million related to employees accepting a voluntary portion of the severance plan in April 2006. The elimination of employees resulted in a partial plan termination, which will result in a pension plan settlement loss of approximately $12 million in the future (upon settlement of the assets and liabilities).

In May 2006, certain employees received lump-sum payouts from the supplemental executive retirement plan. A settlement loss of $2.3 million was recorded in the third quarter of 2006.

In May 2006, Bowater approved changes to its defined benefit pension plan for its U.S. salaried employees. Benefits for certain employees will be frozen effective January 1, 2007 and will be replaced by a Company

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

contribution to a defined contribution plan. A curtailment loss of $3.9 million was recorded in the third quarter of 2006.

In June 2006, Bowater approved changes to its defined benefit pension plan for its Canadian salaried employees. Benefits for certain employees will be frozen effective January 1, 2008 and will be replaced by a Company contribution to a defined contribution plan. A curtailment loss of approximately $1.7 million was recorded in the third quarter of 2006.

In June 2006, Bowater approved changes to its OPEB plan for Canadian salaried employees. The OPEB plan was redesigned to phase out OPEB costs by the end of 2010 by increasing the retirees’ contributions from 20% to 100% over a four-year period beginning January 1, 2007. A curtailment gain of approximately $5.5 million was recorded in the third quarter of 2006.

In August 2006, certain employees received lump-sum payouts from the supplemental executive retirement plan. A settlement loss of approximately $0.3 million will be recorded in the fourth quarter of 2006.

In August 2006, accrued benefits from the director’s retirement plan were converted to the director’s deferred fee plan for certain directors in the form of stock based units. This conversion was treated as a settlement, and therefore, a settlement gain of approximately $0.1 million will be recorded in the fourth quarter of 2006.

Excluding the effect of the curtailment and settlement gains and losses noted above, these initiatives will result in a reduction of our previously calculated 2006 net periodic benefit costs of approximately $6.2 million ($5.8 million for pension and $0.4 million for OPEB). Approximately $2.3 million and $2.8 million of this reduction was recognized during the three and nine months ended September 30, 2006, respectively. The remainder will be recognized in the fourth quarter of 2006.

The OPEB curtailment gain of $5.5 million recorded in the third quarter of 2005 is associated with changes to certain post-retirement benefits in Canada.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

10. Income Taxes

The income tax benefit (provision) attributable to loss before income taxes, minority interests and cumulative effect of accounting change differs from the amounts computed by applying the United States federal statutory income tax rate of 35% as a result of the following:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Unaudited, in millions)	2006			2005			2006			2005

Loss before income taxes, minority interests and cumulative effect of accounting change	$	(225.2	)	$	(3.1	)	$	(211.9	)	$	(19.9	)

Expected income tax benefit		78.9			1.1			74.2			7.0
Increase (decrease) in income taxes resulting from:
Valuation allowance ⁽¹⁾		(18.2	)		(5.1	)		(73.8	)		(5.1	)
Tax reserve adjustment ⁽²⁾		17.5			13.2			17.5			13.2
Foreign taxes ⁽³⁾		1.0			1.5			36.9			7.6
Goodwill ⁽⁴⁾		(70.0	)		—			(78.6	)		—
Foreign exchange		(2.1	)		(17.2	)		(23.4	)		(9.4	)
Other, net		2.8			(8.0	)		17.7			(14.4	)

Income tax benefit (provision)	$	9.9		$	(14.5	)	$	(29.5	)	$	(1.1	)


(1)		For the three and nine months ended September 30, 2006, income tax benefits and tax credits of approximately $18.2 million and $73.8 million, respectively, generated primarily on certain of our Canadian operating losses were entirely offset by tax charges to increase our valuation allowance related to these tax benefits. For the three and nine months ended September 30, 2006, approximately $13.3 million and $45.3 million, respectively, of the valuation allowance related to net operating losses with the balance of the valuation allowance related to tax credits, foreign exchange, impairment charges and asset sales. Included in the net $18.2 million valuation allowance in the third quarter of 2006 is a $1.5 million valuation allowance reversal for an item unrelated to the Canadian losses in which the statute of limitations expired during the quarter.

(2)		On a quarterly basis, we review tax reserves based on changes in tax law and changes in facts or circumstances. Bowater’s tax reserves are adjusted based on either an agreed determination of a particular matter, the expiration of the statute of limitations for a particular tax period or a change in facts or circumstances regarding the matter. We had tax reserves of $17.5 million and $13.2 million associated with various tax matters, on which the statute of limitations expired in the third quarter of 2006 and 2005, respectively. As such, we adjusted our income tax benefit by this amount in the third quarter of 2006 and 2005, respectively. Additionally, in the third quarter of 2006, the statute of limitations expired on tax reserves of $1.2 million related to a previous acquisition. As these reserves were acquisition related, goodwill was reduced by $1.2 million.

(3)		Foreign taxes in the first nine months of 2006 benefited by $15.2 million due to capital gains treatment of certain asset sales.

(4)		During the three and nine months ended September 30, 2006, we recorded a goodwill impairment charge of $200 million, which does not provide a tax benefit.

11. Long-term and Short-term Debt

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

On May 31, 2006, we entered into (i) a five year Credit Agreement among Bowater Incorporated (“Bowater”) as Borrower, several lenders, and Wachovia Bank, National Association, as Administrative Agent (the “US Credit Agreement”) and (ii) a 364-day Credit Agreement, along with its subsidiary Bowater Canadian Forest Products Inc. (“BCFPI”), among BCFPI as Borrower, Bowater as parent Guarantor, several lenders, and The Bank of Nova Scotia as Administrative Agent (the “Canadian Credit Agreement”).

The US Credit Agreement provides for a $415 million revolving credit facility with a scheduled maturity date of May 25, 2011. The US Credit Agreement is guaranteed by certain of our wholly-owned subsidiaries in the United States, and is secured by (i) liens on the inventory, accounts receivable and deposit accounts of Bowater and the guarantors (ii) pledges of 65% of the stock of certain of our foreign subsidiaries, and (iii) pledges of the stock of our U.S. subsidiaries that do not own mills or converting facilities. Availability under the US Credit Agreement is limited to 90% of the net consolidated book value of our accounts receivable and inventory, excluding BCFPI and its subsidiaries.

The Canadian Credit Agreement provides for a $165 million revolving credit facility with a maturity date of May 29, 2007, subject to annual extensions. The Canadian Credit Agreement is secured by liens on the inventory, accounts receivable and deposit accounts of BCFPI. Availability under the Canadian Credit Agreement is limited to 65% of the net book value of the accounts receivable and inventory of BCFPI and its subsidiaries. Financial covenants under both the US Credit Agreement and Canadian Credit Agreement are based upon our consolidated financial results and consist of the following two ratios:

•		a maximum ratio of senior secured indebtedness (including all advances and letters of credit under the US and Canadian facilities, and any other indebtedness secured by assets of Bowater and its subsidiaries) to EBITDA (generally defined as net income, excluding extraordinary, non-recurring or non-cash items and gains (or losses) on asset dispositions, plus income taxes plus depreciation plus interest expense) of 1.25 to 1; and

•		a minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset dispositions) to interest expense of 2.00 to 1.

We believe we are in compliance with all of our covenants and other requirements set forth in our credit facilities.

During August 2006, we repurchased approximately $15.6 million of our $250 million floating rate notes due March 15, 2010 for total cash consideration of approximately $15.8 million or a 1.4% premium over face value. During September 2006, we repurchased approximately $1.9 million of our $250 million 9% notes due August 1, 2009 for total cash consideration of approximately $2.0 million or a 3.7% premium over face value. In conjunction with these transactions, we recorded charges of approximately $0.5 million for premiums, fees and unamortized deferred financing fees. These charges for the early extinguishment of debt are included in “Other income, net” on the accompanying Consolidated Statements of Operations. The repurchases change long-term debt maturities in Year 2009 from $263.7 million to $261.8 million and in Year 2010 from $368.0 million to $352.4 million (See “Note 13. Long-Term and Short-Term Debt and Off-Balance Sheet Arrangements” in Item 8 of Bowater’s Annual Report on Form 10-K for the year ended December 31, 2005).

During November 2006, we repurchased $95.3 million face value of our Series A, 10.625% notes due June 15, 2010 for total cash consideration of approximately $102.7 million or a 7.8% premium over face value. This repurchased debt had a book carrying value of $108.2 million and was comprised of the $95.3 million face value, plus $12.9 million related to the revaluation of Series A debt from the acquisition of Avenor in 1998. In addition to the premium charges of $7.4 million, we expect to record charges of approximately $0.1 million for unamortized deferred financing fees in the fourth quarter. We also expect to record a gain on the extinguishment of debt of approximately $12.9 million in the fourth quarter of 2006 associated with the revaluation of the debt as discussed above. Therefore, the net impact for the extinguishment of the Series A notes will be a net gain of approximately $5.4 million. The repurchase further reduces long-term debt maturities in Year 2010 to $257.1 million.

12. 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

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

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

Lumber Duties

On October 12, 2006, an agreement regarding Canada’s softwood lumber exports to the United States became effective. The agreement provides for a return of a portion of the duties imposed by the United States. Through September 30, 2006, we paid duties totaling approximately $113.1 million. On November 10, 2006, Bowater received a refund of $103.9 million from Export Development Corporation (EDC), which purchased our rights associated with the refund of the duties. The amount of the refund represents substantially all of the funds that we expect to receive under the terms of its agreement with EDC. Our agreement with the EDC stipulates that we may have to refund the lumber duties to the EDC if the Canadian Government does not pass the final legislation and if the U.S. Customs and Border Patrol does not pay the EDC.

The agreement also provides for softwood lumber to be subject to one of two ongoing border measures, depending on the province of first manufacture. Beginning October 12, 2006, softwood lumber exports from all provinces (other than Maritime Provinces) will be subject to an export tax varying up to a maximum of 22.5% depending upon lumber prices and each province’s quantity of exports (Option A). We have been notified that the export tax for the Province of Quebec for October 2006 will be 5% as the export quantities shipped in October were well below the quota amounts. We anticipate paying an export tax of 15% for the rest of the fourth quarter, but that rate is subject to adjustment once actual quantities shipped are known. Bowater may receive a partial refund of the taxes it pays under Option A based on the difference between (i) the Option A export tax we paid and (ii) the Option B tax that would have applied provided total exports from the Option B province do not exceed the maximum Option B export volumes that would have been in place, but will not be able to determine the amount of this refund, if any, until December 2006 at the earliest. Beginning January 1, 2007, exports from certain provinces will instead be subject to volume limitations based on each province’s share of U.S. consumption and a combined export tax of up to 5% (Option B).

13. 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 exposures. We do not enter into contracts for speculative purposes; however, we do, from time to time enter into commodity and currency option contracts that are not accounted for as accounting hedges.

Canadian Dollar Forward Contracts

We pay a significant portion of the operating expenses of our Canadian mill sites in Canadian dollars. To reduce our exposure to United States and Canadian dollar exchange rate fluctuations, we enter into and designate Canadian dollar forward contracts to hedge certain of our forecasted Canadian dollar cash outflows at the Canadian mill operations. On the date in which the derivative contract is entered we designate the derivative as a cash flow hedge.

We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions. We link all hedges that are designated as cash flow hedges to forecasted transactions. The minimum time period we have hedged transactions is one month, and the maximum time period is two years. Our outstanding hedging contracts continue into the fourth quarter of 2006. We also assess, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, we discontinue hedge accounting prospectively. Hedge ineffectiveness associated with these Canadian dollar forward contracts and natural gas forward contracts was not material for the periods presented.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

Natural Gas Hedging Instruments

During the third quarter of 2006, we entered into commodity swap agreements under our natural gas hedging program for the purpose of reducing the risk inherent in fluctuating natural gas prices. These swap agreements, which did not qualify for hedge accounting treatment during the third quarter, are considered financial hedges of our natural gas purchases and have been marked-to-market in the Consolidated Statements of Operations. As a result, approximately $0.1 million of pre-tax losses were recognized in earnings as of September 30, 2006.

The carrying amount of our derivative financial instruments approximates fair market value. Information regarding our Canadian dollar and natural gas swap contracts’ notional amount, fair market value, and range of exchange rates or natural gas prices of the contracts is summarized in the table below. The notional amount of these contracts represents the amount of foreign currencies or natural gas to be purchased or sold at maturity and does not represent our exposure on these contracts. The fair value of derivative financial instruments is based on current termination values or quoted market prices of comparable contracts.

Net

Range Of

Asset/(Liability)

U.S.$/CDN$

Notional

Exchange Rates

As of September 30, 2006

Amount of

Fair Market

and Natural

(Unaudited, in millions of U.S. dollars)

Derivatives

Value

Gas Prices

Foreign Currency Exchange Agreements

Buy Currency:

Canadian dollar

Due in 2006

40.0

0.6

.8811-.8923

Natural Gas Swap Agreements:

Due in 2006

0.3

—

7.10 - 8.00

Due in 2007

0.7

(0.1

)

7.40 - 8.62

1.0

(0.1

)

7.10 - 8.62

The counterparties to our derivative financial instruments are substantial and creditworthy multi-national financial institutions. The risk of counterparty nonperformance is considered to be remote, and no one financial institution has more than 39% of our derivative financial instruments.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited

The components of the cash flow hedges included in “Accumulated other comprehensive loss” are as follows:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Unaudited, in millions)	2006			2005			2006			2005


Gains reclassified to earnings on matured cash flow hedges	$	(5.0	)	$	(21.7	)	$	(34.2	)	$	(78.5	)
Unrealized gains (losses) for change in value on unmatured cash flow hedges		0.5			16.5			4.9			2.1

		(4.5	)		(5.2	)		(29.3	)		(76.4	)
Income tax benefit		1.7			1.9			11.1			29.0


Net increase in “Accumulated other comprehensive loss”	$	(2.8	)	$	(3.3	)	$	(18.2	)	$	(47.4	)

14. Off-Balance Sheet Debt Guarantees

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 Qualified Special Purpose Entities (QSPEs). Bowater guarantees approximately $7.7 million of the investor notes principal balance at September 30, 2006. This guarantee is proportionately reduced by annual principal repayments on the investor notes (annual minimum repayments of $2.0 million) through 2008. The remaining investor notes’ principal amount is to be repaid in 2009. Timber Note Holdings LLC has assets of approximately $34.0 million and obligations of approximately $31.1 million, which include the investor notes. Bowater would be required to perform on the guarantee if the QSPE were to default on the investor notes or if there were a default on the notes receivable.

15. Segment Information

During the third quarter of 2006, Bowater announced that it was realigning its organizational structure to move from a division-based organization to one organized by function that supports and focuses on our multi-line manufacturing and sales across our mill base. As a result of this organizational realignment, our reportable segments have been changed based on how we internally manage our business, which is based on products that we manufacture and sell to external customers. Our primary product lines include—coated papers, specialty papers, newsprint, market pulp, and lumber. The segment information presented herein reflects our new reportable segments and prior year information has been recast to the current year presentation.

None of the income or loss items following “Operating (loss) income” in our Consolidated Statements of Operations are allocated to our segments, since they are reviewed separately by Bowater’s management. For the same reason, impairments, severance, gains on dispositions of assets and other discretionary charges or credits are not allocated to the segments. Stock-based compensation expense is, however, allocated to our segments. We also allocated depreciation expense to our segments, although the related fixed assets are not allocated to segment assets.

Only assets which are identifiable by segment and reviewed by our management are allocated to segment assets. Allocated assets include trade accounts receivable, finished goods inventory at our paper mills and all inventory at our sawmills. All other assets are not identifiable by segment and are included in our Corporate and Other segment.

The following tables summarize information about segment profit and loss for the three and nine months ended September 30, 2006 and 2005 and segment assets as of September 30, 2006 and December 31, 2005:

BOWATER INCORPORATED
Notes to Consolidated Financial Statements – Unaudited




		Coated		Specialty				Market				Corporate		Consolidated
*(Unaudited, in millions)*		Papers		Papers		Newsprint		Pulp		Lumber		and Other		Total


Net Sales

Third Quarter	2006	$	154.4	$	153.9	$	349.1	$	144.2	$	71.1	$	3.2	$	875.9

Third Quarter	2005		165.7		124.9		347.9		127.4		95.9		11.1		872.9


Nine Months	2006	$	463.5	$	426.6	$	1,089.9	$	410.3	$	261.6	$	16.6	$	2,668.5

Nine Months	2005		464.1		358.0		1,055.1		408.2		298.0		24.0		2,607.4


		Coated		Specialty					Market						Corporate			Consolidated
*(Unaudited, in millions)*		Papers		Papers			Newsprint		Pulp			Lumber			and Other			Total


Operating Income (Loss) ⁽¹⁾

Third Quarter	2006	$	15.6	$	(1.4	)	$	30.9	$	17.4		$	(17.4	)	$	(224.4	)	$	(179.3	)

Third Quarter	2005		32.7		3.0			23.4		(1.7	)		(0.7	)		(11.7	)		45.0


Nine Months	2006	$	60.3	$	(26.8	)	$	67.1	$	16.1		$	(20.9	)	$	(167.9	)	$	(72.1	)

Nine Months	2005		80.0		4.6			51.5		15.2			17.9			(46.6	)		122.6



Assets

As of September 30, 2006		$	60.4	$	90.5		$	258.3	$	107.5		$	93.5		$	4,199.8		$	4,810.0

As of December 31, 2005			56.5		60.2			239.2		93.8			109.9			4,592.8			5,152.4


(1)		Corporate and other operating loss includes net gains from land and other fixed asset sales of $54.0 million, $154.5 million, $9.9 million and $30.7 million for the three and nine months ended September 30, 2006 and the three and nine months ended September 30, 2005, respectively. Corporate and other also includes asset impairment and other related charges of $46.4 million and goodwill impairment of $200 million for the three and nine months ended September 30, 2006 and asset impairment and other related charges of $11.9 million for the nine months ended September 30, 2005.

BOWATER INCORPORATED

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Organization

During the third quarter of 2006, Bowater announced that it was realigning its organizational structure to move from a division-based organization to one organized by function that supports and focuses on our multi-line manufacturing and sales across our mill base. As a result of this organizational realignment, our reportable segments have been changed based on how we internally manage our business, which is based on products that we manufacture and sell to external customers. Our primary product lines include—coated papers, specialty papers, newsprint, market pulp, and lumber. This Management’s Discussion and Analysis section reflects our new reportable segments and prior year information has been recast to the current year presentation. For further information regarding our segments, see Note 15 (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 contained in this Form 10-Q that do not constitute historical financial results or other factual 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 “Risk Factors” in Part II of our quarterly report on Form 10-Q for the period ended June 30, 2006 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., the Pulp and Paper Products Council, RISI, Inc., and 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, 2005. Bowater’s critical accounting policies and estimates (except for goodwill, which has been updated below) 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, 2005.

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

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

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

Critical Accounting Policy — Goodwill

During the third quarter, Bowater realigned its organizational structure from a divisional-based structure to a functional-based structure. Our reportable segments are now based on our primary product lines. As a result of current economic conditions and the current operating environment at our Thunder Bay site, including the asset impairment charges we took related to paper machine No. 3, and our organizational realignment, we performed an interim goodwill impairment test on our existing reporting units. We test our goodwill for impairment using a two-step methodology. As discussed below, this two-step methodology contains estimates and judgments that are subjective and difficult to apply, and thus they are inherently uncertain. Our management has reviewed these estimates with the Audit Committee of our Board of Directors.

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

The above-listed assumptions used in our valuation models are interrelated. The continuing degree of interrelationship of these assumptions is, in and of itself a significant assumption. Because of the interrelationships among these assumptions, we do not believe it would be meaningful to provide a sensitivity analysis on any of these individual assumptions. However, one key assumption in our valuation model is the weighted average cost of capital. If the weighted average cost of capital, which is used to discount the projected cash flows, was lower, the measure of the fair value of our assets would increase. Conversely, if the weighted average cost of capital was higher, the measure of the fair value of our assets would decrease. If our estimate of the weighted average cost of capital were to increase by 25 basis points, the excess of the fair values of each of the reporting units, excluding Thunder Bay, would continue to exceed their carrying value amounts. The impact of this increase to our Thunder Bay reporting unit would cause us to increase our goodwill write-off for Thunder Bay by approximately 12%. Another key assumption in our valuation model is foreign exchange. Continuation of a strong Canadian dollar could have a significant impact on the 5-year historical average and negatively impact future valuations.

Our required goodwill impairment test is performed in the fourth quarter of each year. We will complete our goodwill impairment test in the fourth quarter of 2006 based on our new reporting structure and reporting units.

Future changes in assumptions or the interrelationship of the assumptions may negatively impact future valuations. In future measurements of fair value, adverse changes in discounted cash flow assumptions could result in an impairment of goodwill that would require a non-cash charge to the consolidated statement of operations and may have a material effect on our financial condition and operating results.

Overview of Financial Performance

Our net loss for the third quarter of 2006 was $216.1 million, or $3.76 per diluted share, as compared to a net loss of $16.0 million, or $0.28 per diluted share, for the same period in 2005. Our sales in the third quarter of 2006 were $875.9 million, a marginal increase from the third quarter of 2005 and a slight decrease from the second quarter of 2006. During the third quarter of 2006, transaction prices rose for our specialty papers, newsprint and market pulp product groups, while coated paper and lumber transaction prices were lower than the third quarter of 2005 and second quarter of 2006. Shipments increased for specialty papers in the third quarter of 2006 compared to the third quarter of 2005 and the second quarter of 2006 due to the introduction of the new freesheet hybrid product at our Calhoun mill in July 2006. Shipments for coated papers were flat in the third quarter of 2006 compared to the third quarter of 2005 and the second quarter of 2006. Shipments of newsprint were significantly lower compared to the third quarter of 2005 and the second quarter of 2006 due to the conversion of newsprint capacity to specialty grades at our Calhoun mill and due to curtailment, beginning September 16^th, of paper production at our Thunder Bay, Ontario facility. We restarted one of the paper machines during the week of October 16^th, but have not made a decision at this point to restart the second machine, which has an annual capacity of 140,000 metric tons. Shipments of lumber were also lower compared to the third quarter of 2005 and second quarter of 2006 due to weak demand in the housing construction market. Shipments of market pulp decreased from the same two prior periods due to increased internal consumption and the permanent closure of our Thunder Bay “A” kraft pulp mill on May 1, 2006.

Our costs during the third quarter of 2006, as compared to the third quarter of 2005, increased by $20.2 million, primarily due to the stronger Canadian dollar ($23.1 million), which increased from an average rate of US$0.83 to US$0.89, lower production volumes ($19.0 million), reduced benefits from our Canadian hedging program ($16.7 million) and higher chemical costs ($5.1 million). These higher costs were partially offset by lower maintenance costs ($5.7 million), wood and fiber costs ($5.7 million), labor costs ($3.4 million), energy costs ($2.9 million), and lower depreciation ($2.2 million). Our previously announced $80 million cost reduction program is fully implemented. During the third quarter of 2006 we have achieved approximately $24.0 million of savings under this program, putting us over the $80 million target on an annualized basis. These cost savings have helped offset our increased input costs. More information regarding changes in our manufacturing and other costs during the third quarter of 2006 is contained below in the section entitled “Consolidated Results of Operations.” In addition, we recorded impairment and other related charges of $246.4 million and $0.4 million in cost of sales during the third quarter associated with the impairment of goodwill at our Thunder Bay, Ontario facility, the closure of our Benton Harbor, Michigan facility and the impairment of paper machine No. 3 at our Thunder Bay, Ontario facility. We also recorded a net gain on the disposition of assets of $54.0 million associated with our ongoing land sales. Our cash flows from operating

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

activities and asset sale proceeds for the third quarter of 2006 were greater than our capital spending and dividends by $25.0 million, contributing to a debt reduction of $19.6 million, or $26.8 million, net of cash. In the third quarter of 2006, we spent approximately $47.4 million on capital projects.

Market Outlook

Coated mechanical demand improved in North America in the third quarter of 2006. In September 2006, North American demand was up 5.8% during the third quarter of 2006 compared to the same period last year. Operating rates during the quarter were 96%, but industry inventories at the mill level were five days or 93,000 tons higher than last year. Offshore imports of coated mechanical grades were up 28% for the third quarter. The high level of inventories and offshore imports, has led to weakened pricing. Our prices for coated papers have dropped 7.2% in the third quarter of 2006 as compared to the same period in 2005. During the quarter, we made the decision to close our Benton Harbor facility. Previous to this closure, our Benton Harbor and Covington facilities were running at approximately 50% capacity. This closure will allow us to operate one site more efficiently and reduce costs while continuing to serve our Nuway customers effectively.

Demand for supercalendered high gloss grades during the third quarter of 2006 decreased 1.6% compared to last year. Operating rates for North America were 87% and mill inventories at the end of September 2006 are 7.6% above last year. Standard and lightweight uncoated mechanical paper demand was up 3.3% for the third quarter of 2006 compared to third quarter of 2005. This demand increase was driven by a 22% increase in superbrite papers shipments and a 21% increase in bulky book shipments. Other uncoated mechanical mill inventories were normal in the quarter. Substitution pressure from the slowing uncoated freesheet market has begun to affect pricing in these grades. Our conversion of a machine at our Calhoun, Tennessee facility from newsprint to specialty paper production was completed at the end of the second quarter. The machine began production in July and is exceeding our expectations for cost and quality. This product takes advantage of the multiple fiber streams we have at our Calhoun facility.

Newsprint consumption in the United States declined 7.9% in the third quarter of 2006 compared to the same period in 2005, reflecting continuing conservation measures taken by publishers, reduced North American newspaper circulation, lower advertising linage and substitution in some applications by other uncoated mechanical grades. We have been responding to the negative trend in North American consumption by continuing to enhance our product mix, including continued conversion of newsprint production into publication papers with stronger growth characteristics, and increasing exports to the global market. We also temporarily curtailed production of newsprint at our high-cost Thunder Bay, Ontario facility to match lowered demand.

Global pulp shipments are up nearly 5% year-to-date. Producer inventories at the end of September 2006, at 29 days, are low. Overall, the market is strong, especially in softwood grades. Our average price, for all grades, was up $37 per ton in the third quarter of 2006. We have informed our North American and European customers of a $20 per ton price increase on hardwood grades effective on November 1, 2006.

Lumber markets have been very weak due to reduced lumber demand driven mostly by residential housing construction. Housing starts fell year-over-year by almost 18% in September to an annual level of about 1.8 million. In addition to the weak market, lumber prices have decreased 14.7% in the third quarter of 2006 as compared to the same period in 2005. Bowater is operating with shortened schedules due to the weak lumber demand and poor pricing.

Our Outlook

We expect continued progress in manufacturing improvements in the fourth quarter. However, the fourth quarter is typically a high energy and fiber cost quarter due to the impact of inclement weather at our Northern facilities. As announced in September, we curtailed our paper production at our Thunder Bay, Ontario facility. We restarted one of the paper machines during the week of October 16^th, but have not made a decision at this point to restart the second 140,000 ton per year machine. We expect the curtailment of the paper machine to impact operations by approximately $2 to $3 million per month that production remains curtailed.

During the third quarter of 2005, we announced an $80 million cost reduction program. The cost reduction program is centered on reducing our purchased energy requirements, achieving additional operational efficiencies, and lowering our selling, general and administrative expense. As of the end of the third quarter, Bowater has put into place all of the

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

necessary actions required to achieve the $80 million cost reduction program. We believe there is potential to achieve additional cost savings of $10 per ton across our 5.5 million ton platform by implementing best practice manufacturing techniques.

In the fall of 2005, we announced our intention to sell certain assets, primarily timberlands, which were expected to generate proceeds of $300 million, mostly in 2006. During the first nine months of 2006, we generated cash proceeds of $296.5 million primarily from the sale of approximately 519,000 acres of timberlands in the U.S. and Canada and two small Canadian sawmills. Proceeds from these asset sales have contributed to debt reduction, net of cash, of $186.5 million. Since the program’s announcement, we have generated approximately $340 million of proceeds and expect an additional $200 million in proceeds from this program by the end of 2007.

An agreement to settle the softwood lumber dispute between the United States and Canada was finalized in October 2006. Through September 30, 2006, we have paid softwood lumber duties totalling approximately $113.1 million. On November 10, 2006, Bowater received a refund of $103.9 million from EDC, which purchased our rights associated with the refund of the duties. The amount of the refund represents substantially all of the funds that we expect to receive under the terms of its agreement with EDC. Our agreement with the EDC stipulates that we may have to refund the lumber duties to the EDC if the Canadian Government does not pass the final legislation and if the U.S. customs Border Protection does not pay the EDC.

In 2005, we announced a strategic plan to convert a newsprint machine at our Thunder Bay, Ontario mill into the production of coated paper grades. In July 2006, we announced our decision to indefinitely suspend the Thunder Bay conversion project. Although we believe this project is worthwhile in the long term, our near-term goal remains on debt reduction, and current conditions in Ontario, including high energy costs and the strong Canadian dollar, have caused us to indefinitely suspend this project. We believe our operations continue to be positioned to deliver quality products and that capital reinvestment in the business can be held to appropriate levels. We expect to spend approximately $200 million on capital projects in 2006, or approximately $65 million in the fourth quarter, compared to projected depreciation expense of $325 million for the year.

Consolidated Results of Operations



	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(In millions)	2006			2005		Change			2006			2005		Change

Sales	$	875.9		$	872.9	$	3.0		$	2,668.5		$	2,607.4	$	61.1
Operating (loss) income		(179.3	)		45.0		(224.3	)		(72.1	)		122.6		(194.7	)

Significant items that increased (decreased) operating (loss) income:
Product pricing						$	33.8							$	123.4
Distribution costs							(1.4	)							1.5
Manufacturing costs							(47.5	)							(202.7	)
Impairment and other related charges							(246.4	)							(234.5	)
Selling and administrative expenses							(6.9	)							(6.2	)
Net gain on disposition of assets							44.1								123.8

						$	(224.3	)						$	(194.7	)

Three months ended September 30, 2006 versus September 30, 2005

Sales increased in the third quarter of 2006 as compared to the third quarter of 2005 due primarily to higher transaction prices for specialty papers, newsprint and market pulp and increased shipments of coated papers and specialty papers, partially offset by lower transaction prices for coated papers and lumber and lower shipments of newsprint, market pulp and lumber, as further noted in the “Segment Results of Operations” section.

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

Operating income decreased to an operating loss in the third quarter of 2006 as compared to the third quarter of 2005. The above table analyzes the major items that contributed to the decreased operating (loss) income. A brief explanation of these major items follows:

Product pricing for our specialty papers, newsprint and market pulp product groups was higher in the third quarter of 2006 as compared to the third quarter of 2005. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of product pricing and shipments.

Manufacturing costs were higher in the third quarter of 2006 as compared to the same period of 2005 resulting primarily from a stronger Canadian dollar ($23.1 million), lower production volumes ($19.0 million), reduced benefits from our Canadian hedging program ($16.7 million) and higher chemical costs ($5.1 million), offset by lower wood and fiber costs ($5.7 million), lower maintenance costs ($5.7 million), lower labor costs ($3.4 million), lower energy costs ($2.9 million) and lower depreciation ($2.2 million).

Impairment and other related charges relates to the impairment of goodwill at our Thunder Bay, Ontario facility ($200.0 million), the close of our Benton Harbor, Michigan facility ($27.5 million) and the write-down of paper machine No. 3 at our Thunder Bay, Ontario facility ($18.9 million).

Net gain on disposition of assets relates primarily to land sales. The increase is due to higher land sales in the third quarter of 2006 compared to the third quarter of 2005. During the third quarter of 2006, we received proceeds of $58.4 million, resulting in a net gain of $54.0 million, primarily for the sale of 23,000 acres of timberlands in the U.S. and Canada.

Nine months ended September 30, 2006 versus September 30, 2005

Sales increased in the first nine months of 2006 as compared to the same period of 2005 due primarily to higher transaction prices for specialty papers, newsprint and market pulp and increased shipments of coated papers and specialty papers, partially offset by lower transaction prices for coated papers and lumber and lower shipments of newsprint, market pulp and lumber as further noted in the “Segment Results of Operations” section.

Operating income decreased to an operating loss in the first nine months of 2006 as compared to the same period of 2005. The above table analyzes the major items that contributed to our decreased operating (loss) income. A brief explanation of these major items follows:

Product pricing for our specialty papers, newsprint and market pulp product groups was higher in the first nine months of 2006 as compared to the same period of 2005. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of product pricing and shipments.

Manufacturing costs were higher in the first nine months of 2006 as compared to the same period of 2005 resulting primarily from a stronger Canadian dollar ($80.2 million), reduced benefits from our Canadian hedging program ($44.3 million), lower production volumes ($41.7 million), higher maintenance costs ($16.4 million), higher energy costs ($12.3 million), higher labor costs ($8.4 million), higher chemical costs ($7.9 million), offset by lower wood and fiber costs ($18.2 million) and lower depreciation costs ($4.8 million).

Impairment and other related charges relates to impairment of goodwill at our Thunder Bay, Ontario facility ($200 million), the close of our Benton Harbor, Michigan facility ($27.5 million) and the write-down of a paper machine at our Thunder Bay, Ontario facility ($18.9 million). During the second quarter of 2005, Bowater management decided to permanently shut the original line at our Benton Harbor, Michigan facility. This permanent shut resulted in a non-cash asset impairment charge of $11.9 million for the nine months ended September 30, 2005.

Net gain on fixed assets and land sales relates primarily to land sales. The increase is due to higher land sales in the first nine months of 2006 compared to the same period of 2005. During the first nine months of 2006, we received proceeds of $296.5 million, resulting in a net gain of $154.5 million, primarily for the sale of 382,000 acres of timberlands in Canada, 137,000 acres of timberlands in the U.S. and two small Canadian sawmills.

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

Segment Results of Operations

During the third quarter of 2006, Bowater announced that it was realigning its organizational structure to move from a division-based organization to one organized by function that supports and focuses on our multi-line manufacturing and sales across our mill base. As a result of this organizational realignment, our reportable segments have been changed to reflect how we internally manage our business, which is based on products that we manufacture and sell to external customers. Our primary product lines include—coated papers, specialty papers, newsprint, market pulp, and lumber. This Management’s Discussion and Analysis section reflects our new reportable segments, and prior year information has been recast to the current year presentation. For further information regarding our segments, see Note 15 (Segment Information) of the Notes to the Consolidated Financial Statements included in this quarterly report.

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.

COATED PAPERS



	Three Months Ended September 30,							Nine Months Ended September 30,
(In millions)	2006		2005		Change			2006		2005		Change

Sales	$	154.4	$	165.7	$	(11.3	)	$	463.5	$	464.1	$	(0.6	)
Segment income		15.6		32.7		(17.1	)		60.3		80.0		(19.7	)

Significant items that decreased segment income:
Product pricing					$	(11.6	)					$	(3.0	)
Distribution costs						(1.8	)						(2.7	)
Manufacturing costs						(3.3	)						(13.4	)
Selling and administrative expenses						(0.4	)						(0.6	)

					$	(17.1	)					$	(19.7	)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005

Average prices (per short ton)	$	762	$	821	$	777	$	782
Shipments (thousands of short tons)		202.6		201.8		596.8		593.2
Downtime (thousands of short tons)		10.1		10.3		46.1		55.3
Inventory at end of period (thousands of short tons)		40.0		21.3		40.0		21.3

Three months ended September 30, 2006, versus September 30, 2005

Sales decreased in the third quarter of 2006 as compared to the third quarter of 2005 primarily as a result of a 7.2% lower average transaction price for coated paper. During the quarter North American inventories remain above historical averages, resulting in weakened pricing. The lower average transaction price was partially offset by a marginal increase in shipments in the third quarter of 2006 as compared to the third quarter of 2005.

Segment income decreased in the third quarter of 2006 as compared to the third quarter of 2005 primarily as a result of lower product pricing noted above, and higher manufacturing costs. Manufacturing costs were impacted by higher wood and fiber costs ($1.1 million), higher chemical costs ($1.0 million) and lower production volumes ($0.6 million), partially offset by lower energy costs ($0.2 million).

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

Inventory levels were higher at the end of the third quarter of 2006 as compared to the end of the same period in 2005 due to increased production levels and general market conditions. However, these inventory levels are down from the second quarter of 2006 and the year ended December 31, 2005.

Nine months ended September 30, 2006, versus September 30, 2005

Sales decreased in the first nine months of 2006 as compared to the first nine months of 2005 primarily as a result of a lower average transaction price for coated paper due to general market conditions. The lower average transaction price was partially offset by a marginal increase in shipments in the first nine months of 2006 compared to the first nine months of 2005.

Segment income decreased in the first nine months of 2006 as compared to the first nine months of 2005 primarily as a result of lower product pricing noted above and higher manufacturing costs. Manufacturing costs were impacted by higher wood and fiber costs ($4.7 million), higher maintenance costs ($3.1 million), higher chemical costs ($2.4 million), and higher energy costs ($1.0 million). These increased manufacturing costs were partially offset by lower labor costs ($0.7 million) and lower depreciation costs ($0.9 million).

Downtime was taken in the first nine months of 2006 at our Nuway facilities as we continued to operate these facilities below their capacity primarily due to market and economic conditions. The Benton Harbor Nuway facility was closed late in the third quarter of 2006 due to market and economic conditions. Our Covington facility, as a consequence, will operate at higher capacity and has begun servicing all of our Nuway customers.

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

SPECIALTY PAPERS



	Three Months Ended September 30,								Nine Months Ended September 30,
(In millions)	2006			2005		Change			2006			2005		Change

Sales	$	153.9		$	124.9	$	29.0		$	426.6		$	358.0	$	68.6
Segment (loss) income		(1.4	)		3.0		(4.4	)		(26.8	)		4.6		(31.4	)

Significant items that increased (decreased) segment (loss) income:
Product pricing						$	9.9							$	32.3
Distribution costs							(1.4	)							(1.0	)
Manufacturing costs							(12.8	)							(62.9	)
Selling and administrative expenses							(0.1	)							0.2

						$	(4.4	)						$	(31.4	)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005

Average prices (per short ton)	$	679	$	637	$	667	$	620
Shipments (thousands of short tons)		226.8		196.1		639.4		577.3
Downtime (thousands of short tons)		3.0		1.1		5.0		4.6
Inventory at end of period (thousands of short tons)		52.7		29.2		52.7		29.2

Three months ended September 30, 2006, versus September 30, 2005

Sales increased in the third quarter of 2006 as compared to the third quarter of 2005 primarily as a result of a 6.6% higher average transaction price for specialty paper due to realization of price increases in 2006 and 2005 and a 15.7% increase in shipments in the third quarter of 2006 as compared to the third quarter of 2005 largely due to the introduction of the new freesheet hybrid product at our Calhoun mill in July 2006.

Segment income decreased in the third quarter of 2006 as compared to the third quarter of 2005 primarily as a result of higher manufacturing costs including a stronger Canadian dollar ($5.5 million), higher labor costs ($5.8 million), reduced benefits from our Canadian hedging program ($3.7 million) and higher chemical costs ($2.5 million). These increased manufacturing costs were partially offset by higher production volumes ($10.2 million) and lower wood and fiber costs ($1.2 million).

Inventory levels were higher at the end of the third quarter of 2006 as compared to the same period in 2005 due to the addition of the new freesheet hybrid product at our Calhoun mill in July 2006.

Our previously announced $35 per short ton price increase for September 1, 2006 on low bright products was partially implemented during October.

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

Nine months ended September 30, 2006, versus September 30, 2005

Sales increased in the first nine months of 2006 as compared to the first nine months of 2005 primarily as a result of a 7.6% higher average transaction price for specialty paper due to the realization of price increases in 2006 and 2005. Our specialty papers shipments increased 10.8% in the first nine months of 2006 compared to the first nine months of 2005 due to increased production levels and demand for the new freesheet hybrid at our Calhoun mill.

Segment income decreased in the first nine months of 2006 as compared to the first nine months of 2005 primarily as a result of higher manufacturing costs including a stronger Canadian dollar ($18.3 million), higher labor costs ($17.8 million), reduced benefits from our Canadian hedging program ($9.8 million), higher maintenance costs ($11.7 million), higher energy costs ($6.7 million), higher depreciation ($5.5 million) and higher chemical costs ($4.2 million). These increased manufacturing costs were partially offset by higher production volumes ($18.6 million) and lower wood and fiber costs ($1.4 million).

NEWSPRINT



	Three Months Ended September 30,							Nine Months Ended September 30,
(In millions)	2006		2005		Change			2006		2005		Change

Sales	$	349.1	$	347.9	$	1.2		$	1,089.9	$	1,055.1	$	34.8
Segment income		30.9		23.4		7.5			67.1		51.5		15.6

Significant items that increased (decreased) segment income:
Product pricing					$	28.8						$	103.5
Distribution costs						(0.1	)						(0.2	)
Manufacturing costs						(21.7	)						(89.3	)
Selling and administrative expenses						0.5							1.6

					$	7.5						$	15.6



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005

Average prices (per short ton)	$	643	$	591	$	635	$	576
Shipments (thousands of short tons)		542.5		588.3		1,716.9		1,833.1
Downtime (thousands of short tons)		27.2		35.3		61.5		46.4
Inventory at end of period (thousands of short tons)		77.5		100.9		77.5		100.9

Three months ended September 30, 2006, versus September 30, 2005

Sales increased in the third quarter of 2006 as compared to the third quarter of 2005 primarily as a result of higher product pricing partially offset by lower shipments. Our average newsprint transaction price for all markets was 8.8% higher in the third quarter of 2006 compared to the third quarter of 2005. The increase reflects the realization of price increases in our North American and International markets. Shipments were 7.8% lower in the third quarter of 2006 as we continue to match production to our orders and due to the conversion of newsprint to high value added specialties. Additionally, we temporarily curtailed production of newsprint on two paper machines at our Thunder Bay facility on September 16, 2006. Subsequently, on October 19, 2006 one of the paper machines at the site was restarted. The other machine has not been restarted.

Segment income increased in the third quarter of 2006 as compared to the third quarter of 2005 primarily as a result of higher product pricing, partially offset by higher manufacturing costs. Manufacturing costs were higher primarily as a result of lower production volumes ($12.9 million), a stronger Canadian dollar and Korean Won ($10.7 million), and a

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

reduced benefit from our Canadian dollar hedging program ($6.7 million), partially offset by lower depreciation ($3.1 million), lower labor costs ($2.7 million), and lower maintenance ($2.9 million).

Inventory levels were lower at the end of the third quarter of 2006 as compared to the same period in 2005 due to lower export inventory levels.

We announced a $20 per ton price increase for newsprint on August 1, 2006 which is meeting with significant resistance from our customers.

Nine months ended September 30, 2006, versus September 30, 2005

Sales increased in the first nine months of 2006 as compared to the first nine months of 2005 primarily as a result of higher product pricing, partially offset by lower shipments. Our average newsprint transaction price was 10.2% higher in the first nine months of 2006 compared to the first nine months of 2005. The increase reflects the realization of price increases in our North American and International markets. Shipments were 6.3% lower in the first nine months of 2006 as we continue to match production to our orders, the conversion of newsprint to high value added specialties, and our curtailed newsprint production at our Thunder Bay facility.

Segment income increased in the first nine months of 2006 as compared to the first nine months of 2005 primarily as a result of the higher product pricing, partially offset by higher manufacturing costs. Manufacturing costs were higher primarily as a result of lower production volumes ($36.0 million), a stronger Canadian dollar and Korean Won ($36.0 million), reduced benefit from our Canadian dollar hedging program ($18.8 million), higher maintenance costs ($4.6 million) and higher energy costs ($7.3 million), partially offset by lower wood and fiber costs ($6.8 million), lower labor costs ($4.8 million) and lower depreciation costs ($4.5 million).

MARKET PULP



	Three Months Ended September 30,								Nine Months Ended September 30,
(In millions)	2006		2005			Change			2006		2005		Change

Sales	$	144.2	$	127.4		$	16.8		$	410.3	$	408.2	$	2.1
Segment income (loss)		17.4		(1.7	)		19.1			16.1		15.2		0.9

Significant items that increased (decreased) segment income (loss):
Product pricing						$	18.8						$	19.2
Distribution costs							(1.3	)						(3.9	)
Manufacturing costs							1.7							(14.2	)
Selling and administrative expenses							(0.1	)						(0.2	)

						$	19.1						$	0.9



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005

Average prices (per short ton)	$	601	$	518	$	562	$	536
Shipments (thousands of short tons)		239.8		245.9		729.5		761.9
Downtime (thousands of short tons)		3.4		18.8		22.1		42.3
Inventory at end of period (thousands of short tons)		59.1		67.8		59.1		67.8

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

Three months ended September 30, 2006, versus September 30, 2005

Sales increased in the third quarter of 2006 as compared to the third quarter of 2005 as a result of higher product pricing partially offset by lower shipments resulting primarily from the shut of our Thunder Bay “A” kraft mill in May 2006. Our average market pulp transaction price increased 16.0% in the third quarter due to our realization of price increases in 2006. The higher average transaction price was partially offset by a 2.5% decrease in shipments.

Segment income increased primarily related to the increase in transaction pricing in the quarter as well as a result of lower manufacturing costs. The lower manufacturing costs were due primarily to lower fiber and wood costs ($3.1 million), lower maintenance costs ($4.0 million) and lower energy costs ($2.3 million), partially offset by a reduced benefit from our Canadian dollar hedging program ($4.0 million) and a stronger Canadian dollar ($2.9 million).

Market pulp inventory levels decreased from the second quarter of 2006 as we continued our transition of customers after the “A” kraft pulp mill shut on May 1 and continued to experience strong demand for our products throughout the third quarter.

We have informed our North American and European customers of a $20 per ton price increase on hardwood grades effective on November 1, 2006.

Nine months ended September 30, 2006, versus September 30, 2005

Sales increased in the first nine months of 2006 as compared to the first nine months of 2005 as a result of higher average transaction prices partially offset by lower shipments. The lower shipments are primarily due to the shut of our Thunder Bay “A” kraft mill in May 2006 and by increased internal consumption. Our average market pulp transaction price increased 4.9% in the first nine months of 2006 due to our realization of price increases. The higher average transaction price was partially offset by a 4.3% decrease in shipments.

Segment income increased in the first nine months of 2006 as compared to the first nine months of 2005 primarily as a result of increased transaction prices partially offset by higher manufacturing costs. The higher manufacturing costs were due primarily to a reduced benefit from our Canadian dollar hedging program ($12.0 million), a stronger Canadian dollar ($11.2 million) and lower production volumes ($10.3 million), partially offset by lower fiber and wood costs ($8.2 million), lower depreciation ($3.8 million), lower maintenance costs ($2.0 million), lower energy costs ($1.5 million) and lower labor costs ($1.3 million).

LUMBER



	Three Months Ended September 30,									Nine Months Ended September 30,
(In millions)	2006			2005			Change			2006			2005		Change

Sales	$	71.1		$	95.9		$	(24.8	)	$	261.6		$	298.0	$	(36.4	)
Segment (loss) income		(17.4	)		(0.7	)		(16.7	)		(20.9	)		17.9		(38.8	)

Significant items that increased (decreased) segment (loss) income:
Product pricing							$	(12.8	)						$	(28.8	)
Distribution costs								3.3								9.2
Manufacturing costs								(7.5	)							(19.6	)
Selling and administrative expenses								0.3								0.4

							$	(16.7	)						$	(38.8	)

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



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005

Average prices (per mbf)	$	297	$	348	$	329	$	364
Shipments (millions of mbf)		239.4		275.6		795.5		819.1
Downtime (millions of mbf)		69.4		41.3		181.3		159.2
Inventory at end of period (millions of mbf)		54.4		50.5		54.4		50.5

Three months ended September 30, 2006, versus September 30, 2005

Sales decreased in the third quarter of 2006 as compared to the third quarter of 2005 as a result of lower product pricing and lower shipments. Lumber prices decreased 14.7% quarter over quarter as a result of lower demand due to a weaker housing market. Lumber shipments decreased 13.1% in the third quarter of 2006 due primarily to the sale of two of our Canadian sawmills in the first half of 2006.

Segment loss increased in the third quarter of 2006 as compared to the third quarter of 2005 primarily as a result of higher manufacturing costs, and lower product pricing, as noted above. The higher manufacturing costs were due primarily to lower production volumes ($8.1 million), a stronger Canadian dollar ($3.7 million), and a reduced benefit from our Canadian dollar hedging program ($2.3 million), partially offset by lower fiber and wood costs ($2.3 million) due primarily to stumpage rebates and credits for secondary road expenditures, lower labor costs ($2.1 million) and lower maintenance costs ($0.7 million).

Nine months ended September 30, 2006, versus September 30, 2005

Sales decreased in the first nine months of 2006 as compared to the first nine months of 2005 as a result of a 9.6% lumber price decrease due to a weaker housing market. Our lumber shipments decreased 2.9% in the first nine months of 2006 as a result of the sale of two of our Canadian sawmills in the first half of 2006, partially offset by increased output at our Thunder Bay sawmill.

Segment income decreased to a segment loss in the first nine months of 2006 as compared to the first nine months of 2005 primarily as a result of higher manufacturing costs and lower product pricing, as noted above, partially offset by lower distribution costs. Distribution costs were lower due primarily to lower duty rates on lumber shipments from Canada to the U.S. The higher manufacturing costs were due primarily to lower volumes ($13.7 million), a stronger Canadian dollar ($13.3 million), and a reduced benefit from our Canadian dollar hedging program ($3.7 million), partially offset by lower fiber and wood costs ($7.0 million) due primarily to stumpage rebates and credits for secondary road expenditures, lower labor costs ($2.5 million), lower energy costs ($1.2 million) and lower maintenance costs ($1.0 million).

Lumber duties imposed by the U.S. Department of Commerce (DOC) became effective for lumber shipments from Canada to the U.S. beginning May 22, 2002. Between May 22, 2002, and October 12, 2006, we posted cash deposits to cover the various duty rates then in effect. Lumber duties are included as a component of distribution costs on our consolidated statements of operations.

On October 12, 2006, an agreement regarding Canada’s softwood lumber exports to the United States became effective. The agreement provides for the return of approximately U.S. $4.5 billion in accumulated cash deposits to Canadian industry with the remaining $1 billion distributed to U.S. interests. Through September 30, 2006, we paid duties totaling approximately $113 million. Through an arrangement with the EDC, which the government of Canada designated as its agent to expedite the refund of duties, we recovered approximately $103.9 million on November 10, 2006. Our agreement with the EDC stipulates that we may have to refund lumber duties to the EDC if the Canadian Government does not pass the final legislation and if the U.S. Customs and Border Protection does not pay the EDC.

The agreement also provides for softwood lumber to be subject to one of two ongoing border measures, depending upon the province of first manufacture. Beginning October 12, 2006, softwood lumber exports from all provinces (other than the Maritime provinces), will be subject to an export tax varying up to a maximum of 22.5%, depending upon lumber prices and each province’s quantity of exports (Option A). We have been notified that the export tax for the Province of Quebec for October 2006 will be 5% as the export quantities shipped in October were well below the quota amounts. We anticipate paying an export tax of 15% for the rest of the fourth quarter, but that rate is subject to adjustment once actual quantities shipped are known. Bowater may receive a partial refund of the taxes it pays under Option A based on the difference between (i) the Option A export tax we paid and (ii) the Option B tax that would have applied provided total exports from the Option B province do not exceed the maximum Option B export volumes that would have been in place, but will not be able to determine the amount of this refund, if any, until December 2006 at the earliest. Beginning January 1, 2007, exports from the provinces of Quebec, Ontario, Manitoba and Saskatchewan will instead be subject to volume limitations based on each province’s share of U.S. consumption and a combined export tax of up to 5% (Option B).

In 2005, the Province of Quebec mandated that the annual harvests of softwood timber on Crown-owned land will be reduced 20% below 2004 levels. The 20% reduction is required to be achieved, on average, for the three-year period beginning April 1, 2005 and ending March 31, 2008. These requirements did not have any material impact on our results of operations or financial condition during the first nine months of 2006 and are not expected to have a material impact for the balance of 2006 or 2007.

CORPORATE AND OTHER

Bowater excludes gain/losses on disposition of assets, impairment and other related charges and severance charges from its internal review of product line results. These results are analyzed separately. Corporate and other items include timber sales and general administrative expenses and are also excluded from our product line segment results. The following table is included in order to reconcile product line sales and segment income (loss) to our total sales and operating (loss) income on our Consolidated Statements of Operations.



	Three Months Ended September 30,									Nine Months Ended September 30,
(In millions)	2006			2005			Change			2006			2005			Change

Corporate and Other:
Sales	$	3.2		$	11.1		$	(7.9	)	$	16.6		$	24.0		$	(7.4	)
Operating (loss) income:
Net gain on disposition of assets	$	54.0		$	9.9		$	44.1		$	154.5		$	30.7		$	123.8
Impairment and other related Charges		(246.4	)		—			(246.4	)		(246.4	)		(11.9	)		(234.5	)
Severance		(6.9	)		—			(6.9	)		(11.3	)		—			(11.3	)
Corporate and other		(25.1	)		(21.6	)		(3.5	)		(64.7	)		(65.3	)		0.6

Net gain on disposition of assets: During the three months and nine months ended September 30, 2006, Bowater recorded a net pre-tax gain of $54.0 million and $154.5 million, respectively, related primarily to the sale of timberlands. During the third quarter of 2006, we completed the sale of approximately 23,000 acres of timberlands in the U.S. and Canada, and some non-core fixed assets for total proceeds of $58.4 million. During the first nine months of 2006, we completed the sale of approximately 519,000 acres of timberlands and two small Canadian sawmills for total proceeds of $296.5 million. During the three and nine months ended September 30, 2005, Bowater recorded a net pre-tax gain of $9.9 million, and $30.7 million, respectively, related to the sale of timberlands and fixed assets. The increase is primarily due to higher land sales in 2006 compared to 2005.

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

Impairment and other related charges: During the three and nine months ended September 30, 2006, we recorded impairment and other related charges related to impairment of goodwill at our Thunder Bay, Ontario facility ($200.0 million), the closure of our Benton Harbor, Michigan facility ($27.5 million) and the write-down of paper machine No. 3 ($18.9 million) at our Thunder Bay, Ontario facility. Included in the $27.5 million related to the closure of our Benton Harbor facility were $4.0 million in charges for lease costs, contract termination costs and severance. During the second quarter of 2005, Bowater management decided to permanently shut the original line at Benton Harbor. This permanent shut resulted in a non-cash asset impairment charge of $11.9 million for the nine months ended September 30, 2005.

Severance: During the three and nine months ended September 30, 2006, we recorded $6.9 million and $11.3 million, respectively, of curtailment and settlement losses related to the permanent close of our Thunder Bay “A” kraft pulp line and settlement losses and severance related to the departure of certain other employees in our organization (See Note 9 to our Consolidated Financial Statements).

Corporate and other: The decrease in sales for the three and nine months of 2006 as compared to the same periods in the prior year is due to lower timber sales as a result of our timberland sales. The increase in operating loss during the three months ended September 30, 2006 is primarily due to pension and OPEB plan amendments.

Interest Expense and Other Income, Net

Interest expense increased $0.8 million from $50.0 million in the third quarter of 2005 to $50.8 million during the third quarter of 2006. This increase in interest expense is primarily related to higher variable interest rates and decreased capitalized interest, which was partially offset by a lower average debt balance during the third quarter of 2006. Interest expense remained constant at $149.5 million for the nine months ended September 30, 2006 and September 30, 2005.

Other income, net increased $3.0 million from $1.9 million during the third quarter of 2005 to $4.9 million during the third quarter of 2006. The increase in income is primarily attributable to a decrease in foreign currency exchange losses. Other income, net increased $2.7 million from $7.0 million during the first nine months of 2005 to $9.7 million during the first nine months of 2006. The increase in income is primarily attributable to an increase in income from joint venture and interest income as well as a decrease in foreign exchange losses during 2006. These items were partially offset by charges related to the repurchase of debt (See Liquidity and Capital Resources).

Income Taxes

Our effective tax rate varies frequently and substantially from the weighted-average effect of both domestic and foreign statutory tax rates primarily as a result of special tax treatment on foreign currency gains and losses. Due to the variability and volatility of foreign exchange rates, we are unable to estimate the impact of future changes in exchange rates on our effective tax rate.

In the fourth quarter of 2005, based on continued operating losses for our Canadian operations and current evaluation of available tax planning strategies, it was determined in accordance with Statement of Financial Accounting Standard No. 109 that we would record a tax charge to establish a valuation allowance against our remaining net Canadian deferred tax assets, which were primarily for loss carryforwards and tax credits in Canada. Additionally, any income tax benefit recorded on operating losses generated at certain of our Canadian operations for the balance of 2006 will likely be offset by establishing a 100% valuation allowance (tax charge) during 2006. To the extent we establish valuation allowances in future periods our overall effective income tax rate in those periods would be negatively impacted. To the extent that our Canadian operations become profitable, the impact of this valuation allowance would also lessen or reverse and positively impact our effective tax rate in those periods. During the three and nine months ended September 30, 2006, certain of our Canadian operations had income tax benefits and tax credits of $18.2 million, or $0.32 per share and $73.8 million, or $1.29 per diluted share, respectively, that were entirely offset by tax charges to increase the tax valuation allowance. For the three and nine months ended September 30, 2006, approximately $13.3 million and $45.3 million, respectively, of the valuation allowance related to net operating losses with the balance of the valuation allowance related to tax credits, foreign exchange, impairment and other related charges and asset sales. During the first nine months of 2005, no valuation allowances were recorded related to income tax benefits generated during this period.

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

Bowater’s effective tax rate for the third quarter of 2006 was 4.4% versus (467.7%) for the third quarter of 2005. Our effective tax rate for the first nine months of 2006 was (13.9%) versus (5.5%) for the first nine months of 2005. The effective tax rate for the three and nine months ended September 30, 2006 was impacted primarily by the goodwill impairment charge, which does not provide any tax benefit, the tax valuation charges as described above, the reversal of tax reserves and the tax treatment on foreign currency gains and losses. The effective income tax rate for both periods of 2005 were impacted primarily by the tax treatment on foreign currency gains and losses and by permanent tax differences that are not dependent on pre-tax income (losses).

Income tax expense for the third quarter of 2006 and 2005 includes the reversal of income tax reserves and a valuation allowance of approximately $19.0 and $13.2 million, respectively, associated with a statute of limitations expiration for pre-2003 U.S. tax years, resulting in a decrease to income tax expense.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash provided from operations and available borrowings under our credit facilities, which are discussed in more detail below. We periodically review timberland holdings and sell timberlands. In the first nine months of 2006, the sale of timberlands and other assets generating proceeds of $296.5 million has been a significant source of liquidity and has allowed us to reduce our total debt outstanding, net of the increase in cash, by $186.5 million. For the life of the program, we have generated approximately $340 million of proceeds and expect an additional $200 million in proceeds from this program by the end of 2007. We believe that cash from operations and access to our credit facilities will be sufficient to provide for our anticipated requirements for working capital, contractual obligations, capital expenditures and dividend payments for the next twelve months.

Cash From Operations

During the first nine months of 2006 and 2005, Bowater had net losses of $245.5 million and $18.7 million, respectively. Cash provided by operating activities totaled $68.3 million in the first nine months of 2006 compared to $143.3 million during the same period of 2005. Cash generated from operations decreased $75.0 million for the first nine months of 2006 as compared to the same period in 2005, due to a number of factors including a stronger Canadian dollar, lower production at the Thunder Bay mill as a result of the permanent shut down of the “A” kraft pulp line, lower production and higher maintenance costs at the Calhoun mill as we converted a newsprint machine to the production of specialty paper machine in the second quarter of 2006 and higher costs associated with the closure of our Benton Harbor facility. These higher costs were partially offset by increases in our product prices for most of our products. (See Segment Results of Operations).

Working capital in the first nine months of 2006 was negatively impacted by an increase in accounts receivable, primarily as a result of higher pricing. The negative impact to working capital was partially offset by an increase in accounts payable and accrued liabilities and lower inventory levels, primarily the result of the shutdown of the Thunder Bay “A” line. Working capital in the first nine months of 2005 was impacted by an increase in accounts receivable primarily from higher pricing and higher inventory levels to support export markets. These working capital changes were partially offset by an increase in accounts payable and accrued liabilities primarily due to the timing of payments.

An agreement to settle the softwood lumber dispute between the United States and Canada was finalized in October 2006. On November 10, 2006, Bowater received a refund of $103.9 million from EDC, which purchased our rights associated with the refund of the duties. The amount of the refund represents substantially all of the funds that we expect to receive under the terms of its agreement with EDC. Our agreement with the EDC stipulates that we may have to refund the lumber duties to the EDC if the Canadian Government does not pass the final legislation and if the U.S. Customs and Border Protections does not pay the EDC.

Cash From (Used For) Investing Activities

Cash from (used for) investing activities totaled $158.5 million and ($55.9) million for the first nine months of 2006 and 2005, respectively. The increase in cash from investing activities during the first nine months of 2006 is due primarily to increased proceeds from land and asset sales, partially offset by increased capital expenditures. For the first nine months of 2006, capital expenditures include $36.3 million associated with the conversion of a machine at our Calhoun mill to specialty paper production. Capital expenditures for both periods have been for compliance, maintenance and return-

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

based projects. We expect to spend approximately $200 million on capital projects in 2006, or approximately $65 million the fourth quarter, compared to projected depreciation expense of $325 million for the year.

Cash Used for Financing Activities

Cash used for financing activities totaled $136.1 million and $93.8 million for the first nine months of 2006 and 2005, respectively. Bowater paid cash dividends of $34.7 million, had net payments of $61.6 million on its short-term borrowings, net payments of $22.3 million on its long term debt and debt repurchases of $17.5 million during the first nine months of 2006.

During August 2006, we repurchased approximately $15.6 million of our $250 million floating rate notes due March 15, 2010 for total cash consideration of approximately $15.8 million or a 1.4% premium over face value. During September 2006, we repurchased approximately $1.9 million of our $250 million 9% notes due August 1, 2009 for total cash consideration of approximately $2.0 million or a 3.7% premium over face value. In conjunction with these transactions, we recorded charges of approximately $0.5 million for premiums, fees and unamortized deferred financing fees. These charges for the early extinguishment of debt are included in “Other income, net” on the accompanying Consolidated Statements of Operations. The repurchases change our contractual obligation of long-term debt, including current installments in Years 2009-2010 from $631.7 million to $614.2 million (See “Contractual Obligations” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Bowater’s Annual Report on Form 10-K for the year ended December 31, 2005).

During November 2006, we repurchased $95.3 million face value of our Series A, 10.625% notes due June 15, 2010 for total cash consideration of approximately $102.7 million or a 7.8% premium over face value. This repurchased debt had a book carrying value of $108.2 million and was comprised of the $95.3 million face value, plus $12.9 million related to the revaluation of Series A debt from the acquisition of Avenor in 1998. In addition to the premium charges of $7.4 million, we expect to record charges of approximately $0.1 million for unamortized deferred financing fees in the fourth quarter. We also expect to record a gain on the extinguishment of debt of approximately $12.9 million in the fourth quarter of 2006 associated with the revaluation of the debt as discussed above. Therefore, the net impact for the extinguishment of the Series A notes will be a net gain of approximately $5.4 million. The repurchase further reduces our contractual obligation of long-term debt, including current installments in Years 2009-2010 to $506.0 million.

Credit Arrangements

As of September 30, 2006, we had available borrowings on our credit facilities as follows:



									Weighted
									Average
			Amount		Commitment		Termination		Interest
Short-Term Bank Debt	Commitment		Outstanding		Available ⁽¹⁾		Date		Rate ⁽²⁾
			(in millions, except for dates and interest rates)
US Credit Agreement	$	415.0	$	—	$	340.5		05/11		n/a

Canadian Credit Agreement	$	165.0	$	—	$	126.9		05/07		n/a

	$	580.0	$	—	$	467.4


(1)		The commitment available under each of the revolving credit facilities is subject to covenant restrictions as described below and is reduced by outstanding letters of credit of $74.5 million for the U.S. and $38.1 million for Canada. We also have letters of credit outstanding totaling $17.3 million that do not reduce the commitments available under the revolving credit facilities.

(2)		Borrowings under the revolving credit facilities incur interest based, at our option, on specified market interest rates plus a margin. No borrowings were outstanding under these credit facilities during the quarter.

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

On May 31, 2006, we entered into (i) a five year Credit Agreement among Bowater as Borrower, several lenders, and Wachovia Bank, National Association, as Administrative Agent (the “U.S. Credit Agreement”) and (ii) a 364-day Credit Agreement, along with its subsidiary Bowater Canadian Forest Products Inc. (“BCFPI”), among BCFPI as Borrower, Bowater as parent Guarantor, several lenders, and The Bank of Nova Scotia as Administrative Agent (the “Canadian Credit Agreement”).

The U.S. Credit Agreement provides for a $415 million revolving credit facility with a scheduled maturity date of May 25, 2011. The U.S. Credit Agreement is guaranteed by certain of our wholly-owned subsidiaries in the United States, and is secured by (i) liens on the inventory, accounts receivable and deposit accounts of Bowater and the guarantors (ii) pledges of 65% of the stock of certain of our foreign subsidiaries, and (iii) pledges of the stock of our U.S. subsidiaries that do not own mills or converting facilities. Availability under the U.S. Credit Agreement is limited to 90% of the net consolidated book value of our accounts receivable and inventory, excluding BCFPI and its subsidiaries.

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

•		a minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset dispositions) to interest expense of 2.00 to 1.

We believe we are in compliance with all of our covenants and other requirements set forth in our credit facilities.

Employees

As of September 30, 2006, Bowater employed 7,600 people, of whom approximately 5,250 were represented by bargaining units. Labor agreements covering approximately 1,400 employees in the United States paper mills expire in 2007 and 2008. These employees are represented by the United Steelworkers Union. We consider relations with our employees to be good.

During the second quarter of 2006, labor agreements covering approximately 730 employees at our Catawba facility and 100 employees at our Saint-Félicien facility expired. Discussions between Bowater and the unions are continuing, and we can provide no assurance regarding the outcomes or the timing of these negotiations or their effect on our operations. During July 2006, a labor agreement covering approximately 150 employees at our Mokpo facility expired. Recently, the employees have exercised their right to strike for short periods and overall production has decreased. In an effort to successfully resolve the agreement, the employees at Mokpo who are covered by a collective bargaining agreement were locked out on October 31, 2006. Subsequently, the union voted to accept the labor agreement and the mill started production on November 12, 2006. The impact of the temporary work stoppage is expected to impact fourth quarter operating results by approximately $4.0 million. Any protracted work stoppages at any of our facilities could result in a disruption of our operations, which could negatively impact our ability to timely deliver certain products to our customers and thus adversely affect our results.

Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings

Nearly half of our manufacturing costs and certain financial liabilities are denominated in Canadian dollars. The majority of our sales are denominated in the currency of the country in which they occur. Accordingly, changes in the Canadian-U.S. dollar exchange rate may significantly impact our revenues and costs. The magnitude and direction of this impact primarily depends on our production and sales volume, the proportion of our production and sales that occur in Canada, the proportion of our tax and other financial liabilities denominated in Canadian dollars, our hedging levels, and the magnitude, direction and duration of changes in the Canadian-U.S. dollar exchange rate. Increases in the value of the Canadian dollar versus the U.S. dollar reduce our earnings, which are reported in U.S. dollar terms.

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

We attempt to partially limit our exposure to Canadian-U.S. dollar exchange rate fluctuations through hedging transactions. At September 30, 2006, we had $40.0 million of Canadian dollar forward contracts outstanding. Under applicable exchange rates, hedging levels and operating conditions that existed during the three months ended September 30, 2006, for every one-cent change in the Canadian-U.S. dollar exchange rate, our operating loss, net of hedging, for the three and nine months ended September 30, 2006 would have been impacted by approximately $3.4 million and $10.1 million, respectively. For a description of our hedging activities, see Note 13 to Consolidated Financial Statements included in this quarterly report.

At September 30, 2006, we had approximately $0.7 million of unrealized gains recorded on our Canadian dollar hedging program compared to approximately $30.0 million of unrealized gains at December 31, 2005. This decrease resulted primarily from the expiration of hedging contracts during 2006, as noted above. As of September 30, 2006, the balance of our hedging contracts continues into the fourth quarter of 2006. These derivatives are classified in “Other current assets” or “Other assets” in our Consolidated Balance Sheet depending on the maturity date of the hedging contract.

Recent Accounting Pronouncements

Income Taxes

In June 2006, the Financial Accounting Standards Board, (“FASB“) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”). The provisions of FIN No. 48 become effective for Bowater on January 1, 2007. FIN No. 48 prescribes a two-step process for the recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have not yet completed our evaluation of the impact of adopting FIN No. 48 on our financial position.

Taxes Collected from Customers

In March 2006, the Emerging Issues Task Force (EITF) issued EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The provisions of EITF Issue No. 06-3 become effective for Bowater on January 1, 2007. EITF Issue No. 06-3 concluded that the presentation of sales, use, value-added and certain excise taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed in the financial statements. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. EITF Issue No. 06-3 will not impact our results of operations or financial position, but will affect our disclosures. Upon adoption, we will include the necessary disclosure.

Servicing of Financial Assets

In March 2006, the FASB issued Statement on Financial Accounting Standard No. 156,“Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 is effective for Bowater on January 1, 2007. SFAS 156 changes the way entities account for servicing assets and obligations associated with financial assets acquired or disposed of. We have not yet completed our evaluation of the impact of adopting SFAS 156 on our results of operations or financial position.

Hybrid Financial Instruments

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), an amendment of FAS 140 and FAS 133. SFAS 155 permits Bowater to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under SFAS 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irrevocable. SFAS 155 will be effective for all instruments acquired, issued, or subject to a remeasurement event occurring after January 1, 2007. We have not yet completed our evaluation of the impact of adopting SFAS 155 on our results of operations or financial position.

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

Pensions

In September 2006, the FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefit Obligations, an amendment of FASB Statements No. 87, 88, 106 and 132(R),” in order to improve existing reporting for defined benefit postretirement plans. SFAS 158 requires Bowater to:

§		recognize in the statement of financial position, the underfunded or overfunded status of postretirement plans measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation would be the projected benefit obligation,

§		recognize actuarial gains and losses and prior service cost and credits as a component of other comprehensive income,

§		eliminate the early measurement date option,

§		eliminate any remaining unrecognized transition asset or obligation, and

§		modify disclosure requirements.

These requirements are effective for Bowater as of December 31, 2006. Bowater is in the process of evaluating the impact of adopting SFAS 158. Based on preliminary information obtained from our actuaries, we expect the adoption of this new accounting guidance to reduce shareholders’ equity, net of tax, by approximately $175 million to $225 million as of December 31, 2006.

SFAS 158 also requires plan assets and benefit obligations to be measured as of the balance sheet date, but this requirement is not effective until fiscal years ending after December 15, 2008. We currently measure our plan assets and benefit obligations as of September 30 each year, and plan to adopt this change in measurement date provision during our year ended December 31, 2008.

Planned Major Maintenance

In September 2006, the FASB issued FASB Staff Position (FSP) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities which is an amendment to APB Opinion No. 28, Interim Financial Reporting. This FSP prohibits accruing as a liability in annual and interim periods the future costs of periodic major overhauls and maintenance of plant and equipment. Other previously acceptable methods of accounting will continue to be permitted. The provisions of this FSP will be effective for Bowater on December 31, 2006. As Bowater does not accrue the future costs of periodic major overhauls and maintenance of plant and equipment, this FSP will have no effect on our results of operations or financial position.

Quantifying Financial Statement Misstatements

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108 (Topic 1N), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires registrants to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relative quantitative and qualitative factors. SAB 108 will be effective for Bowater on December 31, 2006, although early adoption is allowed. We do not believe that adoption of SAB 108 will have a material effect on our results of operations or financial position.

Fair Value Measurements

In September 2006, the FASB issued SFAS 157 “Fair Value Measurements”. SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. This statement is effective for Bowater on January 1, 2008. We have not yet completed our evaluation of the impact of adopting SFAS 157 on our results of operations or financial position.

BOWATER INCORPORATED

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk

We have provided current disclosure concerning our Canadian dollar forward contracts, which is included in Note 13 to the Consolidated Financial Statements. For information about the effect of Canadian-U.S. dollar exchange rate fluctuations on our manufacturing costs and Canadian dollar denominated liabilities, see the section entitled “Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings.”

Interest Rate Risk

We are exposed to interest rate risk on our fixed-rate long-term debt and our short-term variable rate bank and long-term debt. Our objective is to manage the impact of interest rate changes on earnings and cash flows and on the market value of our borrowings. We have a mix of fixed rate and variable rate borrowings. At September 30, 2006, we had $2.1 billion of fixed rate long-term debt and $267.9 million of short and long-term variable rate debt. The fixed rate long-term debt is exposed to fluctuations in fair value resulting from changes in market interest rates, but not earnings or cash flows. Our variable rate debt approximates fair value as it bears interest rates that approximate market, but changes in interest rates do affect future earnings and cash flows. Based on our short and long-term variable rate debt at September 30, 2006, of $267.9 million, a 100 basis point increase in interest rates would increase our quarterly interest expense by approximately $0.7 million.

Commodity Price Risk

We purchase significant amounts of energy, chemicals, wood fiber and recovered paper to supply our manufacturing facilities. These raw materials are market-priced commodities and, as such, are subject to fluctuations in market prices. Increases in the prices of these commodities will tend to reduce our reported earnings and decreases will tend to increase our reported earnings. From time to time, we may enter into contracts aimed at securing a stable source of supply for commodities such as timber, wood fiber, energy, chemicals and recovered paper. These contracts typically require us to pay the market price at the time of purchase. Thus under these contracts we generally remain subject to market fluctuations in commodity prices. In the third quarter of 2006, in order to mitigate some of our commodity price risk, specifically as it relates to natural gas price volatility, Bowater entered into financial hedges. For information on these energy hedges, see Note 13 to the Consolidated Financial Statements.

Item 4. Controls and Procedures.

(a)

Evaluation of Disclosure Controls and Procedures:

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2006. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in recording, processing, summarizing, and timely reporting information required to be disclosed in our reports to the Securities and Exchange Commission.

(b)

Changes in Internal Control over Financial Reporting:

In connection with the evaluation of internal control over financial reporting, there were no changes during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

BOWATER INCORPORATED

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

a.		Bowater is involved in various legal proceedings relating to contracts, commercial disputes, taxes, environmental issues, employment and workers’ compensation claims and other matters. We periodically review the status of these proceedings with both inside and outside counsel. We believe that the ultimate disposition of these matters will not have a material adverse effect on our financial condition, but it could have a material adverse effect on the results of operations in a given quarter or the year.

b.		There have been no material developments to those legal proceedings described in our annual report on Form 10-K filed on March 13, 2006 and our quarterly report on Form 10-Q filed on August 4, 2006.

BOWATER INCORPORATED

Item 6. Exhibits

(a)

Exhibits (numbered in accordance with Item 601 of Regulation S-K):


Exhibit No.		Description
4.1		Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement between Bowater Canadian Forest Products Inc. and Export Development Canada dated September 19, 2006.

10.1		Change in Control Agreement between Bowater Incorporated and W. Eric Streed, dated August 7, 2006

10.2		Change in Control Agreement between Bowater Incorporated and James T. Wright, executed on October 10, 2006, effective as of September 1, 2005

10.3		First Amendment to the Bowater Incorporated Outside Directors’ Stock-Based Deferred Fee Plan Effective as of May 11, 2005 dated October 10, 2006

10.4		Sixth Amendment to the Bowater Incorporated Retirement Plan for Outside Directors As Amended and Restated Effective February 26, 1999, dated October 10, 2006

10.5		Third Amendment to the Bowater Incorporated Compensatory Benefits Plan As Amended and Restated Effective February 26, 1999, dated October 10, 2006

10.6		Fourth Amendment to the Bowater Incorporated Benefits Equalization Plan as Amended and Restated Effective February 26, 1999, dated October 10, 2006

12.1		Statement regarding Computation of Ratio of Earnings to Fixed Charges.

31.1		Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

BOWATER INCORPORATED

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


		BOWATER INCORPORATED

		By		/s/ William G. Harvey William G. Harvey
				Executive Vice President and Chief
				Financial Officer

		By		/s/ Joseph B. Johnson Joseph B. Johnson
				Vice President and Controller

Dated: November 14, 2006

BOWATER INCORPORATED

INDEX TO EXHIBITS


Exhibit No.		Description
4.1		Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement between Bowater Canadian Forest Products Inc. and Export Development Canada dated September 19, 2006.

10.1		Change in Control Agreement between Bowater Incorporated and W. Eric Streed, dated August 7, 2006

10.2		Change in Control Agreement between Bowater Incorporated and James T. Wright, executed on October 10, 2006, effective as of September 1, 2005

10.3		First Amendment to the Bowater Incorporated Outside Directors’ Stock-Based Deferred Fee Plan Effective as of May 11, 2005 dated October 10, 2006

10.4		Sixth Amendment to the Bowater Incorporated Retirement Plan for Outside Directors As Amended and Restated Effective February 26, 1999, dated October 10, 2006

10.5		Third Amendment to the Bowater Incorporated Compensatory Benefits Plan As Amended and Restated Effective February 26, 1999, dated October 10, 2006

10.6		Fourth Amendment to the Bowater Incorporated Benefits Equalization Plan as Amended and Restated Effective February 26, 1999, dated October 10, 2006

12.1		Statement regarding Computation of Ratio of Earnings to Fixed Charges.

31.1		Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-4.1 2 g04270exv4w1.htm EXHIBIT 4.1 Exhibit 4.1

Exhibit 4.1

EDC TRANSACTION NO. SLA-0176

EXECUTION VERSION

DATED AS OF September 19, 2006

BOWATER CANADIAN FOREST PRODUCTS INC.

AND

EXPORT DEVELOPMENT CANADA

SOFTWOOD LUMBER AGREEMENT CASH DEPOSITS
PURCHASE AND SALE AGREEMENT

EDC TRANSACTION NO. SLA-0176

This SOFTWOOD LUMBER AGREEMENT CASH DEPOSITS PURCHASE AND SALE AGREEMENT dated as of September 19, 2006 (the “Agreement”) is made

BETWEEN

BOWATER CANADIAN FOREST PRODUCTS INC.
1000 de la Gauchetiére West
Suite 2820
Montréal, QC
H3B 4W5

(hereinafter called the “Seller”)

AND

EXPORT DEVELOPMENT CANADA,
a corporation established by an Act of the
Parliament of Canada, having its head office at
Ottawa, Canada
(hereinafter called “EDC”)

WHEREAS pursuant to the Softwood Lumber Agreement negotiated between the Government of Canada and the Government of the United States of America (as amended, the “Softwood Lumber Agreement”), United States Customs and Border Protection (“USCBP”) is required to liquidate certain entries of softwood lumber and, upon their liquidation, to refund cash deposits of countervailing duty and anti-dumping duties to the Seller as an importer of record, together with accrued interest on such cash deposits;

AND WHEREAS Annex 2C of the Softwood Lumber Agreement contemplates, among other things, that the Government of Canada or its agent will enter into an agreement with importers of record for the purchase of the designated cash deposits to be refunded by the USCBP and accrued interest on such deposits;

AND WHEREAS the Government of Canada has identified EDC as its agent for the purposes described in Annex 2C of the Softwood Lumber Agreement;

AND WHEREAS this Agreement is entered into to set out the terms and conditions on which EDC will purchase, and the Seller will sell, the right, title and interest of the Seller

- 2 -

in the designated cash deposits to be refunded to the Seller, together with the accrued interest on such cash deposits;

NOW THEREFORE in consideration of the mutual covenants herein set out, the parties hereto agree as follows:

ARTICLE I
DEFINITIONS

Section 1.01 — Definitions

In this Agreement, the following terms shall have the following respective meanings:

“ACH Agreement” has the meaning attributed to that term in the Softwood Lumber Agreement;

“AD Order” means the Anti-Dumping Duty Order published as Certain Softwood Lumber from Canada, 67 Fed. Reg. 36,068 (May 22, 2002), as amended;

“Business Day” means any day, other than a Saturday or Sunday, or a day that banks are lawfully closed for commercial banking business in Ottawa, Ontario, Canada or a day on which banks are not required or authorized to close in New York, New York, United States of America;

“CVD Order” means Countervailing Duty Order published as Certain Softwood Lumber from Canada, 67 Fed. Reg. 36,070 (May 22, 2002), as amended;

“Canadian Dollars” and “CDN” means the lawful currency of Canada;

“covered entries” has the meaning attributed to that tem in the Softwood Lumber Agreement;

“Dispute Rights” has the meaning attributed to that term in Section 3.03(a) hereof;

“Escrow Agent” means the U.S. financial institution designated by the Seller that has entered into the Escrow Agreement with the Seller to receive and disburse the Purchased Refund to EDC;

“Escrow Agreement” means the agreement entered into between the Seller, EDC and the Escrow Agent, to receive and disburse the Purchased Refund to EDC, substantially in the form attached as Schedule “D”;

- 3 -

“Event Of Default” has the meaning attributed to it in Section 7.01 hereof;

“Irrevocable Power of Attorney” means the power of attorney granted by the Seller to the Escrow Agent pursuant to the Escrow Agreement, substantially in the form attached as Exhibit “A” to the Escrow Agreement;

“knowledge” means actual knowledge;

“Overnight Federal Funds Rate” means for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates per annum on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York;

“Purchase Date” means the date specified as such in the Purchase Notice, which date must be a Business Day not later than one hundred and twenty (120) days after the date the conditions precedent in Section 5.01 hereof have been satisfied;

“Purchase Notice” means the notice substantially in the form attached hereto as Schedule “A” and which, once executed and delivered, shall form part of this Agreement, containing certain information completed by EDC, based upon information provided to EDC by USCBP, and sent by EDC to the Seller;

“Purchase Price” means the aggregate amount of the cash deposits and accrued interest up to and including the Purchase Date (but, for greater certainty, not including interest accruing after the Purchase Date) to which USCBP has determined the Seller is entitled as of the Purchase Date under the Softwood Lumber Agreement, as described in the Purchase Notice;

“Purchased Refund” means the aggregate amount of all cash deposits and accrued interest to which USCBP has determined the Seller is entitled under the Softwood Lumber Agreement, including accrued interest after the Purchase Date up to and including the liquidation date of the related covered entries;

“Seller Amount” means the Purchase Price specified in the Purchase Notice minus the US Interests Amount specified in the Purchase Notice;

“Softwood Lumber Agreement” has the meaning attributed to that term in the recitals hereto;

“US Dollars” and “USD” means the lawful currency of the United States of America;

“US Government” means the Government of the United States of America, including USCBP and other agencies and departments;

- 4 -

“US Interests” means the Coalition for Fair Lumber Imports, the binational industry council, and the meritorious initiatives foundation referred to in the Softwood Lumber Agreement; and

“US Interests Amount” means that portion of the Purchase Price as specified in the Purchase Notice that, pursuant to this Agreement, the Seller has irrevocably directed EDC to pay to the US Interests on its behalf, as computed by EDC in accordance with Section 3.01 (b) hereof.

Section 1.02 — Rules of Interpretation

(a)		The singular shall include the plural and vice versa.

(b)		References to a “person” shall be construed so as to include any individual, firm, company, corporation, government, state or agency of a state or political subdivisions thereof or any joint venture, association, partnership or unincorporated body of persons (whether or not having separate legal personality).

(c)		Whenever any person is referred to, such reference shall be deemed to include the permitted assignees and successors of such person, whether by operation of law, consolidation, merger, sale, amalgamation or otherwise as applicable.

(d)		References to a specified Article, Section or Schedule shall be construed as references to that specified Article or Section of, or Schedule to, this Agreement unless the context otherwise requires.

(e)		References to any agreement or other instrument shall be deemed to include such agreement or other instrument as it may from time to time be modified, amended, supplemented or restated in accordance with its terms and, where required hereunder, with the consent of EDC.

(f)		The terms “hereof’, “herein” and “hereunder” shall be deemed to refer to this Agreement.

(g)		The headings of the Articles and Sections are inserted for convenience only and shall not affect the construction or interpretation of this Agreement.

(h)		All schedules attached hereto are deemed to form a part of this Agreement

- 5 -

ARTICLE II
REPRESENTATIONS AND WARRANTIES

Section 2.01 — Representations and Warranties by Seller

(a) The Seller represents and warrants to EDC on the date hereof and is deemed to represent and warrant on and as of the Purchase Date, that:

	(i)		the Seller is a corporation duly incorporated and organized and validly existing under the laws of Canada and has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and the locations of its chief executive office and its places of business are as set forth on Schedule “E” hereto;

	(ii)		except as to any proceedings and “prior disclosures” made under .19 U.S.C. §1592, disclosed on Schedule “C” hereto, complete and accurate copies of which have been provided to EDC and none of which involved any fraud on the part of the Seller, there are no actions, petitions, suits or proceedings pending, or, to the best of the knowledge of the Seller, threatened against the Seller before any court, tribunal or administrative or governmental agency which, if adversely determined, would reasonably be expected to (i) adversely affect the Seller’s ability to perform its obligations under this Agreement or (ii) adversely affect EDC’s ability to acquire or receive payment in full of the Purchased Refund; and there are no judgments, decrees or orders of any court, tribunal or administrative or governmental agency against or relating to the Seller or any of its property or assets which, if adversely determined, would reasonably be expected to (i) adversely affect the Seller’s ability to perform its obligations under this Agreement; or (ii) adversely affect EDC’s ability to acquire or receive payment in full of the Purchased Refund;

	(iii)		except as to any proceedings and “prior disclosures” referenced in clause (ii)above, there are no disputes between the Seller and the US Government, and to the best of its knowledge, there are no other circumstances which would reasonably be expected to adversely affect (i) the Seller’s right to the Purchased Refund, or (ii) EDC’s ability to acquire or receive payment in full of the Purchased Refund;

	(iv)		subject to the sale, assignment and transfer contemplated by this Agreement, the Seller owns and has good and valid right and title to the Purchased Refund. Ownership of and good and valid right and title to the Purchased Refund shall vest in EDC pursuant to this Agreement after the delivery of the Seller Amount to Seller, free and clear of any lien, charge, security interest, or encumbrance of any nature whatsoever or of any other

- 6 -

			right, claim or interest of any third party and free and clear of all defenses, abatements, set-offs, counterclaims and deductions of any nature, except to the extent expressly permitted by EDC or otherwise contemplated hereby;

	(v)		the Seller has not previously sold, assigned or transferred any or all of its rights to collect duties on softwood lumber imports including any of its rights in respect of the Purchased Refund; and its rights to the Purchased Refund are, as of the Purchase Date, free and clear of any lien, charge, security interest, or encumbrance of any nature whatsoever or of any other right, claim or interest of any third party;

	(vi)		no Event of Default of the nature described in Section 7.01(a) or (b) and to the best of the Seller’s knowledge, after due inquiry, no Event of Default of the nature described in Section 7.01(c) has occurred and is continuing;

	(vii)		the Seller is in compliance with all laws applicable to it relating to anticorruption and bribery;

	(viii)		except as contemplated under the Softwood Lumber Agreement and this Agreement, and except for the filing of an ACH Agreement, to the best of the knowledge of the Seller, no consent, approval or authorization of, or declaration, registration, filing or qualification with, or giving of notice to, or taking of any other action in respect of, any governmental authority or agency on the part of the Seller is required in connection with the execution, delivery or enforcement of this Agreement or the Purchase Notice issued pursuant to this Agreement or the performance hereof or the consummation of any of the transactions contemplated thereof;

	(ix)		the execution and delivery of this Agreement and the performance of, and the compliance with the terms hereof by the Seller (i) do not contravene or conflict with its constating documents, by-laws or its resolutions; (ii) are not in violation of any law, statute, rule, regulation or ordinance of Canada or any political subdivision thereof; (iii) do not, as of the Purchase Date, conflict with, or result in any breach of or constitute default under any document, instrument or agreement to which it is a party to or by which it is bound or its properties or assets are bound; and (iv) will not result in or require the creation or imposition of any lien, charge, security interest, encumbrance or other right, claim or interest of any person other than EDC upon the Purchased Refund whether created or imposed at law or pursuant to the terms of any document, agreement or instrument to which the Seller is subject or by which it or any of its properties or assets are bound; and

	(x)		the Seller has taken all necessary action (corporate or otherwise) to authorize the execution, delivery and performance of this Agreement, and

- 7 -

this Agreement has been duly authorized, executed and delivered by the Seller.

(b)

EDC represents and warrants to the Seller on the date hereof and is deemed to represent and warrant on and as of the Purchase Date, that:

	(i)		EDC is a corporation duly established and validly existing under the laws of Canada; and

	(ii)		EDC has full power and authority to execute, deliver, and perform the terms and provisions of this Agreement, has taken all necessary action (corporate or otherwise) to authorize the execution, delivery and performance thereof, and this Agreement has been duly authorized, executed and delivered by EDC.

Section 2.02 — Disclaimer

SUBJECT TO THE PROVISIONS OF SECTION 10.7, THE PROVISIONS OF THIS AGREEMENT SHALL NOT COME INTO FORCE UNTIL SUCH DATE AS THE GOVERNMENT OF CANADA HAS CONFIRMED TO EDC THAT THE SOFTWOOD LUMBER AGREEMENT IS IN FULL FORCE AND EFFECT.

ARTICLE III
PURCHASE AND SALE

Section 3.01 — Seller Undertakings

(a) On and subject to and in accordance with the terms and conditions set forth herein and in the Purchase Notice, the Seller does hereby absolutely sell, assign and transfer to EDC all of its rights, title, benefits and ownership interests in and to the Purchased Refund, without recourse to the Seller except as specifically provided for in Section 3.02(e) and Section 7.02, and subject to Seller’s right of protest as set forth in Section 3.03(a), such sale being conclusively completed upon the sending of the Purchase Notice by EDC and payment of the Purchase Price as provided in Section 3.02 below, without any further act or formality whatsoever.

(b) The Seller hereby irrevocably directs EDC, pursuant to the Softwood Lumber Agreement, to pay to the US Interests out of the Purchase Price the Seller’s applicable pro rata share of the USD 1 billion to be paid to the US Interests (the “US Interests Amount”) as set out in the Purchase Notice. The Seller’s applicable pro rata share shall be computed by multiplying the Purchase Price by a fraction (i) the numerator of which is USD 1 billion and (ii) the denominator of which is the aggregate amount of all duties and

- 8 -

accrued interest payable to all importers of record, as calculated and provided by USCBP under the AD Order and the CVD Order as of the date of entry into force of the Softwood Lumber Agreement.

(c) It is the understanding of the parties that, pursuant to the Softwood Lumber Agreement, and providing it is in fill force and effect, the Government of Canada shall pay to the US Interests any difference between the USD 1 billion and the aggregate amount which importers of record have directed EDC to pay to US Interests.

(d) The Seller waives any rights it may have against EDC for payment other than as set out in the Purchase Notice and any and all rights to contest the amounts of the Purchased Refund with EDC, provided that the information in the Purchase Notice is consistent with information received by EDC from USCBP in respect of the entries and accrued interest for covered entries, up to and including the Purchase Date.

(e) The Seller shall enter into an ACH Agreement, Irrevocable Power of Attorney, Escrow Agreement and any other documents that EDC may reasonably request the Seller to provide to facilitate the payment of the Purchased Refund to EDC.

(f) The Seller agrees and acknowledges that (i) EDC may perform its obligations and effect its rights hereunder and in respect of the Purchased Refund by or through agents, employees or attorneys-in-fact, and (ii) EDC may assist generally in the selection of agents or other third parties for purposes of effecting and consummating the transactions contemplated by the Softwood Lumber Agreement, the Escrow Agreement, this Agreement and the other agreements and documents contemplated hereby and thereby.

Section 3.02 — Purchase and Sale Procedures

Operation of Facility

(a)		It is acknowledged and agreed by the parties hereto that the Purchased Refund shall be purchased by EDC and sold by the Seller pursuant to this Agreement and the Purchase Notice.

(b)		EDC shall deliver to the Seller, by facsimile or other electronic means, with a completed Purchase Notice based on data concerning cash deposit amounts and accrued interest up to arid including the Purchase Date provided to EDC by USCBP and the Seller hereby acknowledges and agrees that it accepts such amounts for purposes of this Agreement. The Purchase Notice shall specify the Purchase Price and the Purchase Date.

(c)		If EDC has delivered the Purchase Notice to the Seller, EDC shall purchase the Purchased Refund on the Purchase Date for an amount equal to the Purchase Price

- 9 -

		as specified in the Purchase Notice and subject to the terms and conditions of this Agreement.

(d)		Upon payment of the Seller Amount by EDC to the Seller on the Purchase Date, all right, title and interest of the Seller in and to the Purchased Refund shall immediately be deemed to be assigned, transferred and sold to EDC, as an absolute sale (and not as security), and all of Seller’s right, title and interest in and to the Purchased Refund shall indefeasibly and irrevocably vest in EDC automatically without the necessity of any further instrument or formality, conveyance, transfer or assignment thereof to EDC.

(e)		(i) In the event that the amount of the Purchased Refund paid to EDC (excluding any accrued interest on the Purchased Refund from the Purchase Date to the liquidation date of the related covered entries) is less than the Purchase Price, the Seller shall pay EDC, promptly upon receipt of a written request by EDC, the amount of any such shortfall amount plus the interest thereon calculated at the rate per annum used by USCBP from the Purchase Date to the date of receipt by EDC of such amount less the US Interests applicable pro rata share of the shortfall amount. The US Interests applicable pro rata share of the shortfall amount shall be computed by multiplying the shortfall amount by a fraction (i) the numerator of which is USD 1 billion and (ii) the denominator of which is the aggregate amount of all duties and accrued interest payable to all importers of record, as calculated and proved by USCBP under the AD Order and the CVD Order as of the date of entry into force of the Softwood Lumber Agreement.

		(ii) In the event that the Purchased Refund is liquidated prior to the Purchase Date set forth in the Purchase Notice, the Seller shall pay to EDC the difference between (i) an amount equal to the interest that USCBP would have paid for the period from the liquidation date to and including the Purchase Date and (ii) an amount equal to interest at the Overnight Federal Funds Rate on the Purchased Refund for the period from the liquidation date to and including the Purchase Date.

(f)		(iii) In the event that EDC or the Escrow Agent is required to return to USCBP any portion of the Purchased Refund, the Seller shall pay to EDC or the Escrow Agent, promptly upon a written request by EDC, the amount of such remittance, together with interest thereon from the date of such remittance at the Overnight Federal Funds Rate less the US Interests applicable pro rata share of the remittance. The US Interests applicable pro rata share of the remittance shall be computed by multiplying the remittance by a fraction (i) the numerator of which is USD 1 billion and (ii) the denominator of which is the aggregate amount of all duties and accrued interest payable to all importers of record, as calculated and proved by USCBP under the AD Order and the CVD Order as of the date of entry into force of the Softwood Lumber Agreement.

- 10 -

Section 3.03 — Discrepancies and Disputes

	(a)		Nothing in this Agreement will constitute or be interpreted as a waiver or any other relinquishment by the Seller of any right it may have to protest or otherwise dispute with USCBP or any other applicable department or agency of the US Government that the amount of any cash deposit to be refunded in respect of any covered entry or the calculation of accrued interest thereon (any and all such rights herein called “Dispute Rights”) in order to increase such amount. The Seller will deal directly with USCBP or such other applicable department or agency of the US Government_. in exercising and settling any Dispute Right, and any additional amount payable by the US Government to the Seller in respect of any disputed covered entry shall be paid directly to the Seller and shall constitute property of the Seller.

	(b)		The exercise of any Dispute Right by the Seller shall not impair, restrict or otherwise affect the rights or obligations of EDC or the Seller under this Agreement.

Section 3.04 — No Assumption of Obligations

Notwithstanding any other agreement between EDC and the Seller to the contrary EDC shall not assume or be liable for any actions whatsoever the Seller is required to take under the Softwood Lumber Agreement or otherwise in connection with this Agreement, including without limitation, any breach by the Seller of any such agreement, or any representation or warranty made by the Seller, arising by operation of law or otherwise.

ARTICLE IV
PLACE AND MANNER OF PAYMENT

Section 4.01 — Place and Manner of Payment

All Seller Amount payments to be made by EDC to the Seller as provided for hereunder shall be made in US Dollars, to the account specified in the Seller’s payment instructions provided pursuant to Section 5.01(c)(vi) hereof, and all US Interests Amount payments to be made by EDC as directed by the Seller shall be made in US Dollars to the three escrow accounts identified by the US Government under the Softwood Lumber Agreement.

- 11 -

ARTICLE V
CONDITIONS PRECEDENT

Section 5.01 — Conditions Precedent in Favour of EDC

EDC shall have no obligation to purchase the Purchased Refund pursuant to the terms hereof until, and it shall be a condition precedent to such purchase that, each of the following conditions shall be fulfilled to the reasonable satisfaction of EDC in its sole discretion (provided, however, that it is agreed that these conditions are inserted for the sole benefit of EDC and may be waived in whole or in part by EDC with or without conditions).

(a)		EDC shall have received, within ten (10) days after the date of entry into force of the Softwood Lumber Agreement, the documentation from USCBP as to the amount of the covered entries and’ accrued interest necessary to enable EDC to complete the Purchase Notice.

(b)		Prior to September 27, 2006, EDC shall have received the following:

	(i)		this Agreement, including a duly completed Schedule “E”, executed by the Seller;

	(ii)		copy of the ACH Agreement provided to USCBP, as executed by the Seller;

	(iii)		copy of the Escrow Agreement executed by the Seller and the Escrow Agent; and

	(iv)		copy of the Irrevocable Power of Attorney, executed by the Seller.

(c)

Prior to the Purchase Date, EDC shall have received the following:

	(i)		the favourable legal opinion of counsel to the Seller substantially in the form of Schedule “B”;

	(ii)		a duly completed Schedule “C” satisfactory to EDC;

	(iii)		the favourable legal opinions of counsel to EDC, in form and substance satisfactory to EDC;

	(iv)		duly completed and executed forms prepared by external counsel to EDC for filing under the personal property security regime or other applicable similar regime in the applicable jurisdiction(s), together with any search reports conducted by external counsel to EDC and satisfactory .to EDC;

- 12 -

	(v)		evidence of the release of any lien, charge, hypothec, mortgage or other encumbrance or any nature whatsoever applicable to the Purchased Refund;

	(vi)		the Seller’s payment instructions;

	(vii)		a certificate of incumbency from the Seller certifying the authority of the person or persons who has or have, on behalf of the Seller, signed this Agreement, the Escrow Agreement, the Irrevocable Power of Attorney and the ACH Agreement; and

	(viii)		such other documents as EDC may reasonably require to effectuate the purposes of this Agreement.

(d)

On and as of the Purchase Date:

	(i)		this Agreement, and the documents referred to in Section 5.01(a) (b) and (c), shall not have been terminated;

	(ii)		the Softwood Lumber Agreement is in full force and effect; and

	(iii)		the representations and warranties of the Seller shall be true and correct on and as of such date and there shall not exist or be continuing any Event of Default.

Section 5.02 — Conditions Precedent in Favour of the Seller

The Seller shall have no obligation to sell the Purchased Refund pursuant to the terms of this Agreement unless, and it shall be a condition precedent to such sale that:

(a)		this Agreement has not been terminated; and

(b)		the Softwood Lumber Agreement is in full force and effect.

- 13 -

ARTICLE VI
COVENANTS

Section 6.01 — Covenants of the Seller

The Seller covenants and agrees with EDC, from and after the date hereof and so long as any part of the Purchased Refund has yet to be paid to EDC, that it shall:

(a)		not commence any action against the US Government which EDC determines is likely to adversely affect EDC’s rights with respect to the Purchased Refund, without EDC’s consent;

(b)		take all steps and all actions as may be reasonably required or reasonably deemed advisable by EDC to perfect or more fully evidence EDC’s rights, title, benefits and ownership interests in the Purchased Refund purchased by it hereunder;

(c)		not make or consent to any modification or amendment or waive any term or condition which would affect the payment terms for or reduce the amount of the Purchased Refund or agree to any amendment or modification or termination of any document referred to in Section 3.01 (e) hereof, in each case without EDC’s prior written consent;

(d)		notify EDC, immediately, upon becoming aware of the occurrence of any event or circumstance which has adversely affected, or is likely to adversely affect the Seller’s ability to perform all or any of its obligations hereunder;

(e)		not grant or assign to any person other than EDC or, on or after the Purchase Date, suffer to exist any lien, charge, security interest, or other encumbrance of any nature whatsoever or other right, claim or interest of any third party on all or any part of the Purchased Refund, and shall not do anything or take any action to prejudice any of the rights created hereunder or purported to be created hereunder in favor of EDC;

(f)		forthwith advise EDC in writing of the occurrence or existence of any Event of Default or any event or circumstance that, with the passage of time, the giving of notice or both, would constitute an Event of Default of which the Seller may be or become aware and of the acts being taken by the Seller to remedy such Event of Default;

(g)		maintain its corporate existence and maintain all material authorizations, consents and approvals required to own its properties and assets and carry on its business and to perform its obligations hereunder; and

- 14 -

(h)

at the request and expense of EDC take all necessary steps, including instituting proceedings itself (or assisting EDC in the conduct of any such proceedings instituted by EDC) for the purpose of collecting payment of all or any part of the Purchased Refund purchased by EDC under this Agreement.

Section 6.02 — Seller’s Reservation

The Seller reserves the right to protest to USCBP the amount of any cash deposits and accrued interest due from USCBP as provided in Section 3.03(a) hereof. The parties hereto acknowledge and agree that in the event that the aggregate amount paid to EDC for the Purchased Refund is greater than the sum of (i) the Purchase Price set forth in the relevant Purchase Notice delivered to Seller hereunder and (ii) interest accrued with respect to the covered entities after the Purchase Date, to and including the receipt of payment by EDC, Seller shall be entitled to receive from EDC the amount of such excess, together with interest thereon at the Overnight Federal Funds Rate up to, but not including, the date on which EDC remits the same to the Seller.

ARTICLE VII
EVENTS OF DEFAULT

Section 7.01- Events of Default

The occurrence of any one or more of the following events or circumstances shall constitute a default (each an “Event of Default”) by the Seller under this Agreement:

(a)		if any representation or warranty made by the Seller in this Agreement or in any document, opinion of Seller’s counsel or certificate or other instrument furnished in connection with this Agreement, or any such document, opinion or certificate, shall prove to have been materially incorrect when made or deemed to be made which, in the reasonable opinion of EDC, is likely to materially and adversely affect (i) the Seller’s ability to perform all or any of its obligations under this Agreement or (ii) EDC’s ability to acquire or receive payment in full of the Purchased Refund and, if capable of being remedied, is not remedied within 30 days after notice by EDC to Seller to do so;

(b)		the failure by the Seller to perform any of its material obligations under this Agreement; and

(c)		any other event occurs or circumstances arise (including any changes, modifications, amendments to any of the representations or warranties set out in Section 2.01 or if the Seller is unable to make any such representations or warranties) which, in the reasonable opinion of EDC, is likely to materially and adversely affect (i) the Seller’s ability to perform all or any of obligations under

- 15 -

this Agreement or (ii) EDC’s ability to acquire or receive payment in full of the Purchased Refund and, if capable of being remedied, is not remedied within 30 days after notice by EDC to Seller to do so.

Section 7.02 — Remedies

Without limiting any other remedy or recourse otherwise available to EDC by law or contract, upon the occurrence of an Event of Default under Section 7.01(a), (b), or (c), EDC may by written notice to the Seller terminate this Agreement and be entitled to the return of the Purchase Price with interest thereon at the Overnight Federal Funds Rate for the period from the Purchase Date to and including the date of such return of the Purchase Price and, in such event, EDC shall sell back, re-assign, re-transfer and return to the Seller (i) all the rights, title, benefits and ownership interests in and to the Purchased Refund as and to the extent sold, assigned and transferred by the Seller to EDC pursuant to Section 3.01(a) hereof and as and to the extent then outstanding and (ii) the amount of all payments, if any, of any part of the Purchased Refund received by EDC (the “Paid Amount”), the parties agreeing to automatic set-off between the Purchase Price and the Paid Amount, if any.

ARTICLE VIII
COSTS AND EXPENSES

Section 8.01 — Costs and Expenses

(a) EDC will be responsible for:

	(i)		all costs and expenses incurred by it in connection with the negotiation, preparation and execution of this Agreement (including legal fees and expenses of EDC’s counsel but excluding legal fees and expenses of the Seller’s counsel or counsel for any industry association);

	(ii)		all of EDC’s costs of administration of this Agreement, including costs associated with obtaining information from USCBP and costs and legal expenses relating to the filing, recording or registration of documents under personal property security or other legislation in any jurisdiction to document, perfect or protect EDC’s rights in respect of the Purchased Refund; and

	(iii)		all reasonable fees and expenses of the Escrow Agent and other reasonable costs and expenses of the Escrow Agent relating to the Escrow Agreement.

- 16 -

(b) The Seller will be responsible for all reasonable out-of-pocket expenses of EDC (including reasonable legal fees and disbursements of external counsel but excluding costs of ordinary administration) in connection with any amendment requested by Seller of, preservation of rights under, or enforcement of this Agreement.

(c) All expenses for which the Seller is responsible under paragraph (b) above will be payable to EDC in Canadian Dollars or US Dollars no later than ten (10) Business Days after EDC’s request for payment (with reasonable supporting documents).

(d) The Seller agrees to indemnify and hold harmless EDC from and against any and all liabilities or damages, including, but not limited to, reasonable costs and expenses of litigation such as counsel fees, resulting from third party claims relating to or arising from any breach of the provisions of this Agreement by the Seller, including, but not limited to, a breach of the Seller’s representations and warranties contained herein.

ARTICLE IX
NOTICE

Section 9.01 — Notice

All demands, notices and other communications provided for hereunder shall be in writing and sent by registered mail, commercial courier, telefax or any other electronic mail service or delivered in person and shall be deemed to have been given and received, if delivered in person, upon delivery, if sent by registered mail, the third Business Day following the date of mailing, and, if transmitted by telefax, or any other electronic mail service, the Business Day following the date of transmission. The mailing address and telefax numbers of each of the parties for such purposes shall respectively be:

For the Seller,

BOWATER CANADIAN FOREST PRODUCTS INC.
1000 de la Gauchetiére West
Suite 2820
Montréal, QC
H3B 4W5

Attention: Linda Gauvin

Telefax: 514-954-2167

Email: gauvinl@bowater.com

- 17 -

For EDC,

EXPORT DEVELOPMENT CANADA
151 O’Connor Street
Ottawa, Canada K1A 1K3

Attention: Softwood Lumber Agreement

Loans Services

Telefax: 1-877-336-5464

Email: softwood.lumber@edc.ca

or such other address or numbers as to which either party may, but upon not less than ten (10) Business Days prior written notice from time to time notify the other.

ARTICLE X
MISCELLANEOUS

Section 10.01 — Further Assurances

The Seller and EDC hereby agree to do such further acts and things, and to execute and deliver to the other party such additional consents and instruments, as may be reasonably required or deemed advisable to carry into effect the purposes of this Agreement.

Section 10.02 — Entire Agreement

Except as expressly contemplated or provided herein, this Agreement, including without limitation, all Schedules and the Purchase Notice, constitutes the whole and entire agreement between the parties and cancels and supersedes any prior agreements, undertakings, declarations, representations, written or verbal, relating to the subject matter hereof. None of the terms hereof shall be modified except by instrument in writing, duly signed by each of the parties, and in the case of any amendment or modification to Section 3.01(c) with the consent of the Government of Canada and the Government of the United States of America.

Section 10.03 — Governing Law

This Agreement shall be governed by, and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and the Seller hereby irrevocably submits to the non-exclusive jurisdiction of the Courts of the Province of Ontario.

- 18 -

Section 10.04 — Successors and Assigns

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Seller may not assign (other than as collateral security) nor transfer all or any part of its rights or obligations hereunder without the prior written consent of EDC.

Section 10.05 — Counterparts

This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same instrument.

Section 10.06 — Confidentiality

EDC will not disclose the Purchase Notice, or any information provided to EDC of the type referenced in Section 2.01(a)(ii) hereof, to any third party without the prior written consent of the other party, except to the Escrow Agent and to the respective employees, officers, directors of EDC and the Escrow Agent, and to their respective legal and financial advisors on a “need to know basis” (on the condition that any such financial advisor agree in writing not to disclose such terms). The obligation of EDC to maintain confidentiality of such matters shall be subject to the requirements of applicable law, regulation or legal process and of Canada’s international commitments, including without limitation, in respect of the WTO Agreement on Subsidies and Countervailing Measures. EDC shall also be entitled to disclose any matters in relation to the transaction contemplated herein to the Government of Canada and the Auditor General of Canada and to make publicly available the following information, required for the purpose of EDC’s Disclosure Policy: the name of the Seller; the service provided by EDC (i.e. “Purchase of Purchased Refund”) under such Agreement; and a general description of the commercial transaction under the Agreement.

Section 10.07 — Automatic Termination

The parties agree that this Agreement shall automatically terminate, without either party taking any further action, should the Softwood Lumber Agreement not come into full force and effect by March 31, 2007.

Section 10.08 — Language

The parties agree that it is their express wish that this Agreement and Schedules be drawn up and signed in the English language only. Les parties aux présentes conviennent que

- 19 -

c’est leur volonté expresse que la présente convention et les annexes soient rédigées et signées en langue anglaise seulement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers duly authorized as of the date first above written.

BOWATER CANADIAN FOREST PRODUCTS INC.


By: Vice-President		By: Vice-President

Signature:	/s/ Pierre Monahan	Signature:	/s/ Linda Gauvin

(Print Name):	Pierre Monahan	(Print Name):	Linda Gauvin

EXPORT DEVELOPMENT CANADA

By:

Signature:
(Print Name):

- 20 -

EXPORT DEVELOPMENT CANADA


By:		/s/ Stephen Davis

		Name: Stephen Davis
		Title: Senior Risk Transfer Manger

By:		/s/ Hal Miller

		Name: Hal Miller
		Title: Manager, Small Business Product Solutions

- 20 -

Schedule “A” to the Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement dated as of BLANK made between EDC and [Seller-IOR].

SCHEDULE “A”

PURCHASE NOTICE

[INSERT DATE]

TO: [Seller Name]


RE:		Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement dated as of [insert date], between EDC and [Seller-IOR] (the “Agreement”)

We hereby notify you that EDC will purchase, pursuant to and subject to all the terms and conditions of the Agreement, the Purchased Refund on the Purchase Date for the Purchase Price set forth below and confirm that EDC will pay to the Seller the Seller Amount and pay to the US Interests, the US Interest Amount on Seller’s behalf, in accordance with the Agreement:

Duties Paid by the Seller

Accrued Interest

Purchase Price

US Interests

Seller Amount

up to and including

(sum of column 1

Amount (portion of

(portion of

Purchase

Seller’s

[BLANK]

the Purchase Date

and column 2)

Purchase Price)

Date

wire Instructions

All capitalized teens used herein and not otherwise defined have the meanings given to them in the Agreement.

Dated the day of , .

EXPORT DEVELOPMENT CANADA

By:
Name:
Title:

-21-

By:
Name:
Title

- 22 -

Schedule “B” to the Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement dated as of BLANK made between EDC and BLANK.

OPINION OF COUNSEL TO SELLER

To: Export Development Canada
151 O’Connor Street
Ottawa, Ontario K1A 1K3

Attention: Risk Transfer

      Citibank, N.A. as Escrow Agent
      388 Greenwich Street (14^thFloor)
      New York, NY 10013
      Attention:

Dear Sirs/Mesdames:


Re:		Purchase by Export Development Canada (“EDC”) of certain of Payment Obligations to BLANK (the “Seller”) under the Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement dated as of [] between EDC and the Seller (the “Purchase and Sale Agreement”).


		EDC Transaction No. SLA-BLANK

In my capacity as legal counsel to the Seller, I have been asked to give an opinion to EDC and the Escrow Agent in connection with the purchase by EDC of certain obligations owed to the Seller under the Purchase and Sale Agreement.

For the purposes of my opinion, I have reviewed original executed copies or copies certified to my satisfaction of the following:

(a)		the Purchase and Sale Agreement;

(b)		the form of Purchase Notice from EDC to the Seller annexed to the Purchase and Sale Agreement, in respect of the purchase of certain Purchased Refunds under the Agreement (the “Purchase Notice”);

(c)		corporate documentation of Seller required to authorize the Seller to enter into the Agreements (true copies of such documents are attached hereto);

(d)		Escrow Agreement;

- 23 -

(e)		Irrevocable Power of Attorney;

(f)		the ACH Agreement; and

(g)		[other relevant documents and laws].

I have also examined such other documents as I have considered necessary or desirable in order that I may give this opinion.

Expressions defined in the Purchase and Sale Agreement shall have the same meaning when used in this opinion and every reference to “Agreements” shall be deemed to refer to the Purchase and Sale Agreement as executed by the Seller and EDC as well as the Purchase Notice, the Escrow Agreement, the ACH Agreement and the Irrevocable Power of Attorney.

I am of the opinion that:

1.		the Seller is a [corporation/partnership/other] duly [incorporated] and organized and validly existing under the laws of BLANK;

2.		the Seller has full power and authority to execute, deliver and perform the terms and provisions of the Agreements, has taken all necessary action (corporate or otherwise) to authorize the execution, delivery and performance of the Agreements to which it is a party, and such Agreements have been duly authorized, executed and delivered by the Seller;

3.		the execution and delivery of the Agreements to which it is a parry and the performance of, and the compliance with the terms thereof:

	(i)		do not contravene or conflict with its constating documents, by-laws or its resolutions;

	(ii)		are not in violation of any law, statute, rule, regulation or ordinance of [Canada/the United States] or [insert relevant province or state]; and

	(iii)		do not require any consents or approvals of any governmental authority or agency of [Canada) the United States] or [relevant province/state] whatsoever.

This opinion is given for the benefit of EDC and the Escrow Agent and may not be relied upon by anyone else other than EDC and the Escrow Agent and this opinion is limited to

- 24 -

the matters stated herein and does not extend to and is not to be read as extending by implication to any other matters not specifically referred to herein.

Yours truly

By:

- 25 -

Schedule “C” to the Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement dated as of BLANK made between EDC and [Seller-IOR].

Disclosures of 19 U.S.C. § 1592 proceedings, including “prior disclosures”

Description

NONE

- 26 -

Schedule “D” to the Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement dated as of BLANK made between EDC and [Seller-IOR].

ESCROW AGREEMENT

- 27 -

Schedule “E” to the Softwood Lumber Agreement Cash Deposits Purchase and Sale Agreement dated as of BLANK made between EDC and [Seller-IOR].

LOCATIONS OF SELLER’S CHIEF EXECUTIVE OFFICE AND PLACES OF
BUSINESS

See attached

SCHEDULE “E” TO THE SOFTWOOD LUMBER AGREEMENT
CASH DEPOSITS PURCHASE AND SALE AGREEMENT
DATED AS OF
BETWEEN EDC AND BOWATER CANADIAN FOREST PRODUCTS INC.

Bowater Canadian Forest Products Inc.
Chief Executive Office :
1000 De La Gauchetiere St. West
Suite 2820
Montreal, QC H3B 4W5

Places of business:
79Main St.
Gatineau, QC J8P 4X6

168-170 Principale St.
Maniwak i, QC J9E 1Z7

200 Dequen St.
Dolbeau-Mistassini, QC G8L 5M8

1 –4th Avenue
Dolbeau-Mistassini, QC G8L 2R4

1 Laberge St.
St. Felicien, QC G8K 2R7

1 Notre Dame St.
Donnacona, QC G3M 1E7

2001 Neebing Ave.
Thunder Bay, ON P7E 6S3

256 Darrel Ave.
Thunder Bay, ON P75 1L7

Affiliates

Bowater Mitis Inc.
Chief Executive Office :
1 Mitis St.
Price, QC GOJ 1Z0

Places of business:
2977 St. Joseph Rd N.
Girardville, QC GOW 1RO

Bowater Mersey Inc.
Chief Executive Office :
3691 Highway #3
Liverpool, NS BOT 1KO

Places of business:
283 Oakhill Rd.
Bridgewater, NS B4V 3J5

EX-10.1 3 g04270exv10w1.htm EXHIBIT 10.1 Exhibit 10.1

Exhibit 10.1

CHANGE IN CONTROL AGREEMENT

THIS AGREEMENT, made as of the 7th day of August 2006, by and between Bowater Incorporated, a Delaware corporation having a mailing address of 55 East Camperdown Way, P.O. Box 1028, Greenville, South Carolina 29602 (the “Corporation”), and W. Eric Streed of 5234 Kimblewick Cove, Dunwoody, Georgia 30338 (the “Executive”).

WHEREAS, the Corporation considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and

WHEREAS, the uncertainty attendant to a Change in Control of the Corporation may result in the departure or distraction of management personnel to the detriment of the Corporation and its stockholders; and

WHEREAS, the Board of Directors of the Corporation (the “Board”) has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Corporation’s management, including Executive, to their assigned duties in the event of a Change in Control of the Corporation.

NOW THEREFORE, it is hereby agreed as follows:

DEFINITIONS

The following terms shall have the meanings assigned to them below:

	(a)		“Accrued Compensation” shall mean all amounts earned or accrued through the Termination Date but not paid as of the Termination Date including (i) the Base Amount, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Corporation during the period ending on the Termination Date, (iii) vacation pay, and (iv) any bonus award with respect to the Corporation’s fiscal year ended prior to the Termination Date.

	(b)		“Acquiring Person” shall mean the Beneficial Owner, directly or indirectly, of securities representing 20% or more of the combined voting power of the Corporation’s then outstanding securities, not including (except as provided in clause (i) of the next sentence) securities of such Beneficial Owner acquired pursuant to an agreement allowing the acquisition of up to and including 50% of such voting power approved by two-thirds of the members of the Board who are Board members before the Person becomes Beneficial Owner, directly or indirectly, of securities representing 5% or more of the combined voting power of the Corporation’s then outstanding securities. Notwithstanding the foregoing, (i) securities acquired pursuant to an agreement described in the preceding sentence will be included in determining whether a Beneficial Owner is an Acquiring Person if, subsequent to the approved acquisition, the Beneficial Owner acquires 5% or more of such voting power other than pursuant to such an agreement so approved; and (ii) a Person shall not be an Acquiring Person if such

			Person is eligible to and files a Schedule 13G under the Exchange Act with respect to such Person’s status as a Beneficial Owner of all securities of the Corporation of which the Person is a Beneficial Owner.

	(c)		“Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date hereof.

	(d)		“Base Amount” shall mean the greater of (i) the Executive’s annual base salary at the rate in effect immediately prior to the Change in Control and (ii) the Executive’s annual base salary at the rate in effect on the Termination Date.

	(e)		“Beneficial Owner” of securities shall mean (i) a Person who beneficially owns such securities, directly or indirectly, or (ii) a Person who has the right to acquire such securities (whether such right is exercisable immediately or only with the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, warrants, options or otherwise.

	(f)		“Bonus Amount” shall mean an amount equal to the Executive’s target amount (100% times salary grade bonus percentage times base salary) under the Corporation’s annual or other short term cash incentive plans in effect immediately prior to the Change in Control for the fiscal year in which the Change in Control occurred or, if higher, the target amount under such plans in effect at the Termination Date based on the Executive’s then base salary and position.

	(g)		“Cause” shall mean and be limited to the Executive’s gross negligence, willful misconduct or conviction of a felony, which has a demonstrable and material adverse effect upon the Corporation; provided that if Cause exists by virtue of the Executive’s gross negligence or willful misconduct that is capable of being cured, the Corporation shall give the Executive written notice of the alleged negligence or misconduct and if the Executive cures the negligence or misconduct within thirty (30) days after receipt of the notice, such Cause shall cease to exist and the Corporation shall not terminate the Executive’s employment therefor. The Executive shall be deemed to have been terminated for Cause as of the effective date stated in a Notice of Termination delivered by the Corporation to the Executive, which shall not be delivered before the end of the thirty (30) day period described in the preceding sentence, if applicable. The Notice of Termination must be accompanied by a certified copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the membership of the Board after reasonable notice to the Executive and an opportunity for the Executive, with the Executive’s counsel present, to be heard before the Board, finding that, in the good faith opinion of the Board, the

			Executive was guilty of conduct constituting Cause hereunder and setting forth in reasonable detail the facts and circumstances claimed to provide the basis for the Executive’s termination.

	(h)		“Change in Control” shall be deemed to have occurred upon:

	(i)		the date that any Person is or becomes an Acquiring Person;

	(ii)		the date that the Corporation’s stockholders approve a merger, consolidation or reorganization of the Corporation with another corporation or other Person, unless, immediately following such merger, consolidation or reorganization, (A) at least 50% of the combined voting power of the outstanding securities of the resulting entity would be held in the aggregate by the stockholders of the Corporation as of the record date for such approval (provided that securities held by any individual or entity that is an Acquiring Person, or who would be an Acquiring Person if 5% were substituted for 20% in the definition of such term, shall not be counted as securities held by the stockholders of the Corporation, but shall be counted as outstanding securities for purposes of this determination), or (B) at least 50% of the board of directors or similar body of the resulting entity are Continuing Directors;

	(iii)		the date the Corporation sells or otherwise transfers all or substantially all of the Corporation’s assets to another corporation or other Person, unless, immediately following such sale or transfer, (A) at least 50% of the combined voting power of the outstanding securities of the acquiring entity would be held in the aggregate by the stockholders of the Corporation as of the record date for such approval (provided that securities held by any individual or entity that is an Acquiring Person, or who would be an Acquiring Person if 5% were substituted for 20% in the definition of such term, shall not be counted as securities held by the stockholders of the Corporation, but shall be counted as outstanding securities for purposes of this determination), or (B) at least 50% of the board of directors or similar body of the acquiring entity are Continuing Directors; or

	(iv)		the date on which less than 50% of the total membership of the Board consists of Continuing Directors.

	(i)		“Code” shall mean the United States Internal Revenue Code of 1986, amended.

	(j)		“Continuing Directors” shall mean any member of the Board who (i) was a member of the Board immediately prior to the date of the event that would constitute a Change in Control, and any successor of a Continuing Director while such successor is a member of the Board, (ii) who is not an Acquiring Person or

			an Affiliate or Associate of an Acquiring Person and (iii) is recommended or elected to succeed the Continuing Director by a majority of the Continuing Directors.

	(k)		“Corporation” shall mean Bowater Incorporated; provided that, if the Executive is employed by a subsidiary of the Corporation, “Corporation” shall mean such subsidiary of the Corporation for purposes of references to the Executive’s compensation and benefits, and the plans, programs and arrangements pursuant to which compensation and benefits are provided.

	(l)		“Disability” shall mean a physical or mental condition that is defined as a disability in the Corporation’s long term disability insurance plan covering the Executive immediately prior to the Change in Control.

	(m)		“Employer Match” shall mean an amount equal to the maximum matching contribution the Corporation could have made (regardless of actual circumstances) on the Executive’s behalf to the Corporation’s Statutory and non-Statutory defined contribution or savings plans for the fiscal year in which the Change in Control occurred, or, if higher, the maximum matching contribution the Corporation could have made for the fiscal year in which the Executive’s employment terminated.

	(n)		“Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended.

	(o)		“Good Reason” shall mean:

	(i)		a change in the Executive’s status, title, position or responsibilities (including in reporting line relationships) that, in the Executive’s reasonable judgment, represents a substantial adverse change from the Executive’s status, title, position or responsibilities as in effect at any time within one hundred eighty (180) days preceding the date of a Change in Control or at any time thereafter; the assignment to the Executive of any duties or responsibilities that, in the Executive’s reasonable judgment, are inconsistent with the Executive’s status, title, position or responsibilities as in effect at any time within one hundred eighty (180) days preceding the date of a Change in Control or any time thereafter; or any removal of the Executive from or failure to reappoint or reelect the Executive to any office or position held prior to the Change in Control, except in connection with the termination of the Executive’s employment for Disability, Cause, as a result of the Executive’s death or by the Executive other than for Good Reason;

	(ii)		the failure by the Corporation to provide the Executive with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities which opportunities will be evaluated in light of the performance requirements therefor) to those provided for under the

			employee compensation and benefit plans, programs and practices in which the Executive was participating at any time within one hundred eighty (180) days preceding the date of a Change in Control or at any time thereafter;

	(iii)		the reduction of the Executive’s salary as in effect on the date of the Change in Control or any time thereafter;

	(iv)		a failure by the Corporation to obtain from any Successor its assent to this Agreement contemplated by Section 10 hereof; or

	(v)		the relocation of the principal office at which the Executive is to perform services on behalf of the Corporation to a location more than thirty-five (35) miles from its location immediately prior to the Change in Control or a substantial increase in the Executive’s business travel obligations subsequent to the Change in Control.

	(p)		“Notice of Termination” shall mean a notice sent by either the Executive or the Corporation to the other party terminating the Executive’s employment as of a certain date and setting forth the reasons therefor.

	(q)		“Person” shall mean any individual, corporation, partnership, group, association or other “person” as such term is used in Sections 13(d) and 14(d) of the Exchange Act.

	(r)		“Pro Rata Bonus” shall mean an amount equal to the Bonus Amount multiplied by a fraction, the numerator of which is the number of months and partial months through the Termination Date and the denominator of which is twelve (12).

	(s)		“Statutory Plan” shall mean a retirement plan that is intended to be qualified (for purposes of United States tax law) or registered (for purposes of Canadian tax law), as the case may be.

	(t)		“Successor” shall mean the direct or indirect successor by purchase, merger, consolidation or otherwise, to all or substantially all of the business and/or assets of the Corporation.

	(u)		“Termination Date” shall mean (i) in the case of the Executive’s death, the date of death, (ii) in the case of a termination by the Executive in accordance with Section 3, the last day of employment as set forth in the Notice of Termination given by the Executive, (iii) in the case of a termination by the Corporation for Cause, a date not less than thirty (30) days after receipt of the Notice of Termination by the Executive, (iv) in the case of a termination by the Corporation due to the Executive’s Disability, the date not less than thirty (30) days after receipt of the Notice of Termination by the Executive, provided that the Executive shall not have returned to the full-time performance of duties within thirty (30) days after such receipt, and (v) in all other cases, the date specified in the Notice

of Termination or if no Notice of Termination is sent, the last day of the Executive’s employment (an Executive receiving periodic severance pay is not considered employed for the purposes of this Agreement).

2.		TERM OF AGREEMENT

		This Agreement shall commence as of the date hereof and shall continue in effect until the date the Executive’s employment is terminated (an Executive being paid periodic severance benefits is no longer considered employed for these purposes); provided, however, that if the Executive’s employment is terminated following, or in anticipation of, a Change in Control, the term shall continue in effect until all payments and benefits have been made or provided to the Executive hereunder.

3.		EXECUTIVE’S RIGHT OF TERMINATION

		After a Change in Control and for thirty-six (36) months thereafter, the Executive shall have the right to terminate employment for Good Reason by sending a Notice of Termination to the Corporation setting forth in reasonable detail the facts and circumstances claimed to constitute Good Reason. If the Executive’s employment is terminated in accordance with the provisions of this Section 3, the Executive shall be entitled to the compensation and benefits described in Section 4(b) below.

4.		COMPENSATION UPON CHANGE IN CONTROL FOLLOWED BY CERTAIN TERMINATIONS

		If the Executive’s employment with the Corporation shall be terminated within thirty-six (36) months following a Change in Control, the Executive shall be entitled to the following compensation and benefits:

	(a)		If the Executive’s employment is terminated (i) by the Corporation for Cause or Disability, (ii) by reason of the Executive’s death or (iii) by the Executive other than in accordance with Section 3, the Corporation shall pay to the Executive the Accrued Compensation and, if such termination is other than by the Corporation for Cause, the Pro Rata Bonus, computed as of the applicable Termination Date.

	(b)		If the Executive’s employment with the Corporation shall be terminated (x) by the Corporation for any reason other than for Cause or Disability, (y) other than by reason of the Executive’s death, or (z) by the Executive pursuant to the provisions of Section 3, the Executive shall be entitled to the following as of the applicable Termination Date:

	(i)		the Accrued Compensation and the Pro-Rata Bonus;

	(ii)		an amount equal to three (3) times the Base Amount;

	(iii)		an amount equal to three (3) times the Bonus Amount;

	(iv)		an amount equal to three (3) times the Employer Match;

	(v)		an amount equal to 30% of the Base Amount for certain lost benefits;

	(vi)		an amount equal to the present value of the additional retirement benefits the Executive would have earned under the Corporation’s defined contribution or savings plans (excluding the Employer Match) for the three (3) years following the Termination Date, computed assuming the following:

	(A)		the Executive’s salary continues at the Base Amount with a bonus equal to the Bonus Amount; and

	(B)		vesting requirements are waived;

	(vii)		as of the Executive’s Termination Date, or, if later, when the Executive attains age fifty (50), the Executive (and the Executive’s spouse or surviving spouse and dependents) will be provided the retiree health care and life insurance coverage provided by the Corporation to executive retirees as of the date of the Change in Control. If and to the extent that the benefits described in this paragraph cannot be provided under the Corporation’s plans or programs without the benefits provided thereunder being taxable to the Executive, the Corporation shall procure an insurance policy or policies on substantially similar terms and conditions for the Executive and the Executive’s spouse or surviving spouse and dependents, or if such policy or policies cannot be obtained, shall provide a lump sum payment equal to the value of the lost benefits, provided that if any of the foregoing benefits or payment is determined to be deferred compensation subject to Code Section 409A, benefits shall be provided or payment shall be made in accordance with Code Section 409A or any guidance issued thereunder; and

	(viii)		the Corporation shall pay for or provide the Executive individual out-placement assistance as offered by a member firm of the Association of Out-Placement Consulting Firms.

		Unless otherwise required in the next paragraph, amounts payable pursuant to subsections (b)(i) — (vi) shall be made in a lump sum as soon as administratively feasible following the Executive’s Termination Date, but in no event shall payment be made later than March 15 following the calendar year of the Executive’s Termination Date, unless otherwise required by Internal Revenue Code Section 409A or any guidance issued thereunder.

		Any amounts payable under this Agreement that are determined to be vested deferred compensation under Code Section 409A shall be paid in a lump sum as of the first day of the seventh month following the Executive’s Termination Date.

5.		EXCISE TAX GROSS-UP

		If any payment or benefit made available to the Executive in connection with a Change in Control (including, without limitation, any payment made pursuant to any long-term incentive plans, stock option or equity participation right plans) or termination of the Executive’s employment following a Change in Control (in either category, a “Change in Control Payment”) is subject to the Excise Tax (as hereinafter defined), the Corporation shall pay to the Executive additional amounts (the “Gross Up Amounts”) such that the total amount of all Change in Control Payments net of the Excise Tax shall equal the total amount of all Change in Control Payments to which the Executive would have been entitled if the Excise Tax had not been imposed. For purposes of this Section 5, the term “Excise Tax” shall mean the tax imposed by Section 4999 of the Code and any similar tax that may hereafter be imposed.

		The Gross Up Amounts due to the Executive under this Section 5 shall be estimated by a nationally recognized firm of certified public accountants (other than the firm that audited the financial statements of the Corporation for the most recently preceding fiscal year) selected by the individual holding the position of Chief Financial Officer immediately before the Change in Control or such officer’s designee, at any time that the Executive is to receive a Change in Control Payment. The Gross Up Amounts will be based upon the following assumptions:

	(a)		all Change in Control Payments shall be deemed to be “parachute payments” within the meaning of Section 280(G)(b)(2) of the Code, and all “excess parachute payments” shall be deemed to be subject to the Excise Tax except to the extent that, in the opinion of the certified public accountants charged with estimating the Gross Up Amounts for the Executive under this Section 5, such Change in Control Payments are not subject to the Excise Tax; and

	(b)		the Executive shall be deemed to pay federal, state and local taxes at the highest marginal rate of taxation for the applicable calendar year.

		The estimated Gross Up Amount due the Executive with respect to any Change in Control Payment pursuant to this Section 5 shall be paid to the Executive in a lump sum not later than thirty (30) business days after such Change in Control Payment is provided to the Executive. In the event that the Gross Up Amount is less than the amount actually due to the Executive under this Section 5, the amount of any such shortfall shall be paid to the Executive within ten (10) days after the existence of the shortfall is discovered. In the event the Gross Up Amount is more than the amount actually due the Executive under this Section 5, the Executive shall repay the amount of such overpayment to the Corporation within a reasonable time after the overpayment is discovered.

6.		NO MITIGATION REQUIRED

		The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement, nor shall any payment or benefit provided for in this Agreement be

		offset by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, or be offset against any amount claimed to be owed by the Executive to the Corporation, or otherwise.

7.		INTEREST

		If any payment to the Executive required by this Agreement is not made within the time for such payment specified herein, the Corporation shall pay to the Executive interest on such payment at the legal rate payable from time to time upon judgments in the State of Delaware from the date such payment is payable under the terms hereof until paid.

8.		NON-COMPETE CANCELLATION

		If the Executive is entitled to the payments and benefits described in Section 4(b), then any agreement by the Executive not to compete with the Corporation or its Affiliates after the Executive’s Termination Date shall be null and void and any such agreement shall be deemed to be amended accordingly.

9.		EXECUTIVE’S EXPENSES

		The Corporation shall pay or reimburse the Executive for all costs, including reasonable attorneys’, accountants’ and actuaries’ fees and expenses, incurred by the Executive (i) to confirm the Executive’s rights to and amounts of payments hereunder, (ii) to contest or dispute any termination of the Executive’s employment following a Change in Control or seek to obtain or enforce any right or benefit provided by this Agreement in litigation or arbitration, or (iii) in connection with any audit by a taxing authority related to any payment or benefit hereunder, or any subsequent contest or litigation relating to the tax treatment of such payment or benefit. Upon demand therefor, the Corporation shall advance to the Executive any amount as to which the Executive reasonably believes he will be entitled pursuant to this Section 9 for costs that the Executive has incurred or will incur during the ninety (90) days following such demand.

10.		BINDING AGREEMENT

		This Agreement shall inure to the benefit of and be enforceable by the Executive, and the Executive’s heirs, executors, administrators, successors and assigns. This Agreement shall be binding upon the Corporation, its Successors and assigns. The Corporation shall require any Successor to assume and agree to perform this Agreement in accordance with its terms. The Corporation shall obtain such assumption and agreement prior to the effectiveness of any such succession.

11.		NOTICE

		Any notices and all other communications provided for herein shall be in writing and shall be delivered personally or sent by facsimile transmission (with written confirmation sent at the same time), prepaid air courier or prepaid certified or registered mail. Any such notice shall be deemed to have been given (a) when received, if delivered in person, sent by facsimile transmission, or sent by prepaid air courier, or (b) three (3) business

		days following the mailing thereof, if mailed by prepaid certified or registered mail, return receipt requested, addressed to the respective addresses set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. All notices to the Corporation shall be addressed to the attention of the Board with a copy to the General Counsel.

12.		SOLE SEVERANCE; OTHER BENEFITS

		If the Executive is paid the entitlements due under Section 4(b), such payments shall be in lieu of any other severance amounts to which the Executive may be entitled under any other severance arrangement, including under any employment agreement, severance pay plan, or applicable legislation entitling the Executive to severance benefits. However, the parties acknowledge that the benefits paid hereunder are only exclusive as to other severance payments and that the Executive may be entitled to other benefits or payments triggered by a Change in Control under certain other of the Corporation’s benefit or compensation arrangements, including, without limitation, any long term incentive plans or stock option plans.

13.		AMENDMENTS; WAIVERS

		No provision of this Agreement may be modified, waived or discharged except in a writing specifically referring to such provision and signed by the party against which enforcement of such modification, waiver or discharge is sought. No waiver by either party hereto of the breach of any condition or provision of this Agreement shall be deemed a waiver of any other condition or provision at the same or any other time.

14.		GOVERNING LAW

		The validity, interpretation, construction and performance of this Agreement shall be governed by the substantive laws of the State of Delaware without regard to the choice of law provisions thereof.

15.		VALIDITY

		The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

16.		ARBITRATION

		If the Executive so elects, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Greenville, South Carolina, or at the Executive’s election in the city nearest to the Executive’s principal residence that has an office of the American Arbitration Association, by one arbitrator in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. The Corporation hereby waives its right to contest the personal jurisdiction or venue of any

		court, federal or state, in an action brought to enforce this Agreement or any award of an arbitrator hereunder which action is brought in the jurisdiction in which such arbitration was conducted, or, if no arbitration was elected, in which arbitration could have been conducted pursuant to this Section 16.

17.		COUNTERPARTS

		This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.


		BOWATER INCORPORATED

		By:		/s/ James T. Wright

		Name: Title:		James T. Wright Sr. Vice President — Human Resources
		Date Signed:

		/s/ W. Eric Streed

		Name: W. Eric Streed
		Date Signed:

EX-10.2 4 g04270exv10w2.htm EXHIBIT 10.2 Exhibit 10.2

Exhibit 10.2

CHANGE IN CONTROL AGREEMENT

THIS AGREEMENT, made as of the 1st day of September, 2005, by and between Bowater Incorporated, a Delaware corporation having a mailing address of 55 East Camperdown Way, P.O. Box 1028, Greenville, South Carolina 29602 (the “Corporation”), and James T. Wright of 10 Hillswick Road, Tryon, NC 28782 (the “Executive”).

WHEREAS, the Corporation considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and

NOW THEREFORE, it is hereby agreed as follows:

DEFINITIONS

The following terms shall have the meanings assigned to them below:

	(a)		“Accrued Compensation” shall mean all amounts earned or accrued through the Termination Date but not paid as of the Termination Date including (i) the Base Amount, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Corporation during the period ending on the Termination Date, (iii) vacation pay, and (iv) any bonus award with respect to the Corporation’s fiscal year ended prior to the Termination Date.

	(b)		“Acquiring Person” shall mean the Beneficial Owner, directly or indirectly, of securities representing 20% or more of the combined voting power of the Corporation’s then outstanding securities, not including (except as provided in clause (i) of the next sentence) securities of such Beneficial Owner acquired pursuant to an agreement allowing the acquisition of up to and including 50% of such voting power approved by two-thirds of the members of the Board who are Board members before the Person becomes Beneficial Owner, directly or indirectly, of securities representing 5% or more of the combined voting power of the Corporation’s then outstanding securities. Notwithstanding the foregoing, (i) securities acquired pursuant to an agreement described in the preceding sentence will be included in determining whether a Beneficial Owner is an Acquiring Person if, subsequent to the approved acquisition, the Beneficial Owner acquires 5% or more of such voting power other than pursuant to such an agreement so approved; and (ii) a Person shall not be an Acquiring Person if such

			Person is eligible to and files a Schedule 13G under the Exchange Act with respect to such Person’s status as a Beneficial Owner of all securities of the Corporation of which the Person is a Beneficial Owner.

	(c)		“Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date hereof.

	(d)		“Base Amount” shall mean the greater of (i) the Executive’s annual base salary at the rate in effect immediately prior to the Change in Control and (ii) the Executive’s annual base salary at the rate in effect on the Termination Date.

	(e)		“Beneficial Owner” of securities shall mean (i) a Person who beneficially owns such securities, directly or indirectly, or (ii) a Person who has the right to acquire such securities (whether such right is exercisable immediately or only with the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, warrants, options or otherwise.

	(f)		“Bonus Amount” shall mean an amount equal to the Executive’s target amount (100% times salary grade bonus percentage times base salary) under the Corporation’s annual or other short term cash incentive plans in effect immediately prior to the Change in Control for the fiscal year in which the Change in Control occurred or, if higher, the target amount under such plans in effect at the Termination Date based on the Executive’s then base salary and position.

	(g)		“Cause” shall mean and be limited to the Executive’s gross negligence, willful misconduct or conviction of a felony, which has a demonstrable and material adverse effect upon the Corporation; provided that if Cause exists by virtue of the Executive’s gross negligence or willful misconduct that is capable of being cured, the Corporation shall give the Executive written notice of the alleged negligence or misconduct and if the Executive cures the negligence or misconduct within thirty (30) days after receipt of the notice, such Cause shall cease to exist and the Corporation shall not terminate the Executive’s employment therefor. The Executive shall be deemed to have been terminated for Cause as of the effective date stated in a Notice of Termination delivered by the Corporation to the Executive, which shall not be delivered before the end of the thirty (30) day period described in the preceding sentence, if applicable. The Notice of Termination must be accompanied by a certified copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the membership of the Board after reasonable notice to the Executive and an opportunity for the Executive, with the Executive’s counsel present, to be heard before the Board, finding that, in the good faith opinion of the Board, the

			Executive was guilty of conduct constituting Cause hereunder and setting forth in reasonable detail the facts and circumstances claimed to provide the basis for the Executive’s termination.

	(h)		“Change in Control” shall be deemed to have occurred upon:

	(i)		the date that any Person is or becomes an Acquiring Person;

	(ii)		the date that the Corporation’s stockholders approve a merger, consolidation or reorganization of the Corporation with another corporation or other Person, unless, immediately following such merger, consolidation or reorganization, (A) at least 50% of the combined voting power of the outstanding securities of the resulting entity would be held in the aggregate by the stockholders of the Corporation as of the record date for such approval (provided that securities held by any individual or entity that is an Acquiring Person, or who would be an Acquiring Person if 5% were substituted for 20% in the definition of such term, shall not be counted as securities held by the stockholders of the Corporation, but shall be counted as outstanding securities for purposes of this determination), or (B) at least 50% of the board of directors or similar body of the resulting entity are Continuing Directors;

	(iii)		the date the Corporation sells or otherwise transfers all or substantially all of the Corporation’s assets to another corporation or other Person, unless, immediately following such sale or transfer, (A) at least 50% of the combined voting power of the outstanding securities of the acquiring entity would be held in the aggregate by the stockholders of the Corporation as of the record date for such approval (provided that securities held by any individual or entity that is an Acquiring Person, or who would be an Acquiring Person if 5% were substituted for 20% in the definition of such term, shall not be counted as securities held by the stockholders of the Corporation, but shall be counted as outstanding securities for purposes of this determination), or (B) at least 50% of the board of directors or similar body of the acquiring entity are Continuing Directors; or

	(iv)		the date on which less than 50% of the total membership of the Board consists of Continuing Directors.

	(i)		“Code” shall mean the United States Internal Revenue Code of 1986, amended.

	(j)		“Continuing Directors” shall mean any member of the Board who (i) was a member of the Board immediately prior to the date of the event that would constitute a Change in Control, and any successor of a Continuing Director while such successor is a member of the Board, (ii) who is not an Acquiring Person or

			an Affiliate or Associate of an Acquiring Person and (iii) is recommended or elected to succeed the Continuing Director by a majority of the Continuing Directors.

	(k)		“Corporation” shall mean Bowater Incorporated; provided that, if the Executive is employed by a subsidiary of the Corporation, “Corporation” shall mean such subsidiary of the Corporation for purposes of references to the Executive’s compensation and benefits, and the plans, programs and arrangements pursuant to which compensation and benefits are provided.

	(l)		“Disability” shall mean a physical or mental condition that is defined as a disability in the Corporation’s long term disability insurance plan covering the Executive immediately prior to the Change in Control.

	(m)		“Employer Match” shall mean an amount equal to the maximum matching contribution the Corporation could have made (regardless of actual circumstances) on the Executive’s behalf to the Corporation’s Statutory and non-Statutory defined contribution or savings plans for the fiscal year in which the Change in Control occurred, or, if higher, the maximum matching contribution the Corporation could have made for the fiscal year in which the Executive’s employment terminated.

	(n)		“Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended.

	(o)		“Good Reason” shall mean:

	(i)		a change in the Executive’s status, title, position or responsibilities (including in reporting line relationships) that, in the Executive’s reasonable judgment, represents a substantial adverse change from the Executive’s status, title, position or responsibilities as in effect at any time within one hundred eighty (180) days preceding the date of a Change in Control or at any time thereafter; the assignment to the Executive of any duties or responsibilities that, in the Executive’s reasonable judgment, are inconsistent with the Executive’s status, title, position or responsibilities as in effect at any time within one hundred eighty (180) days preceding the date of a Change in Control or any time thereafter; or any removal of the Executive from or failure to reappoint or reelect the Executive to any office or position held prior to the Change in Control, except in connection with the termination of the Executive’s employment for Disability, Cause, as a result of the Executive’s death or by the Executive other than for Good Reason;

	(ii)		the failure by the Corporation to provide the Executive with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities which opportunities will be evaluated in light of the performance requirements therefor) to those provided for under the

			employee compensation and benefit plans, programs and practices in which the Executive was participating at any time within one hundred eighty (180) days preceding the date of a Change in Control or at any time thereafter;

	(iii)		the reduction of the Executive’s salary as in effect on the date of the Change in Control or any time thereafter;

	(iv)		a failure by the Corporation to obtain from any Successor its assent to this Agreement contemplated by Section 10 hereof; or

	(v)		the relocation of the principal office at which the Executive is to perform services on behalf of the Corporation to a location more than thirty-five (35) miles from its location immediately prior to the Change in Control or a substantial increase in the Executive’s business travel obligations subsequent to the Change in Control.

	(p)		“Notice of Termination” shall mean a notice sent by either the Executive or the Corporation to the other party terminating the Executive’s employment as of a certain date and setting forth the reasons therefor.

	(q)		“Person” shall mean any individual, corporation, partnership, group, association or other “person” as such term is used in Sections 13(d) and 14(d) of the Exchange Act.

	(r)		“Pro Rata Bonus” shall mean an amount equal to the Bonus Amount multiplied by a fraction, the numerator of which is the number of months and partial months through the Termination Date and the denominator of which is twelve (12).

	(s)		“Statutory Plan” shall mean a retirement plan that is intended to be qualified (for purposes of United States tax law) or registered (for purposes of Canadian tax law), as the case may be.

	(t)		“Successor” shall mean the direct or indirect successor by purchase, merger, consolidation or otherwise, to all or substantially all of the business and/or assets of the Corporation.

	(u)		“Termination Date” shall mean (i) in the case of the Executive’s death, the date of death, (ii) in the case of a termination by the Executive in accordance with Section 3, the last day of employment as set forth in the Notice of Termination given by the Executive, (iii) in the case of a termination by the Corporation for Cause, a date not less than thirty (30) days after receipt of the Notice of Termination by the Executive, (iv) in the case of a termination by the Corporation due to the Executive’s Disability, the date not less than thirty (30) days after receipt of the Notice of Termination by the Executive, provided that the Executive shall not have returned to the full-time performance of duties within thirty (30) days after such receipt, and (v) in all other cases, the date specified in the Notice

2.		TERM OF AGREEMENT

		This Agreement shall commence as of the date hereof and shall continue in effect until the date the Executive’s employment is terminated (an Executive being paid periodic severance benefits is no longer considered employed for these purposes); provided, however, that if the Executive’s employment is terminated following, or in anticipation of, a Change in Control, the term shall continue in effect until all payments and benefits have been made or provided to the Executive hereunder.

3.		EXECUTIVE’S RIGHT OF TERMINATION

		After a Change in Control and for thirty-six (36) months thereafter, the Executive shall have the right to terminate employment for Good Reason by sending a Notice of Termination to the Corporation setting forth in reasonable detail the facts and circumstances claimed to constitute Good Reason. If the Executive’s employment is terminated in accordance with the provisions of this Section 3, the Executive shall be entitled to the compensation and benefits described in Section 4(b) below.

4.		COMPENSATION UPON CHANGE IN CONTROL FOLLOWED BY CERTAIN TERMINATIONS

		If the Executive’s employment with the Corporation shall be terminated within thirty-six (36) months following a Change in Control, the Executive shall be entitled to the following compensation and benefits:

	(a)		If the Executive’s employment is terminated (i) by the Corporation for Cause or Disability, (ii) by reason of the Executive’s death or (iii) by the Executive other than in accordance with Section 3, the Corporation shall pay to the Executive the Accrued Compensation and, if such termination is other than by the Corporation for Cause, the Pro Rata Bonus, computed as of the applicable Termination Date.

	(b)		If the Executive’s employment with the Corporation shall be terminated (x) by the Corporation for any reason other than for Cause or Disability, (y) other than by reason of the Executive’s death, or (z) by the Executive pursuant to the provisions of Section 3, the Executive shall be entitled to the following as of the applicable Termination Date:

	(i)		the Accrued Compensation and the Pro-Rata Bonus;

	(ii)		an amount equal to three (3) times the Base Amount;

	(iii)		an amount equal to three (3) times the Bonus Amount;

	(iv)		an amount equal to three (3) times the Employer Match;

	(v)		an amount equal to 30% of the Base Amount for certain lost benefits;

	(vi)		an amount equal to the present value of the additional retirement benefits the Executive would have earned under the Corporation’s defined contribution or savings plans (excluding the Employer Match) for the three (3) years following the Termination Date, computed assuming the following:

	(A)		the Executive’s salary continues at the Base Amount with a bonus equal to the Bonus Amount; and

	(B)		vesting requirements are waived;

	(vii)		as of the Executive’s Termination Date, or, if later, when the Executive attains age fifty (50), the Executive (and the Executive’s spouse or surviving spouse and dependents) will be provided the retiree health care and life insurance coverage provided by the Corporation to executive retirees as of the date of the Change in Control. If and to the extent that the benefits described in this paragraph cannot be provided under the Corporation’s plans or programs without the benefits provided thereunder being taxable to the Executive, the Corporation shall procure an insurance policy or policies on substantially similar terms and conditions for the Executive and the Executive’s spouse or surviving spouse and dependents, or if such policy or policies cannot be obtained, shall provide a lump sum payment equal to the value of the lost benefits, provided that if any of the foregoing benefits or payment is determined to be deferred compensation subject to Code Section 409A, benefits shall be provided or payment shall be made in accordance with Code Section 409A or any guidance issued thereunder; and

	(viii)		the Corporation shall pay for or provide the Executive individual out-placement assistance as offered by a member firm of the Association of Out-Placement Consulting Firms.

		Unless otherwise required in the next paragraph, amounts payable pursuant to subsections (b)(i) — (vi) shall be made in a lump sum as soon as administratively feasible following the Executive’s Termination Date, but in no event shall payment be made later than March 15 following the calendar year of the Executive’s Termination Date, unless otherwise required by Internal Revenue Code Section 409A or any guidance issued thereunder.

		Any amounts payable under this Agreement that are determined to be vested deferred compensation under Code Section 409A shall be paid in a lump sum as of the first day of the seventh month following the Executive’s Termination Date.

5.		EXCISE TAX GROSS-UP

		If any payment or benefit made available to the Executive in connection with a Change in Control (including, without limitation, any payment made pursuant to any long-term incentive plans, stock option or equity participation right plans) or termination of the Executive’s employment following a Change in Control (in either category, a “Change in Control Payment”) is subject to the Excise Tax (as hereinafter defined), the Corporation shall pay to the Executive additional amounts (the “Gross Up Amounts”) such that the total amount of all Change in Control Payments net of the Excise Tax shall equal the total amount of all Change in Control Payments to which the Executive would have been entitled if the Excise Tax had not been imposed. For purposes of this Section 5, the term “Excise Tax” shall mean the tax imposed by Section 4999 of the Code and any similar tax that may hereafter be imposed.

		The Gross Up Amounts due to the Executive under this Section 5 shall be estimated by a nationally recognized firm of certified public accountants (other than the firm that audited the financial statements of the Corporation for the most recently preceding fiscal year) selected by the individual holding the position of Chief Financial Officer immediately before the Change in Control or such officer’s designee, at any time that the Executive is to receive a Change in Control Payment. The Gross Up Amounts will be based upon the following assumptions:

	(a)		all Change in Control Payments shall be deemed to be “parachute payments” within the meaning of Section 280(G)(b)(2) of the Code, and all “excess parachute payments” shall be deemed to be subject to the Excise Tax except to the extent that, in the opinion of the certified public accountants charged with estimating the Gross Up Amounts for the Executive under this Section 5, such Change in Control Payments are not subject to the Excise Tax; and

	(b)		the Executive shall be deemed to pay federal, state and local taxes at the highest marginal rate of taxation for the applicable calendar year.

		The estimated Gross Up Amount due the Executive with respect to any Change in Control Payment pursuant to this Section 5 shall be paid to the Executive in a lump sum not later than thirty (30) business days after such Change in Control Payment is provided to the Executive. In the event that the Gross Up Amount is less than the amount actually due to the Executive under this Section 5, the amount of any such shortfall shall be paid to the Executive within ten (10) days after the existence of the shortfall is discovered. In the event the Gross Up Amount is more than the amount actually due the Executive under this Section 5, the Executive shall repay the amount of such overpayment to the Corporation within a reasonable time after the overpayment is discovered.

6.		NO MITIGATION REQUIRED

		The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement, nor shall any payment or benefit provided for in this Agreement be

		offset by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, or be offset against any amount claimed to be owed by the Executive to the Corporation, or otherwise.

7.		INTEREST

		If any payment to the Executive required by this Agreement is not made within the time for such payment specified herein, the Corporation shall pay to the Executive interest on such payment at the legal rate payable from time to time upon judgments in the State of Delaware from the date such payment is payable under the terms hereof until paid.

8.		NON-COMPETE CANCELLATION

		If the Executive is entitled to the payments and benefits described in Section 4(b), then any agreement by the Executive not to compete with the Corporation or its Affiliates after the Executive’s Termination Date shall be null and void and any such agreement shall be deemed to be amended accordingly.

9.		EXECUTIVE’S EXPENSES

		The Corporation shall pay or reimburse the Executive for all costs, including reasonable attorneys’, accountants’ and actuaries’ fees and expenses, incurred by the Executive (i) to confirm the Executive’s rights to and amounts of payments hereunder, (ii) to contest or dispute any termination of the Executive’s employment following a Change in Control or seek to obtain or enforce any right or benefit provided by this Agreement in litigation or arbitration, or (iii) in connection with any audit by a taxing authority related to any payment or benefit hereunder, or any subsequent contest or litigation relating to the tax treatment of such payment or benefit. Upon demand therefor, the Corporation shall advance to the Executive any amount as to which the Executive reasonably believes he will be entitled pursuant to this Section 9 for costs that the Executive has incurred or will incur during the ninety (90) days following such demand.

10.		BINDING AGREEMENT

		This Agreement shall inure to the benefit of and be enforceable by the Executive, and the Executive’s heirs, executors, administrators, successors and assigns. This Agreement shall be binding upon the Corporation, its Successors and assigns. The Corporation shall require any Successor to assume and agree to perform this Agreement in accordance with its terms. The Corporation shall obtain such assumption and agreement prior to the effectiveness of any such succession.

11.		NOTICE

		Any notices and all other communications provided for herein shall be in writing and shall be delivered personally or sent by facsimile transmission (with written confirmation sent at the same time), prepaid air courier or prepaid certified or registered mail. Any such notice shall be deemed to have been given (a) when received, if delivered in person, sent by facsimile transmission, or sent by prepaid air courier, or (b) three (3) business

		days following the mailing thereof, if mailed by prepaid certified or registered mail, return receipt requested, addressed to the respective addresses set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. All notices to the Corporation shall be addressed to the attention of the Board with a copy to the General Counsel.

12.		SOLE SEVERANCE; OTHER BENEFITS

		If the Executive is paid the entitlements due under Section 4(b), such payments shall be in lieu of any other severance amounts to which the Executive may be entitled under any other severance arrangement, including under any employment agreement, severance pay plan, or applicable legislation entitling the Executive to severance benefits. However, the parties acknowledge that the benefits paid hereunder are only exclusive as to other severance payments and that the Executive may be entitled to other benefits or payments triggered by a Change in Control under certain other of the Corporation’s benefit or compensation arrangements, including, without limitation, any long term incentive plans or stock option plans.

13.		AMENDMENTS; WAIVERS

		No provision of this Agreement may be modified, waived or discharged except in a writing specifically referring to such provision and signed by the party against which enforcement of such modification, waiver or discharge is sought. No waiver by either party hereto of the breach of any condition or provision of this Agreement shall be deemed a waiver of any other condition or provision at the same or any other time.

14.		GOVERNING LAW

		The validity, interpretation, construction and performance of this Agreement shall be governed by the substantive laws of the State of Delaware without regard to the choice of law provisions thereof.

15.		VALIDITY

		The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

16.		ARBITRATION

		If the Executive so elects, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Greenville, South Carolina, or at the Executive’s election in the city nearest to the Executive’s principal residence that has an office of the American Arbitration Association, by one arbitrator in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. The Corporation hereby waives its right to contest the personal jurisdiction or venue of any

		court, federal or state, in an action brought to enforce this Agreement or any award of an arbitrator hereunder which action is brought in the jurisdiction in which such arbitration was conducted, or, if no arbitration was elected, in which arbitration could have been conducted pursuant to this Section 16.

17.		COUNTERPARTS

		This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.


		BOWATER INCORPORATED

		By:		/s/ David J. Paterson

		Name: Title:		David J. Paterson Chief Executive Officer

		/s/ James T. Wright 10/10/06

		Name: James T. Wright

EX-10.3 5 g04270exv10w3.htm EXHIBIT 10.3 Exhibit 10.3

Exhibit 10.3

First Amendment to the
Bowater Incorporated
Outside Directors’ Stock-Based Deferred Fee Plan
Effective as of May 11, 2005

WHEREAS, Bowater Incorporated (the “Corporation”) established the Bowater Incorporated Outside Directors’ Stock-Based Deferred Fee Plan (the “Plan”), effective as of May 11, 2005;

WHEREAS, Section 19 of the Plan permits the Board to amend the Plan; and

WHEREAS, the Board desires to amend the Plan to (1) reflect that Outside Directors who elected to remain in the Bowater Incorporated Retirement Plan for Outside Directors shall be ineligible to participate in the Plan, and (2) provide for the crediting of stock units that represent the value of retirement benefits previously accrued for participants under the Retirement Plan for Outside Directors, which benefits were frozen under that plan effective May 11, 2005.

NOW, THEREFORE, the Plan is amended, effective as of the dates set forth below, in the following respects:

1. Effective as of May 11, 2005, Paragraph 3 is amended, in its entirety to read as follows:

“3. Eligibility. Participation in the Plan shall be extended to Outside Directors except any Outside Director who elected to remain a participant in the Bowater Incorporated Retirement Plan for Outside Directors (‘Retirement Plan’) pursuant to the terms of the Retirement Plan.”

2. Effective as of August 31, 2006, new subsection (b) is added to Paragraph 7 to read as follows and subsequent subsections are re-numbered accordingly:

“(b)

Each Outside Director whose benefits under the Bowater Incorporated Retirement Plan for Outside Directors (the ‘Retirement Plan’) were frozen as of May 11, 2005 pursuant to the Retirement Plan’s terms shall have the present value of his Retirement Plan benefit converted into Stock Units and credited to his Deferred Retainer Account as of August 31, 2006. The number of Stock Units to be credited to each Outside Director’s Deferred Retainer Account shall be determined by (i) calculating the present value of such individual’s frozen retirement benefit as of August 31, 2006 using a 7% interest rate, the 1994 Group Annuity Mortality Table blended 50% for males and 50% for females and an assumed retirement age of 72, and (ii) dividing such resulting value by the Fair Market Value of a Share of stock on August 31, 2006.”

* * *

[signature page follows]

IN WITNESS WHEREOF, the Board has caused this First Amendment to the Plan to be executed by a duly authorized officer this 10^th day of October, 2006.


		BOWATER INCORPORATED

		By:		/s/ James T. Wright

				James T. Wright Executive Vice President — Human Resources

EX-10.4 6 g04270exv10w4.htm EXHIBIT 10.4 Exhibit 10.4

Exhibit 10.4

Sixth Amendment to the
Bowater Incorporated
Retirement Plan for Outside Directors
As Amended and Restated Effective February 26, 1999

WHEREAS, Bowater Incorporated (the “Corporation”) previously amended and restated the Retirement Plan for Outside Directors as of February 26, 1999 (the “Plan”);

WHEREAS, Section 8.06 of the Plan permits the Corporation to amend the Plan;

WHEREAS, pursuant to the Fourth Amendment, the Plan was frozen to new participants and benefits were frozen effective May 11, 2005 for all participants except those participants who were permitted to make an election, and so elected, to continue participating in the Plan; and

WHEREAS, the Board desires to amend the Plan to provide that: (1) no retirement benefits shall be payable under the Plan with respect to participants whose benefits were frozen as of May 11, 2005, and (2) all benefits for participants who continue to participate in the Plan shall be distributed in a lump sum when a participant incurs a separation from service (within the meaning of Internal Revenue Code Section 409A).

NOW, THEREFORE, the Plan is amended, effective as of the dates set forth below, in the following respects:

1. The Preamble is amended, effective as of January 1, 2005, by adding a new paragraph at the end thereto to read as follows:

		“Code Section 409A

		Notwithstanding any other provision of the Plan to the contrary, effective as of January 1, 2005, all benefits payable under the Plan shall be subject to Internal Revenue Code Section 409A (‘Code Section 409A’) and the Treasury Regulations promulgated thereunder. For such amounts, the Plan shall be interpreted and administered consistent with Code Section 409A and the Treasury Regulations promulgated thereunder.”

2. Section 1.15 of the Plan is amended, effective as of January 1, 2005, to read as follows:

“1.15

RETIRE: A ‘separation from service’ (within the meaning of Code Section 409A and the Treasury Regulations promulgated thereunder) for any reason other than death. A change in status which does not interrupt Continuous Service under Section 1.06 shall not constitute a separation from service for purposes of this Section.”

3. Article 3 is amended and restated in its entirety, effective as of January 1, 2005, to read as follows:

		“ARTICLE 3: COMMENCEMENT OF RETIREMENT INCOME

		A Participating Director shall receive a lump sum payment of his retirement income benefits (determined in accordance with Article 4) as soon as administratively possible following the date on which the Participating Director Retires. Notwithstanding anything in the Plan to the contrary, effective as of August 31, 2006, no retirement income benefits shall be payable to any Participating Director who began participation in the Outside Directors’ Stock-Based Deferred Fee Plan, effective as of May 11, 2005 (the ‘Stock-Based Plan’) (including any Participating Director who elected to participate in such plan). The value of the retirement income benefits for such Participating Directors and related Stock Units (as defined in the Stock-Based Plan) shall be determined, credited to and payable under the Stock-Based Plan pursuant to the terms of such plan.”

4. Article 4 is amended and restated in its entirety, effective as of January 1, 2005, to read as follows:

“ARTICLE 4: AMOUNT AND FORM OF RETIREMENT INCOME DISTRIBUTION

	4.01		NORMAL RETIREMENT BENEFITS: If the Participating Director Retires on the first day of the month following his attainment of age sixty-five (65), the retirement income benefit payable under this Plan shall equal ten percent (10%) of the Participating Director’s Final Average Earnings multiplied by the Participating Director’s years of Service in Continuous Service up to a maximum of 10 with proportionate credit for completed months.

	4.02		EARLY RETIREMENT BENEFITS: If the Participating Director Retires on or after the first day of the month following his attainment of age fifty-five (55) but prior to the first day of the month following his attainment of age sixty-five (65), his retirement benefits will be based on his accrued benefit determined under Section 4.01 as of the date of his early retirement. Such benefits shall be actuarially reduced for the period (if any) by which the commencement of benefits precedes the first day of the month following the Participating Director’s sixty-fifth (65^th) birthday. The mortality table used for purposes of calculating the actuarial reduction hereunder shall be the Unisex Pension Table, 1984 (set forward one year) and the assumed interest rate shall be eight percent (8%) per annum.

	4.03		POSTPONED RETIREMENT BENEFITS: If the Participating Director Retires after the first day of the month following his attainment of age sixty-five (65), the retirement benefit will be based on his accrued benefit determined under Section 4.01 as of the date of his termination of Service. Such benefits shall not be actuarially increased to reflect commencement subsequent to the attainment of age sixty-five (65).

4.04

LUMP SUM PAYMENT: The benefit payable shall be distributed in a single lump sum payment computed using the applicable mortality table defined in Internal Revenue Code Section 417(e)(3)(A)(ii)(I) and an interest rate to be the same as established under the Supplemental Benefit Plan for Designated Employees of Bowater Incorporated and Affiliated Companies prior to the commencement of each calendar year for the calendar year in which the distribution occurs.”

5. Section 6.02 is deleted effective as of January 1, 2005.

* * *

IN WITNESS WHEREOF, the Board has caused this Sixth Amendment to the Plan to be executed by a duly authorized officer this 10th day of October, 2006.


		BOWATER INCORPORATED

		By:		/s/ James T. Wright

				James T. Wright Executive Vice President — Human Resources

EX-10.5 7 g04270exv10w5.htm EXHIBIT 10.5 Exhibit 10.5

Exhibit 10.5

Third Amendment to the
Bowater Incorporated Compensatory Benefits Plan
As Amended and Restated Effective February 26, 1999

WHEREAS, Bowater Incorporated (the “Company”) previously amended and restated the Bowater Incorporated Compensatory Benefits plan as of February 26, 1999 (the “Plan”);

WHEREAS, Section 10 of the Plan permits the Human Resources and Compensation Committee of the Board of Directors of the Company (the “HRCC”) to amend the Plan; and

WHEREAS, the HRCC desires to amend the Plan to provide that no new employees will participate in the Plan effective as of January 1, 2005.

NOW, THEREFORE, the Plan is amended, effective as of January 1, 2005, in the following respects:

1. Section 1 is amended by adding a new paragraph at the end thereto to read as follows:

“Effective as of January 1, 2005, the Company established the Bowater Incorporated Supplemental Retirement Savings Plan (the ‘Supplemental Savings Plan’) as a new nonqualified deferred compensation plan and as a replacement plan for the portion of the Plan that maintained account balances during the 409A transition period that are subject to provisions of Code Section 409A. As a result, no new employees shall participate in the Plan effective as of January 1, 2005, but shall begin participation in the Supplemental Savings Plan if otherwise eligible pursuant to the terms of the Supplemental Savings Plan.”

2. Section 3 is amended by adding the following to the end thereto to read as follows:

“Notwithstanding anything in the Plan to the contrary, effective as of January 1, 2005, no new Eligible Employees shall participate in the Plan.”

* * *

IN WITNESS WHEREOF, the HRCC has caused this Third Amendment to the Plan to be executed by a duly authorized officer this 10^th day of October, 2006.


		BOWATER INCORPORATED

		By:		/s/ James T. Wright

				James T. Wright Title: Executive Vice President — Human Resources

EX-10.6 8 g04270exv10w6.htm EXHIBIT 10.6 Exhibit 10.6

Exhibit 10.6

Fourth Amendment to the
Bowater Incorporated Benefits Equalization Plan
As Amended and Restated Effective February 26, 1999

WHEREAS, Bowater Incorporated (the “Company”) previously amended and restated the Bowater Incorporated Benefits Equalization Plan as of February 26, 1999 (the “Plan”);

WHEREAS, Section 9 of the Plan permits the Human Resources and Compensation Committee of the Board of Directors of the Company (the “HRCC”) to amend the Plan; and

WHEREAS, the HRCC desires to amend the Plan to: (1) freeze participation and Plan benefits as of January 1, 2007 for those participants who are younger than age 55 and whose age plus years of service total less than 70 (“non-grandfathered participants”) and (2) provide that no new employees shall be eligible to participate in the Plan after December 31, 2006.

NOW, THEREFORE, the Plan is amended, effective as of January 1, 2007, in the following respects:

1. Section 1 is amended by adding a new paragraph at the end thereto to read as follows:

“Effective as of January 1, 2007, the Plan will be frozen to new, otherwise eligible employees and to active participants who are less than age 55 and whose age plus years of service total less than 70 (determined as of December 31, 2006). The Plan, as may be amended from time to time, will continue for participants who are age 55 or older or whose age plus years of service equal or exceed 70 (determined as of December 31, 2006).”

2. Section 3 is amended by adding the following at the end thereto to read as follows:

“Notwithstanding anything in the Plan to the contrary, effective as of January 1, 2007, Participants who are less than age 55 and whose age plus Years of Service (determined under the Funded Plans) total less than 70 (determined as of December 31, 2006) shall cease to actively participate in the Plan, and all benefits shall cease to accrue for such Participants. No additional compensation (within the meaning of the Funded Plans) or Years of Service earned by such a Participant after December 31, 2006 shall be applied to determine the amount of the Participant’s benefits pursuant to Section 4. In addition, effective as of January 1, 2007, no new Eligible Employees shall be eligible to participate in the Plan.”

* * *

[signature page follows]

IN WITNESS WHEREOF, the HRCC has caused this Fourth Amendment to the Plan to be executed by a duly authorized officer this 10th day of October, 2006.


		BOWATER INCORPORATED

		By:		/s/ James T. Wright

				James T. Wright Title: Executive Vice President — Human Resources

EX-12.1 9 g04270exv12w1.htm EXHIBIT 12.1 Exhibit 12.1

BOWATER INCORPORATED

Exhibit 12.1

Bowater Incorporated
Statement of Computation of Unaudited Ratio of Earnings to Fixed Charges
(in millions, except ratio information)


	Nine Months Ended September 30,
	2006			2005

Earnings:

Loss before income taxes, minority interests and cumulative effect of accounting change	$	(211.8	)	$	(19.9	)

Add: Fixed charges from below		158.1			154.9
Less: Capitalized interest		2.8			0.6


	$	(56.5	)	$	134.4

Fixed Charges:

Interest expense, net of interest capitalized	$	149.5		$	149.5
Capitalized interest		2.8			0.6
Estimate of interest within rental expense		2.5			1.4
Amortized premium and discounts related to indebtedness		3.3			3.4


	$	158.1		$	154.9



Deficiency of Earnings to Fixed Charges	$	214.6		$	20.5

EX-31.1 10 g04270exv31w1.htm EXHIBIT 31.1 Exhibit 31.1

Exhibit 31.1

Certification

I, David J. Paterson, President and Chief Executive Officer of Bowater Incorporated, certify that:

I have reviewed this Form 10-Q for the quarterly period ended September 30, 2006 of Bowater Incorporated;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)		All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 14, 2006


/s/ David J. Paterson

David J. Paterson President and Chief Executive Officer

EX-31.2 11 g04270exv31w2.htm EXHIBIT 31.2 Exhibit 31.2

Exhibit 31.2

Certification

I, William G. Harvey, Executive Vice President and Chief Financial Officer of Bowater Incorporated, certify that:

I have reviewed this Form 10-Q for the quarterly period ended September 30, 2006 of Bowater Incorporated;

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2006


/s/ William G. Harvey

William G. Harvey Executive Vice President and Chief Financial Officer

EX-32.1 12 g04270exv32w1.htm EXHIBIT 32.1 Exhibit 32.1

EXHIBIT 32.1

Certification

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Bowater Incorporated (the “Company”), hereby certifies, to such officer’s knowledge, that the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated: November 14, 2006		/s/ David J. Paterson

		Name: David J. Paterson Title: Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2 13 g04270exv32w2.htm EXHIBIT 32.2 Exhibit 32.2

EXHIBIT 32.2

Certification


Dated: November 14, 2006		/s/ William G. Harvey

		Name: William G. Harvey Title: Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

-----END PRIVACY-ENHANCED MESSAGE-----