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 ENDEDSeptember 30, 2007 MARCH 31, 2008
   
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: 1-33776
ABITIBIBOWATER INC.
(Exact Name of Registrant as Specified in its Charter)
   
Delaware 98-0526415
(State or other jurisdiction of Incorporation)incorporation or organization ) (I.R.S. Employer Identification No.)
1155 Metcalfe Street, Suite 800; Montreal, Quebec;Canada H3B 5H2
(Address of principal executive offices)(Zip Code)employer identification number)
1155 Metcalfe Street, Suite 800; Montréal, Québec; Canada H3B 5H2
(Address of principal executive offices) (Zip Code)
(514) 875-2160
 
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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.
Yesþ       Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).Act.
Large Accelerated Fileraccelerated filerþ Accelerated Filerfilero Non-accelerated FilerfileroSmaller reporting companyo
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso       No      þ
Indicate the numberAs of April 30, 2008, there were 53,163,151 shares outstanding of each of the issuer’s classes ofAbitibiBowater common stock as of November 1, 2007.
ClassOutstanding at November 1, 2007
Common Stock, $1.00 Par Value
57,458,815 Shares
outstanding.
 
 

 

ABITIBIBOWATER INC.
I N D E XTABLE OF CONTENTS
     
    Page Number
 
PART I FINANCIAL INFORMATION FINANCIAL INFORMATION  
     
Item 1.Financial Statements:  
     
  Consolidated Statements of Operations for the Three and Nine Months Ended September 30,March 31, 2008 and 2007 and 2006 32
     
  Consolidated Balance Sheets at September 30, 2007March 31, 2008 and December 31, 20062007 43
     
  Consolidated Statements of Stockholders’Shareholders’ Equity for the NineThree Months Ended September 30,March 31, 2008 and 2007 and 2006 54
     
  Consolidated Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2008 and 2007 and 2006 65
     
  Notes to Consolidated Financial Statements 7 - 226-16
     
Item 2.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 - 4317-36
     
Item 3.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44 - 4536
     
Item 4.
 
Item 4. Controls and Procedures 4537
     
PART II OTHER INFORMATION
 OTHER INFORMATION  
     
Item 1.
 
Item 1. Legal Proceedings 4638
     
Item 1A.
 
Item 1A. Risk Factors 46 - 5338-44
     
Item 6.
 
Item 6. Exhibits 5445
     
SIGNATURES
  5546
Exhibit 2.1
Exhibit 10.1
Exhibit 10.2
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

21

ABITIBIBOWATER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions of US dollars except per share and per-share amounts)
         
  Three months ended 
  March 31, 
  2008  2007 
 
         
Sales   $1,728    $772 
Costs and expenses:        
Cost of sales, excluding depreciation, amortization and cost of timber harvested  1,403   601 
Depreciation, amortization and cost of timber harvested  191   80 
Distribution costs  199   75 
Selling and administrative expenses  97   49 
Closure costs and other related charges  10   - 
Net gain on disposition of assets  (23)  (58)
 
Operating (loss) income
  (149)  25 
Interest expense  (129)  (47)
Other income (expense), net  34   (5)
 
Loss before income taxes and minority interests
  (244)  (27)
Income tax provision  (3)  (1)
Minority interests, net of tax  (1)  (7)
 
Net loss
   $(248)   $(35)
 
         
Net loss per common share:
        
Basic and diluted   $(4.32)   $(1.19)
 
Weighted-average number of shares outstanding:
        
Basic and diluted (Restated in 2007 - Note 1)  57.5   29.9 
 
         
Dividends declared per common share
   $-    $0.38 
 
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2007 2006 2007 2006
 
Sales $814.7  $875.9  $2,384.9  $2,668.5 
Costs and expenses:                
Cost of sales, excluding depreciation, amortization and cost of timber harvested  672.3   650.7   1,912.3   2,028.6 
Depreciation, amortization and cost of timber harvested  79.5   80.8   239.1   243.1 
Distribution costs  83.9   83.4   242.0   249.8 
Selling and administrative expense  49.8   47.9   144.8   127.2 
Arbitration award  28.4   —   28.4   — 
Impairment and other related charges  —   246.4   —   246.4 
Net gain on disposition of assets  (17.1)  (54.0)  (139.6)  (154.5)
 
Operating loss
  (82.1)  (179.3)  (42.1)  (72.1)
Interest expense  (47.3)  (50.8)  (141.9)  (149.5)
Other (expense) income, net  (16.1)  4.9   (34.8)  9.7 
 
Loss before income taxes, minority interests, and cumulative effect of accounting change
  (145.5)  (225.2)  (218.8)  (211.9)
 
Income tax benefit (provision)  0.4   9.9   (19.2)  (29.5)
Minority interests, net of tax  3.0   (0.8)  (2.1)  (1.5)
 
Loss before cumulative effect of accounting change
  (142.1)  (216.1)  (240.1)  (242.9)
 
Cumulative effect of accounting change, net of tax  —   —   —   (2.6)
 
Net loss
 $(142.1) $(216.1) $(240.1) $(245.5)
 
                 
 
Loss per share:
                
Basic loss per common share:                
Loss before cumulative effect of accounting change $(2.47) $(3.76) $(4.18) $(4.23)
Cumulative effect of accounting change, net of tax  —   —   —   (0.05)
 
Net loss $(2.47) $(3.76) $(4.18) $(4.28)
 
Diluted loss per common share:                
Loss before cumulative effect of accounting change $(2.47) $(3.76) $(4.18) $(4.23)
Cumulative effect of accounting change, net of tax  —   —   —   (0.05)
 
Net loss $(2.47) $(3.76) $(4.18) $(4.28)
 
Average number of shares outstanding (in millions):                
Basic and diluted  57.5   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.

2

ABITIBIBOWATER INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions)
         
  March 31, December 31,
  2008  2007 
 
         
Assets
        
Current assets:
        
Cash and cash equivalents   $292    $195 
Accounts receivable, net  809   754 
Inventories, net  905   906 
Assets held for sale  217   184 
Other current assets  101   103 
 
Total current assets
  2,324   2,142 
 
Timber and timberlands  54   58 
Fixed assets, net  5,569   5,707 
Goodwill  779   779 
Other intangible assets, net  1,170   1,203 
Other assets  429   430 
 
Total assets
   $10,325    $10,319 
 
         
Liabilities and shareholders’ equity
        
Current liabilities:
        
Accounts payable and accrued liabilities   $1,195    $1,206 
Short-term bank debt  894   589 
Current installments of long-term debt  366   364 
Liabilities associated with assets held for sale  25   19 
 
Total current liabilities
  2,480   2,178 
 
Long-term debt, net of current installments  4,697   4,695 
Pension and other postretirement benefit obligations  905   936 
Other long-term liabilities  243   231 
Deferred income taxes  235   230 
Minority interests in subsidiaries  147   150 
Commitments and contingencies        
Shareholders’ equity:
        
Common stock, $1 par value. 52.6 shares at March 31, 2008 and 52.4 shares at December 31, 2007  53   52 
Exchangeable shares, no par value. 4.9 shares at March 31, 2008 and 5.1 shares at December 31, 2007  267   276 
Additional paid-in capital  2,323   2,313 
Retained deficit  (852)  (598)
Accumulated other comprehensive loss  (173)  (144)
         
 
Total shareholders’ equity
  1,618   1,899 
 
Total liabilities and shareholders’ equity
   $10,325    $10,319 
 
See accompanying notes to consolidated financial statements.

3

ABITIBIBOWATER INC.
CONSOLIDATED BALANCE SHEETS
STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited, in millions of US dollars except share and per-share amounts)
                         
  For the three months ended March 31, 2008 
                  Accumulated    
          Additional      Other  Total 
  Common  Exchangeable  Paid-In  Retained  Comprehensive  Shareholders’ 
  Stock  Shares  Capital  Deficit  Loss  Equity 
 
Balance at December 31, 2007   $52    $276    $2,313    $(598)   $(144)   $1,899 
 
Adoption of SFAS 158, net of tax  -   -   -   (6)  (11)  (17)
Exchangeable shares retracted and common issued (0.2 shares)  1   (9)  8   -   -   - 
                         
Share-based compensation costs for equity awards  -   -   2   -   -   2 
                         
Comprehensive loss:                        
                         
Net loss  -   -   -   (248)  -   (248)
                         
Change in unrealized prior service costs, net of tax of $1  -   -   -   -   1   1 
                         
Change in actuarial gains and losses, net of tax of $1  -   -   -   -   (2)  (2)
                         
Foreign currency translation  -   -   -   -   (19)  (19)
                         
Change in unrecognized gain on hedged transactions, net of tax of $1  -   -   -   -   2   2 
                       
Total comprehensive loss                      (266)
 
Balance at March 31, 2008
   $53    $267    $2,323    $(852)   $(173)   $1,618 
 
         
  September 30,
2007		 December 31,
2006
 
Assets
        
         
Current assets:
        
Cash and cash equivalents $83.9  $98.9 
Accounts receivable, net  456.7   444.5 
Inventories  366.8   349.8 
Timberlands held for sale  4.8   18.7 
Other current assets  68.5   47.1 
 
Total current assets
  980.7   959.0 
 
Timber and timberlands  58.8   60.8 
Fixed assets, net  2,737.3   2,877.9 
Goodwill  590.7   590.2 
Other assets  142.6   158.0 
 
Total assets
 $4,510.1  $4,645.9 
 
         
Liabilities and shareholders’ equity
        
Current liabilities:
        
Current installments of long-term debt $21.7  $14.9 
Short-term bank debt  72.0   — 
Accounts payable and accrued liabilities  466.1   431.2 
 
Total current liabilities
  559.8   446.1 
 
Long-term debt, net of current installments  2,243.9   2,251.6 
Pension and other postretirement benefits obligations  641.1   651.1 
Other long-term liabilities  72.1   92.5 
Deferred income taxes  349.3   313.0 
Minority interests in subsidiaries  77.7   59.0 
Commitments and contingencies        
Shareholders’ equity:
        
Common stock, $0.01 par value. Authorized 100 shares; issued 2 shares at September 30, 2007. No shares were authorized, issued or outstanding at December 31, 2006  —   — 
Common stock, $1 par value. Authorized 100,000,000 shares; issued 67,852,878 and 67,585,104 shares at September 30, 2007 and December 31, 2006, respectively  67.8   67.6 
Exchangeable shares, no par value. Unlimited shares authorized; 1,202,154 and 1,423,830 shares outstanding at September 30, 2007 and December 31, 2006, respectively  56.8   67.6 
Additional paid-in capital  1,650.5   1,630.1 
Retained deficit  (348.8)  (76.0)
Accumulated other comprehensive loss  (374.4)  (371.0)
Treasury stock at cost, 11,597,419 and 11,600,717 shares at September 30, 2007 and December 31, 2006, respectively  (485.7)  (485.7)
 
Total shareholders’ equity
  566.2   832.6 
 
Total liabilities and shareholders’ equity
 $4,510.1  $4,645.9 
 
                             
  For the three months ended March 31, 2007 
          Additional      Accumulated        
  Common      Paid-In      Other      Total 
  Stock  Exchangeable  Capital  Retained  Comprehensive  Treasury  Shareholders’ 
  (restated)  Shares  (restated)  Deficit  Loss  Stock  Equity 
 
Balance at December 31, 2006   $35    $68    $1,663    $(76)   $(371)   $(486)   $833 
 
Adoption of FIN 48  -   -   -   2   -   -   2 
Dividends on common stock ($0.38 per share)  -   -   -   (12)  -   -   (12)
Exchangeable shares retracted and common issued (0.1 shares)  -   (11)  11   -   -   -   - 
Share-based compensation  -   -   4   -   -   -   4 
                             
Comprehensive loss:                            
                             
Net loss  -   -   -   (35)  -   -   (35)
                             
Change in unamortized prior service costs, net of tax of $1  -   -   -   -   (1)  -   (1)
                             
Change in unamortized actuarial gains and losses, net of tax of $2  -   -   -   -   8   -   8 
                             
Foreign currency translation  -   -   -   -   -   -   - 
                             
Change in unrecognized gain on hedged transactions, net of tax of $1  -   -   -   -   1   -   1 
                           
Total comprehensive loss                          (31)
 
Balance at March 31, 2007
   $35    $57    $1,678    $(121)   $(367)   $(486)   $796 
 
See accompanying notes to consolidated financial statements.

4

ABITIBIBOWATER INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CASH FLOWS
(Unaudited, in millions of US dollars except share and per-share amounts)millions)
For the nine months ended September 30, 2007
                             
                  Accumulated      
          Additional     Other     Total
  Common Exchangeable Paid In Retained Comprehensive     Shareholders’
  Stock Shares Capital Deficit Loss Treasury Stock Equity
 
Balance at December 31, 2006 $67.6  $67.6  $1,630.1  $(76.0) $(371.0) $(485.7) $832.6 
 
Cumulative adjustment to retained deficit for the adoption of FIN 48  —   —   —   2.3   —   —   2.3 
Dividends on common stock ($0.60 per share)  —   —   —   (35.0)  —   —   (35.0)
Issuance of common stock (2 shares)  —   —   —   —   —   —   — 
Retraction of exchangeable shares (221,676 shares issued and exchangeable shares retracted)  0.2   (10.8)  10.6   —   —   —   — 
Share-based compensation costs for equity awards  —   —   10.6   —   —   —   10.6 
Restricted stock units vested (46,098 shares, net of shares forfeited for employee withholding taxes)  —   —   (0.8)  —   —   —   (0.8)
Treasury stock used for dividend reinvestment plans and to pay employee and director benefits (3,298 shares)  —   —   —   —   —   —   — 
                             
Comprehensive loss:                            
Net loss  —   —   —   (240.1)  —   —   (240.1)
Change in unrealized prior service costs, net of tax of $2.7  —   —   —   —   (2.2)  —   (2.2)
Change in actuarial gains and losses, net of tax of $6.5  —   —   —   —   28.7   —   28.7 
Foreign currency translation  —   —   —   —   (30.7)  —   (30.7)
Change in unrealized gain on hedged transactions, net of tax of $0.5  —   —   —   —   0.8   —   0.8 
                             
Total comprehensive loss                          (243.5)
 
Balance at September 30, 2007
 $67.8  $56.8  $1,650.5  $(348.8) $(374.4) $(485.7) $566.2 
 
For the nine months ended September 30, 2006
                             
                  Accumulated      
          Additional     Other     Total
  Common Exchangeable Paid In Retained Comprehensive     Shareholders’
  Stock Shares Capital Earnings (Deficit) Loss Treasury Stock Equity
 
Balance at December 31, 2005 $67.5  $68.1  $1,621.6  $100.1  $(156.0) $(485.8) $1,215.5 
 
Cumulative adjustment to retained earnings for adoption of SAB 108  —   —   —   8.6   —   —   8.6 
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 
Share-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  $(171.5) $(175.3) $(485.8) $929.8 
 
         
  Three months ended
  March 31
  2008  2007 
 
         
Cash flows from operating activities:
        
Net loss   $(248)   $(35)
Adjustments to reconcile net loss to net cash from operating activities:        
Share-based compensation  6   5 
Depreciation, amortization and cost of timber harvested  191   80 
Deferred income taxes  (8)  (3)
Minority interests, net of tax  1   7 
Net pension contributions  (60)  (11)
Net gain on disposition of assets  (23)  (58)
Amortization of debt discount (premium), net  14   (2)
Gain on translation of foreign-currency denominated debt  (14)  - 
Changes in working capital:        
Accounts receivable  (55)  30 
Inventories  1   (27)
Income taxes receivable and payable  11   4 
Accounts payable and accrued liabilities  6   (12)
Other, net  (19)  6 
 
Net cash used for operating activities
  (197)  (16)
 
Cash flows from investing activities:
        
Cash invested in fixed assets, timber and timberlands  (35)  (26)
Dispositions of assets, including timber and timberlands  29   64 
Direct acquisition costs related to the Combination  -   (9)
Other investing activities, net  (1)  - 
 
Net cash (used for) provided by investing activities
  (7)  29 
 
Cash flows from financing activities:
        
Cash dividends, including minority interests  (2)  (11)
Short-term financing  306   8 
Short-term financing repayments  -   (8)
Payments of long-term debt  (3)  (3)
 
Net cash provided by (used for) financing activities
  301   (14)
 
Net increase (decrease) in cash and cash equivalents  97   (1)
Cash and cash equivalents:
        
Beginning of period  195   99 
 
End of period   $292    $98 
 
See accompanying notes to consolidated financial statements.

5

ABITIBIBOWATER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Notes to Unaudited in millionsConsolidated Financial Statements
1. Organization and Basis of US dollars)Presentation
Basis of Presentation
             
  Nine Months Ended    
  September 30,    
  2007 2006    
     
Cash flows from operating activities:
            
Net loss $(240.1) $(245.5)    
Adjustments to reconcile net loss to net cash (used for) provided by operating activities:            
Cumulative effect of accounting change, net of tax  —   2.6     
Share-based compensation  10.1   1.8     
Depreciation, amortization and cost of timber harvested  239.1   243.1     
Impairment and other related charges  —   246.4     
Deferred income taxes  31.4   21.6     
Minority interests, net of tax  2.1   1.5     
Net pension (contributions) benefit costs  (26.6)  (25.9)    
Net gain on disposition of assets  (139.6)  (154.5)    
Changes in working capital:            
Accounts receivable, net  (12.1)  (51.4)    
Inventories  (17.0)  6.8     
Income taxes receivable and payable  0.1   11.2     
Accounts payable and accrued liabilities  34.6   21.2     
Other, net  4.1   (10.6)    
     
Net cash (used for) provided by operating activities  (113.9)  68.3     
     
Cash flows from investing activities:
            
Cash invested in fixed assets, timber and timberlands  (72.6)  (138.0)    
Dispositions of assets, including timber and timberlands  166.6   296.5     
Direct acquisition costs related to the merger with Abitibi-Consolidated Inc.  (17.2)  —     
     
Net cash provided by investing activities  76.8   158.5     
     
Cash flows from financing activities:
            
Cash dividends  (34.9)  (34.7)    
Short-term financing  80.0   370.9     
Short-term financing repayments  (8.0)  (432.5)    
Repurchase of long-term debt  —   (17.5)    
Payments of long-term debt  (15.0)  (22.3)    
     
Net cash provided by (used for) financing activities  22.1   (136.1)    
     
Net (decrease) increase in cash and cash equivalents  (15.0)  90.7     
Cash and cash equivalents:
            
Beginning of period  98.9   30.1     
 
End of period $83.9  $120.8     
 
Supplemental disclosures of cash flow information:
            
Cash paid during the year for:            
Interest, including capitalized interest of $0.3 and $2.8, respectively $119.9  $129.6     
Income taxes $—  $6.8     
 
See accompanying notesOn October 29, 2007, pursuant to a Combination Agreement and Agreement and Plan of Merger, dated as of January 29, 2007, Abitibi-Consolidated Inc. (“Abitibi”) and Bowater Incorporated (“Bowater”) combined in a merger of equals (the “Combination”) with each becoming a wholly-owned subsidiary of AbitibiBowater Inc. (“AbitibiBowater,” also referred to as “we” or “our”). The Combination has been accounted for in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” Bowater is deemed to be the “acquirer” of Abitibi for accounting purposes, and AbitibiBowater is deemed to be the successor to Bowater for purposes of U.S. securities laws and regulations governing financial reporting. Therefore, unless otherwise indicated, our consolidated financial statements.statements and notes reflect the results of operations and financial position of both Abitibi and Bowater as of March 31, 2008 and December 31, 2007 and for the three-month period ended March 31, 2008 and those of only Bowater for the three-month period ended March 31, 2007. As a result of the Combination, each issued and outstanding share of Bowater common stock and exchangeable share of Bowater Canada Inc. (a wholly-owned subsidiary of Bowater now named AbitibiBowater Canada Inc.) was converted into 0.52 of a share of AbitibiBowater common stock and 0.52 of an exchangeable share of AbitibiBowater Canada Inc., respectively. Each issued and outstanding share of Abitibi common stock was exchanged for either 0.06261 of a share of AbitibiBowater common stock or 0.06261 of an exchangeable share of AbitibiBowater Canada Inc. We retroactively restated all share and share-related information in our consolidated financial statements and notes for the periods preceding the Combination to reflect the Bowater exchange ratio of 0.52.
The consolidated balance sheet as of March 31, 2008, and the related statements of operations, shareholders’ equity and cash flows for the periods ended March 31, 2008 and 2007 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 March 31, 2008 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 estimates included in our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008. Certain prior-year amounts in the unaudited consolidated financial statements and the related notes have been reclassified to conform to the 2008 presentation. The reclassifications had no effect on total shareholders’ equity or net loss.
Recently adopted accounting pronouncements
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a framework for measuring fair value. It applies to other accounting pronouncements that require or permit fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 as it is applied to financial assets and liabilities and for fiscal years beginning after November 15, 2008 as it is applied to non-financial assets and liabilities. The adoption of SFAS 157 as it relates to our financial assets and liabilities, effective as of January 1, 2008, did not have an impact on our results of operations or financial position. See also note 13, “Financial Instruments.” We continue to evaluate the impact the adoption of SFAS 157 will have on our non-financial assets and liabilities, which will become effective January 1, 2009.
In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158’s measurement date provisions are effective for fiscal years ending after December 15, 2008. A measurement date of September 30, 2007 was used for all of our Bowater plans, while the measurement date for our Abitibi plans was October 29, 2007. SFAS 158 requires us to use a December 31 measurement date. We have elected to use the 15-month transition method to determine the amount of the adjustment to our opening retained deficit balance and opening accumulated other comprehensive loss balance on January 1, 2008, and the adjustment increased our retained deficit by $6 million, net of taxes of $2 million, and increased our accumulated other comprehensive loss by $11 million, net of taxes of $1 million. The increase to our accumulated other comprehensive loss primarily represents the additional net actuarial loss that arose from our fourth quarter of 2007 settlement and curtailment events.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits an election to measure selected financial assets and liabilities at fair value each financial reporting date with changes in their fair values recorded in income. We chose not to make this fair value accounting election

6

ABITIBIBOWATER INC.

Notes to Unaudited Consolidated Financial Statements — Unaudited
for any of our financial assets and liabilities. Accordingly, any financial assets and liabilities within the scope of SFAS 159 will continue to be carried at their historical amortized cost basis, adjusted for other than temporary impairments in value. As a result, the adoption of SFAS 159, effective as of January 1, 2008, did not have an impact on our results of operations or financial position.
New accounting pronouncements
1.Summary of Significant Accounting Policies
Basis of Presentation
AbitibiBowater Inc. (“AbitibiBowater”) was incorporated in Delaware on January 25, 2007. On October 29, 2007, pursuant to a Combination Agreement and Agreement and Plan of Merger, dated as of January 29, 2007, among AbitibiBowater, Abitibi-Consolidated Inc. (“Abitibi”), Bowater Incorporated (“Bowater”), Alpha-Bravo Merger Sub Inc. (“Merger Sub”) and Bowater Canada Inc. (now named AbitibiBowater Canada Inc.), as amended by the First Amendment, dated as of May 7, 2007 (as amended, the “Combination Agreement”), the following transactions (as well as additional related transactions) were consummated (collectively, the “Combination”):
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). This Statement changes the disclosure requirements for derivative instruments and hedging activities, requiring us to provide enhanced disclosures about (a) how and why we use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. Early application is encouraged.
•Merger Sub was merged with and into Bowater, with Bowater continuing as the surviving corporation, and each issued and outstanding share of Bowater common stock (excluding shares to be cancelled in accordance with the Combination Agreement) was converted into the right to receive 0.52 shares of AbitibiBowater common stock; and
•the Articles of Arrangement (as defined in the Combination Agreement) became effective pursuant to which, among other things, each outstanding common share of Abitibi (other than the Abitibi common shares exchanged for AbitibiBowater Canada Inc. exchangeable shares) were transferred to AbitibiBowater in exchange for 0.06261 shares of AbitibiBowater common stock.
In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This new guidance also provides additional disclosure requirements related to recognized intangible assets. This FSP is effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited.
As a result of these transactions, Abitibi and Bowater became subsidiaries of AbitibiBowater, and AbitibiBowater issued approximately 57.5 million shares of AbitibiBowater common stock to the former shareholders of Abitibi and Bowater.
AbitibiBowater is deemed to be the successor to Bowater for purposes of U.S. securities laws and regulations governing financial reporting and, even though Abitibi and Bowater consider the Combination to have been a merger-of-equals, Bowater is deemed to be the “acquirer” for accounting purposes. Therefore, the accompanying consolidated financial statements reflect the results of operations and financial position of Bowater for the periods presented. However, any references to amounts for periods after the closing of the Combination relate to AbitibiBowater. AbitibiBowater had no separate operations for the periods presented.
Unless the context otherwise requires, both Bowater and AbitibiBowater are referred to as the “Company,” in this Quarterly Report on Form 10-Q.
The consolidated balance sheet as of September 30, 2007, and the related statements of operations, stockholders’ equity and cash flows for the periods ended September 30, 2007 and 2006 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, 2007 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 estimates included in Bowater’s most recent Annual Report on Form 10-K. Certain prior-year amounts in the notes to the financial statements have been reclassified to conform to the 2007 presentation. The reclassifications had no effect on total shareholders’ equity or net loss.
On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for the uncertainty in income taxes recognized by prescribing the threshold a tax position is required to meet before being recognized in the financial statements. As a result of the adoption, we recorded a $2.3 million credit to our opening retained deficit balance in 2007. The credit represents the cumulative effect of adoption on prior periods. For additional information regarding this adjustment, refer to Note 9, Income Taxes.
In December 2006, we adopted the provisions of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).
2. Business Combination
As discussed in Note 1, the Combination of Abitibi and Bowater was completed on October 29, 2007. The purchase price of $1.4 billion was allocated to the identifiable assets acquired and liabilities assumed based on their relative fair values. The purchase price allocation is still preliminary and subject to refinement during the allocation period, which will not last beyond a year from the date of purchase to allow for the finalization of the gathering and review of all pertinent information. No significant adjustments were made to the preliminary purchase price allocation during the first quarter of 2008.
3. Closure Costs and Other Related Charges
Immediately upon the Combination, we began a comprehensive strategic review of our operations to reduce costs and improve our profitability. On November 29, 2007, we announced the results of the initial phase of our comprehensive review, which included a decision to reduce our newsprint and specialty papers production capacity by approximately one million metric tons per year. The reductions included the permanent closure of Bowater’s Dalhousie, New Brunswick facility and Abitibi’s Belgo, Quebec facility; Fort William, Ontario facility and Lufkin, Texas facility, as well as the indefinite idling of Bowater’s Donnacona, Quebec facility and Abitibi’s Mackenzie, British Columbia facility, including two sawmills that directly support the Mackenzie paper mill operations. Additionally, we decided to permanently close paper machine no. 3 at Bowater’s Gatineau, Quebec facility. The actions were completed in the first quarter of 2008. We recorded charges of $123 million for long-lived asset impairment, severance and termination costs associated with our Bowater mills in the fourth quarter of 2007. The costs associated with our Abitibi mills were included in liabilities assumed in the Combination.
During the three-month period ended March 31, 2008 we recorded additional closure costs and other related charges of $10 million primarily for noncancelable contracts at our Bowater Dalhousie and Donnacona operations.
4. Severance Related Liabilities
The activity in our severance related liabilities is as follows:
                 
 
(Unaudited, in millions) 2008 Initiatives 2007 Initiatives 2006 Initiatives Total 
 
Balance at December 31, 2007 $-  $100  $3  $103 
Charges (Credits)  6   2   -   8 
Payments  -   (24)  (1)  (25)
Other  -   (4)  -  (4)
 
Balance at March 31, 2008
 $6  $74  $2  $82 
 

7

ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements —
In 2008, we recorded employee termination costs primarily associated with downsizings at several of our mills. The remaining severance accrual is expected to be paid out in 2008 and 2009.
In 2007, we recorded employee termination costs primarily associated with the closures announced as a result of our comprehensive strategic review; mill-wide restructurings at our Thunder Bay, Ontario; Gatineau, Quebec; Donnacona, Quebec and Dolbeau, Quebec facilities, the preliminary allocation of the purchase price of Abitibi to severance liabilities assumed in the Combination, lump-sum payouts of pension assets to certain employees and certain changes to our U.S. postretirement benefit plans. These initiatives resulted in the elimination of approximately 428 positions. The remaining severance accrual is expected to be paid out in 2008 and 2009.
We do not allocate employee termination and severance costs to our segments; thus, these costs are included in “Corporate and Other” in our segment information. Termination costs are classified as cost of sales (manufacturing personnel), selling and administrative expenses (administrative personnel) or closure costs, impairment and other related charges (mill closures) in our Consolidated Statements of Operations. The severance accruals are included in “Accounts payable and accrued liabilities” in the Consolidated Balance Sheets.
5. Other Income (Expense), Net
“Other income (expense), net” in the Consolidated Statements of Operations includes the following:
         
 
  Three Months Ended 
  March 31, 
(Unaudited, in millions) 2008  2007 
 
         
Foreign exchange gain (loss)   $41    $(3)
Loss from equity method investments  (1)  (2)
Interest income  3   2 
Loss on sale of accounts receivable  (5)  - 
Miscellaneous loss  (4)  (2)
 
    $34    $(5)
 
6. Loss Per Share
No adjustments to net loss are necessary to compute net loss per basic and diluted share for all periods presented. Additionally, no adjustments to our basic weighted-average number of common shares outstanding are necessary to compute our diluted weighted-average number of common shares outstanding for all periods presented. Options to purchase 3.8 million and 2.5 million shares for the three months ended March 31, 2008 and March 31, 2007, respectively, were excluded from the calculation of diluted loss per share as the impact would have been anti-dilutive. In addition, 0.2 million and 0.5 million restricted stock units for the three months ended March 31, 2008 and 2007, respectively, were excluded from the calculation of diluted loss per share for the same reason.

8

ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements
7. Inventories, net
Inventories, net consist of the following:
         
 
  March 31, December 31,
(Unaudited, in millions) 2008  2007 
 
At lower of cost or market:        
Raw materials and work in process   $220    $220 
Finished goods  340   355 
Mill stores and other supplies  359   345 
 
   919   920 
Excess of current cost over LIFO inventory value  (14)  (14)
 
    $905    $906 
 
8. Assets Held for Sale and Liabilities Associated with Assets Held for Sale
Assets held for sale are comprised of the following:
         
 
  March 31, December 31,
(Unaudited, in millions) 2008  2007 
 
Accounts receivable   $1    $2 
Inventories  16   15 
Other current assets  1   - 
Timber and timberlands  15   8 
Fixed assets, net  163   159 
Investment in hydroelectric assets  21   - 
 
    $217    $184 
 
Liabilities associated with assets held for sale are comprised of the following:
         
 
  March 31, December 31,
(Unaudited, in millions) 2008  2007 
 
Accounts payable and accrued liabilities   $23    $17 
Other long-term liabilities  2   2 
 
    $25    $19 
 
At December 31, 2007, we held our Snowflake paper mill, Price sawmill and some of our timberlands in the United States and Canada for sale. On March 23, 2008, we sold our Price sawmill to Groupe Lebel (2004) Inc. for approximately $5 million, resulting in a gain of $2 million. During the three months ended March 31, 2008, we sold approximately 14,916 acres of timberlands and other assets for proceeds of approximately $24 million, resulting in a net gain on disposition of assets of $21 million. In connection with the review and approval of the Combination by the antitrust division of the U.S. Department of Justice (“DOJ”), we agreed, among other things, to sell our Snowflake, Arizona newsprint mill, which is included in our Newsprint segment, and certain related assets and liabilities. On April 10, 2008, we completed the sale of Abitibi’s Snowflake mill to a subsidiary of Catalyst Paper Corporation for approximately $161 million. This sale was approved by the DOJ.
At March 31, 2008, in addition to our Snowflake mill, we held our Fort William, Ontario facility, an investment we have in a hydroelectric facility and some of our timberlands in the United States and Canada for sale. We plan to complete the sale of these assets in 2008 for an amount that exceeds their individual carrying values. The assets and liabilities held for sale are carried on our Consolidated Balance Sheets at the lower of carrying value or fair value less costs to sell.
In April 2008, we decided to sell and began marketing our Mokpo, Korea newsprint facility for sale. The related assets and liabilities will be included in assets held for sale beginning in the second quarter of 2008. The mill is expected to be sold for an amount that exceeds its carrying value.

9

ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements
9. Pension and Other Postretirement Expense
The components of net periodic benefit costs relating to our pension and other postretirement benefits plans (“OPEB plans”) are as follows for the three months ended March 31, 2008 and 2007:
                 
  
  Pension Plans  Other Postretirement Plans 
  Three Months Ended  Three Months Ended 
  March 31,  March 31, 
(Unaudited, in millions) 2008    2007    2008    2007   
 
Components of net periodic benefit cost:                
Service cost    $19     $9  $1  $- 
Interest cost  89   30   6   3 
Expected return on plan assets  (102)  (32)  -   - 
Amortization of prior service cost (credit)  1   1   (3)  (3)
Recognized net actuarial loss  2  7   1   2 
Curtailments and settlements  -   5   -   (3)
 
Net periodic benefit cost (credit)    $9     $20  $5  $(1)
 
Events Impacting Net Periodic Benefit Cost for the Three months Ended March 31, 2007
In December 2006, certain employees received lump-sum payouts from two of our retirement pension plans. Accordingly, we recorded settlement losses of $5 million in the first quarter of 2007.
In October 2006, we approved changes to the other postretirement plan for our U.S. salaried employees. Benefits for employees were either eliminated or reduced depending on whether the employee met certain age and years of service criteria. As a result, we recorded a curtailment gain of $3 million in the first quarter of 2007.
10. Liquidity and Debt
As of March 31, 2008, our total liquidity was comprised of liquidity from our Abitibi and Bowater subsidiaries.
As described in Notes 4 and 17 to our audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008, our Abitibi subsidiary was experiencing a liquidity shortfall and facing significant near-term liquidity challenges. As a result of these liquidity issues, we had concluded at December 31, 2007 that there was substantial doubt about Abitibi’s ability to continue as a going concern. As of March 31, 2008, Abitibi had a total of $346 million of long-term debt maturing in 2008: $196 million principal amount of its 6.95% Senior Notes due April 1, 2008 and $150 million principal amount of its 5.25% Senior Notes due June 20, 2008. Additionally, Abitibi had revolving bank credit facilities with commitments totalling $692 million maturing in the fourth quarter of 2008. These amounts were successfully refinanced on April 1, 2008. SeeRefinancingsection below for a discussion of the financing transactions completed. While our April 1 refinancing has alleviated the substantial doubt about Abitibi’s ability to continue as a going concern, significant financial uncertainties remain for Abitibi to overcome including, but not limited to, Abitibi’s ability to repay or to refinance the $350 million 364-day term facility due on March 30, 2009, to service the considerable debt resulting from the April 1 refinancings and to overcome their expected ongoing net losses and negative cash flows.

10

ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements
Refinancing
On April 1, 2008 AbitibiBowater successfully completed a series of financing transactions designed to address these upcoming debt maturities and general liquidity needs, principally at its Abitibi subsidiary. The transactions included:
 We elected, as allowed under SAB 108, to reflect the effect of initially applying this guidance by adjusting the carrying amount of the impacted liabilities as of the beginning of 2006 and recording an offsetting adjustment to the opening balance of our retained earnings in 2006. We recorded a cumulative adjustment to increase our retained earnings by $8.6 million for the adoption of SAB 108.
2.§ Inventories
         
  September 30, December 31,
(Unaudited, in millions) 2007 2006
 
At lower of cost or market:        
Raw materials $57.3  $87.7 
Work in process  18.0   20.1 
Finished goods  155.9   123.0 
Mill stores and other supplies  149.0   132.0 
 
   380.2   362.8 
Excess of current cost over LIFO inventory value  (13.4)  (13.0)
 
  $366.8  $349.8 
 
3.Timberlands Held for SaleA private placement, by ACCC of $413 million of 13.75% senior secured notes due 2011 (“2011 Notes”). The senior secured notes are guaranteed by Abitibi and certain of its subsidiaries, and are secured by mortgages on certain pulp and paper mills owned by, and security interests in and pledges of certain other assets of, ACCC and the guarantors.
 
 §We are currently marketing for sale approximately 17,600 acresA $400 million 364-day senior secured term loan (“Term Loan”) to ACCC, with interest at LIBOR + 800 basis points, with a 3.5% LIBOR floor. ACCC is required to repay $50 million of timberlands in the United States and Canada. TheTerm Loan with certain proceeds from the sale of these timberlandsour Snowflake, Arizona newsprint mill (see note 8 “Assets Held for Sale and Liabilities Associated with Assets Held for Sale”). The senior secured term loan is expected to be completed in 2007secured primarily by the personal property (including accounts receivable and 2008. Timberlands held for sale are carriedinventory, but excluding equipment, intellectual property and capital stock of subsidiaries) of ACCC, Abitibi and other guarantors, and by a first lien on our Consolidated Balance Sheets at cost as we expect the proceedssubstantially all of the timberland salesassets of Donohue Corp., a direct subsidiary of AbitibiBowater (“D Corp.”), and D Corp’s subsidiaries, including fixed assets and certain other assets. The Term Loan ranks effectively senior to exceed the individual carrying values2011 Notes to the extent of the timberlands sold. Included in deferred income taxes are $1.1 million and $4.8 million at September 30, 2007 and December 31, 2006, respectively, of deferred tax liabilities associated with these timberlands held for sale.collateral securing the Term Loan.
 
 §DuringA private exchange offer whereby ACCC exchanged a combination of new senior unsecured notes and cash for an aggregate of a $455 million of outstanding notes issued by Abitibi, ACCC and Abitibi-Consolidated Finance L.P. (“ACF”), a wholly-owned subsidiary of Abitibi. The exchange included a combination of cash and new 15.5% unsecured notes, due 2010, issued by ACCC for three series of outstanding notes: (i) $175 million principal amount of 6.95% senior notes due April 1, 2008, issued by Abitibi, (ii) $138 million principal amount of 5.25% senior notes due June 20, 2008, issued by ACCC, and (iii) $142 million principal amount of 7.875% senior notes due August 1, 2009, issued by ACF. We expect this debt exchange transaction to result in an extinguishment gain during the three months ended September 30, 2007, we sold approximately 11,400 acressecond quarter of timberlands and other assets for proceeds2008 of approximately $19.2 million. During the nine months ended September 30, 2007, we sold approximately 119,200 acres of timberlands and other assets for proceeds of approximately $166.6$30 million.
 
 §DuringSimultaneously with these transactions, AbitibiBowater consummated the three months ended September 30, 2006,sale of a private placement of $350 million of 8% convertible notes due 2013 (“Convertible Notes”) to Fairfax Financial Holdings Limited (“Fairfax”) and certain of its designated subsidiaries. The Convertible Notes bear interest at a rate of 8% per annum (10% per annum if we sold approximately 23,000 acreselect to pay interest through the issuance of timberlandsadditional convertible notes as “pay in kind”). Bowater provided a full and other assets for proceedsunconditional guarantee of approximately $58.4 million. During the nine months ended September 30, 2006, we sold approximately 519,000 acrespayment of timberlands,principal and interest, and premium, if any, on the debentures. Bowater’s guarantee ranks equally in right of payment with all of our Dégelisexisting and Baker Brook sawmills and other assets for proceedsfuture senior indebtedness. The Convertible Notes are not guaranteed by Abitibi or any of approximately $296.5 million.its respective subsidiaries. The Convertible Notes are convertible into shares of AbitibiBowater common stock at an initial conversion price of $10.00 per share. On April 15, 2008, Fairfax exercised its right to appoint the two directors to the Board of AbitibiBowater, pursuant to the terms of the purchase agreement.
As a result of the refinancings and the repayment and cancellation of the Abitibi credit facilities, Abitibi is no longer subject to financial covenants on its recourse debt.

811

ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements — Unaudited
Short-term Debt
4.Accumulated Other Comprehensive Loss
The components of “Accumulated other comprehensive loss” in the Consolidated Balance Sheets areAbitibi and Bowater each maintain separate bank credit facilities. As of March 31, 2008, our available borrowings under such bank credit facilities were as follows:
                     
  
                  Weighted 
      Amount  Commitment  Termination  Average 
(Unaudited, in millions) Commitment  Outstanding  Available(1)  Date  Interest Rate(2) 
 
Abitibi:
                    
Credit facilities(3)
 $692      $615      $3       11/08 & 12/08   7.4%
                     
Bowater:
                    
U.S. credit facility  415       240       84       05/11   6.8%
Canadian credit facility  165       39       94       05/08   7.0%
                     
 
  $      1,272      $      894      $181             
 
 
         
  September 30, December 31,
(Unaudited, in millions) 2007 2006
 
Unrealized prior service costs(1)
 $(25.4) $(23.2)
Unrealized actuarial gains and losses(2)
  (330.2)  (358.9)
Unrealized transition obligation (3)
  (0.1)  (0.1)
Foreign currency translation(4)
  (18.7)  12.0 
Unrealized loss on hedging transactions(5)
  —   (0.8)
 
  $(374.4) $(371.0)
 
(1) NetThe commitment available under each of deferred tax benefitthese revolving bank credit facilities is subject to collateral requirements and covenant restrictions as described below or in our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008, and is reduced by outstanding letters of $4.2credit of $69 million for the Bowater U.S. credit facility, $32 million for the Bowater Canadian credit facility and $1.5$74 million respectively. Net of minority interest of $2.4 millionfor the Abitibi credit facility, while commitment fees for unused portions are 50, 25, and $2.4 million,70 basis points, respectively.
 
(2) NetBorrowings under the Abitibi and Bowater bank credit facilities incur interest based, at our option, on specified market interest rates plus a margin.
(3)The Abitibi credit facility was repaid and cancelled on April 1, 2008 as discussed above.
Bowater’s 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 facility is limited to 75% of the net consolidated book value of our accounts receivable and inventory, excluding BCFPI and its subsidiaries.
Bowater’s Canadian credit agreement is secured by liens on the inventory, accounts receivable and deposit accounts of Bowater Canadian Forest Products Inc. (“BCFPI”). Availability under the Canadian credit facility is limited to 60% of the net book value of the accounts receivable and inventory of BCFPI and its subsidiaries. We believe that this credit agreement will be extended or a similar agreement entered into given the fact that the agreement is secured by liens on the inventory, accounts receivable and deposit accounts of BCFPI.
Amendments to Bank Credit Facilities
On March 31, 2008, AbitibiBowater, Bowater and Bowater’s subsidiaries entered into amendments to its U.S. and Canadian bank credit facilities which principally (i) withdraws the requirement that was included in the February 25, 2008 amendment disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008, that Bowater move the Catawba, South Carolina mill assets into the Catawba Subsidiary, (ii) requires Bowater to transfer the stock in subsidiaries owning the Coosa Pines and Grenada mill assets to AbitibiBowater, and grant such lenders first-ranking mortgages on such assets, and (iii) requires AbitibiBowater to provide an unsecured guarantee of obligations under our Bowater U.S. Credit Facility.
On April 30, 2008, Bowater and Bowater’s subsidiaries entered into further amendments to its U.S. and Canadian bank credit facilities which principally extended the dates for (1) granting the lenders first-ranking mortgages on the Coosa Pines and Grenada mill assets from April 30, 2008 to May 15, 2008, and (2) delivering other related documentation to the lenders from April 30, 2008 to various dates between May 22, 2008 and June 30, 2008. We fully anticipate meeting these commitments.
Our Bowater U.S. Credit facility permits Bowater to send distributions to AbitibiBowater to service interest on AbitibiBowater’s convertible debt provided that no default exists under this facility at the time of such payment and we are in pro forma compliance with this facility’s financial covenants at the time of such payment. The lenders under our credit facilities have implemented a more traditional, more restrictive borrowing base, using more extensive eligibility criteria and imposing additional reporting obligations on us. We are not obligated to comply with the additional reporting requirements or the more restrictive borrowing base requirements until November 15, 2008.

12

ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements
In addition to the limitations discussed above, Bowater may make dividends and distributions to AbitibiBowater sufficient to pay (1) taxes attributable to Bowater and its subsidiaries, (2) up to $75 million in aggregate annual dividends to the holders of common stock and exchangeable shares, and (3) up to $10 million more than 50% of certain AbitibiBowater’s annual overhead expenses, such as accounting and auditing costs, director fees, director and officer insurance premiums, franchise taxes, transfer agent fees, and legal and other expenses connected to AbitibiBowater’s status as a public company. Overhead expenses do not include management fees, salaries, bonuses, or debt service.
Abitibi and Bowater and their subsidiaries may also, from time to time, subject to any applicable restrictions contained in any indebtedness documents, enter into transactions with related parties, including AbitibiBowater for management and other services (such as IT, environmental, human resources and legal services) and inter-company advances, loans and investments, intercompany product sales and purchases.
Considering the amendments to the Bowater credit facilities, we expect to be in compliance through March 31, 2009.
11. Income Taxes
The income tax provision attributable to loss before income taxes and minority interests 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 
  March 31, 
(Unaudited, in millions) 2008     2007   
 
Loss before income taxes and minority interest     $(244)     $(27)
         
Expected income tax benefit  85   9 
Increase (decrease) in income taxes resulting from:        
Valuation allowance(1)
  (93)  (13)
Foreign exchange  29   (1)
State income taxes, net of federal income tax benefit  (1)  — 
Foreign taxes  (14)  1 
Tax Reserves  (6)  — 
Other, net  (3)  3 
 
Income tax provision     $(3)     $(1)
 
(1)During the first quarter of 2008 and 2007, income tax benefits of approximately $93 million and $13 million generated on our current quarter Canadian operating losses were entirely offset by tax charges to increase our valuation allowance related to these tax benefits. Additionally, any income tax benefit recorded on any future operating losses generated in these Canadian operations will probably be offset by additional increases to the valuation allowance (tax charge).

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ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements
12. Accumulated Other Comprehensive Loss
The components of “Accumulated other comprehensive loss” in the Consolidated Balance Sheets are as follows:
         
  
  March 31,  December 31, 
(Unaudited, in millions) 2008  2007 
 
Unamortized prior service costs(1)
     $1      $- 
Unamortized actuarial gains and losses(2)
  (148)  (135)
Foreign currency translation(3)
  (18)  1 
Unrecognized losses on hedging transactions(4)
  (8)  (10)
 
      $(173)     $(144)
 
(1)As of March 31, 2008 and December 31, 2007, net of deferred tax benefitprovision of $103.1$14 million and $109.6$13 million, respectively. Net of minority interest of $5.2$2 million as of March 31, 2008 and $5.2December 31, 2007.
(2)As of March 31, 2008 and December 31, 2007, net of deferred tax benefit of $67 million respectively.for both periods.
 
(3)Net of deferred tax benefit of $0.1 million and $0.1 million, respectively.
(4) No tax effect is recorded for foreign currency translation since the foreign net assets translated are deemed indefinitely invested.
 
(5)(4) NetAs of aMarch 31, 2008 and December 31, 2007, net of deferred tax benefit of $0.5 million for 2006.
5.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) 2007 2006 2007 2006
 
Basic weighted-average number of common shares outstanding  57.5   57.4   57.4   57.4 
Effect of potentially dilutive securities:                
Stock options  —   —   —   — 
Restricted stock units  —   —   —   — 
 
Diluted weighted-average number of common shares outstanding  57.5   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 4.8 million shares for both the three and nine months ended September 30, 2007, and 5.0 million shares for both the three and nine months ended September 30, 2006, were excluded from the calculation of diluted loss per share as the impact would have been anti-dilutive. In addition, 1.0 million restricted stock units for both the three and nine months ended September 30, 2007, and 0.7 million restricted stock units for both the three and nine months ended September 30, 2006 were excluded from the calculation of diluted loss per share for the same reason.
On October 29, 2007, in connection with the Combination, AbitibiBowater issued approximately 57.5 million new shares of AbitibiBowater common stock to the former shareholders of Abitibi and Bowater.

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ABITIBIBOWATER INC.
Notes to Consolidated Financial Statements — Unaudited
6.Other (Expense) Income, Net
“Other (expense) income, net” in the Consolidated Statements of Operations includes the following:
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Unaudited, in millions) 2007 2006 2007 2006
 
Foreign exchange (losses) gains $(17.4) $0.7  $(37.0) $(2.3)
(Losses) earnings from equity method investments  (1.9)  1.0   (4.6)  5.2 
Interest income  2.2   2.0   5.7   4.1 
Charges for repurchase of debt (Note 11)  —   (0.5)  —   (0.5)
Miscellaneous income, net  1.0   1.7   1.1   3.2 
 
  $(16.1) $4.9  $(34.8) $9.7 
 
7.Impairment and Other Related Charges
Goodwill Impairment
During the third quarter of 2006, we realigned our organizational structure to move from a divisional organization to a functional organization that supports and focuses on our multi-product line manufacturing and sales across our mill base. As a result of this organizational realignment, we now manage our business based on the products that we manufacture and sell to external customers and, therefore, our reportable segments and goodwill reporting units changed. Prior to the reallocation of goodwill to our new reporting units, we performed an interim test for impairment. As a result of this review, we recorded a charge of $200.0 million attributable to an impairment of goodwill at our Thunder Bay facility. Additional information regarding this impairment charge can be found in Bowater’s Annual Report on Form 10-K filed on March 13, 2007.
Asset Impairment
Based on the continued decline of North American newsprint consumption through the third quarter of 2006, we could no longer foresee the restart of paper machine No. 3 at our Thunder Bay facility, which had been idled since 2003. Accordingly, we recorded a non-cash asset impairment charge of $18.9 million in the third quarter of 2006 to write down the carrying value of the 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 our 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.

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ABITIBIBOWATER INC.
Notes to Consolidated Financial Statements — Unaudited
8.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, 2007 and 2006:
Pension Plans:
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Unaudited, in millions) 2007 2006 2007 2006
 
Components of net periodic benefit cost:
                
Service cost $9.1  $10.5  $27.4  $32.4 
Interest cost  32.8   29.9   94.7   89.1 
Expected return on plan assets  (35.1)  (30.8)  (100.6)  (91.0)
Amortization of prior service cost  1.2   1.3   3.5   4.1 
Amortization of net actuarial loss  6.8   8.0   20.6   25.7 
Special termination benefits  2.7   —   6.7   — 
Curtailment and settlement losses, net  5.1   8.8   12.5   13.4 
 
Net periodic benefit cost $22.6  $27.7  $64.8  $73.7 
 
OPEB Plans:
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Unaudited, in millions) 2007 2006 2007 2006
 
Components of net periodic benefit cost:
                
Service cost $0.5  $1.1  $1.7  $3.1 
Interest cost  3.2   3.9   9.3   11.9 
Amortization of prior service credit  (2.8)  (1.5)  (8.5)  (4.5)
Amortization of net actuarial loss  1.6   2.1   4.8   6.1 
Curtailment and settlement gains  —   (5.5)  (3.5)  (5.7)
 
Net periodic benefit cost $2.5  $0.1  $3.8  $10.9 
 
Since the measurement date of our pension and OPEB plans is 90 days prior to the start of our year, curtailment gains and losses that arise during the year are recorded on a 90-day lag.
Events Impacting Net Periodic Benefit Cost for the Three and Nine Months Ended September 30, 2007
In October 2006, we approved changes to the other postretirement plan for our U.S. salaried employees. Benefits for employees were either eliminated or reduced depending on whether the employee met certain age and years of service criteria. As a result, a curtailment gain of $3.2 million was included in the net periodic benefit cost of our OPEB plans during the nine months ended September 30, 2007.
In February 2007, union members at our Thunder Bay, Ontario facility ratified a new labor agreement. As a result of a mill-wide restructuring of this facility, 157 jobs were eliminated. A curtailment loss of approximately $1.8$6 million and the cost of special termination benefits of $4.0$5 million, were included in the net periodic benefit cost of our pension plans during the nine months ended September 30, 2007, and a curtailment gain of $0.3 million was included in the net periodic benefit cost of our OPEB plans during the nine months ended September 30, 2007 as a result of the employee reduction. This event will also result in a settlement loss at the time the benefits are paid.respectively.

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ABITIBIBOWATER INC.
Notes to Consolidated13. Financial Statements — UnauditedInstruments
In May 2007, union members at our Gatineau, Quebec facility ratified a new labor agreement. As a result of a mill-wide restructuring of this facility, 143 jobs were eliminated. A curtailment loss of approximately $1.7 million and special termination benefits of approximately $2.7 million were included in the net periodic benefit cost of our pension plans for the three and nine months ended September 30, 2007 as a result of the employee reduction.
In June 2007, union members at our Dolbeau, Quebec facility ratified a new labor agreement. As a result of a mill-wide restructuring of this facility, 130 jobs were eliminated. A curtailment loss of approximately $2.6 million was included in the net periodic benefit cost of our pension plans for the three and nine months ended September 30, 2007 as a result of the employee reduction. Additionally, special termination benefits of approximately $2.7 million will be included in the net periodic benefit cost of our pension plans for the fourth quarter of 2007.
At various dates from December 2006 to June 2007, certain employees received lump-sum payouts from two of our retirement pension plans. Accordingly, settlement losses of $0.8 million and $6.4 million were included in the net periodic benefit cost of our pension plans during the three and nine months ended September 30, 2007, respectively.
Events Impacting Net Periodic Benefit Cost for the Three and Nine Months Ended September 30, 2006
As a result of the reduction of employees at our Thunder Bay “A” kraft pulp mill, curtailment losses of $0.9 million and $5.5 million were included in the net periodic benefit cost of our pension plans during the three and nine months ended September 30, 2006, respectively. In addition, a curtailment gain of $0.2 million was included in net periodic benefit cost for our OPEB plans during the nine months ended September 30, 2006. This event resulted in a partial plan termination and will result in a settlement loss when the assets and liabilities are eventually settled.
In May 2006, certain employees received lump-sum payouts from the supplemental executive retirement plan. A settlement loss of $2.3 million was included in net periodic benefit cost for our pension plans during the three and nine months ended September 30, 2006.
In May 2006, we approved changes to our defined benefit pension plan for our U.S. salaried employees. Benefits for certain employees were frozen effective January 1, 2007 and were replaced with a Company contribution to a defined contribution plan. A curtailment loss of $3.9 million was included in net periodic benefit cost for our pension plans during the three and nine months ended September 30, 2006.
In June 2006, we approved changes to our defined benefit pension plan for our Canadian salaried employees. Benefits for certain employees will be frozen 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 included in net periodic benefit cost for our pension plans during the three and nine months ended September 30, 2006.
In June 2006, we approved changes to our 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 included in net periodic benefit cost for our OPEB plans during the three and nine months ended September 30, 2006.

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ABITIBIBOWATER INC.
NotesWe utilize certain derivative instruments to Consolidated Financial Statements — Unauditedenhance our ability to manage risk relating to cash flow exposures. 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 interest rate, commodity and currency derivative contracts that are not accounted for as accounting hedges. Counterparty risk is limited to institutions with long-term debt ratings of A or better for North American financial institutions or ratings of AA or better for international institutions.
9.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:
Please refer to our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008, for a description of the derivative financial instruments we use.
The fair value of our derivative instruments is determined based on the fair value hierarchy provided in SFAS 157, which requires the use of observable inputs whenever available. In addition, we consider the risk of non-performance of the obligor, which in some cases reflects our own credit risk, in determining the fair value of our derivative instruments. The fair value hierarchy is as follows:
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Unaudited, in millions) 2007 2006 2007 2006
 
Loss before income taxes, minority interests and cumulative effect of accounting change $(145.5) $(225.2) $(218.8) $(211.9)
                 
Expected income tax benefit  50.9   78.9   76.6   74.2 
Increase (decrease) in income taxes resulting from:                
Valuation allowance(1)
  (34.1)  (18.2)  (71.4)  (73.8)
Tax reserves(2)
  5.3   17.5   5.3   17.5 
Goodwill(3)
  —   (78.6)  —   (78.6)
Foreign exchange  (16.3)  7.7   (33.6)  (13.6)
State income taxes, net of federal income tax benefit  0.5   (0.2)  0.1   (2.1)
Foreign taxes(4)
  (2.1)  (7.2)  8.7   39.6 
Other, net  (3.8)  10.0   (4.9)  7.3 
 
Income tax benefit (provision) $0.4  $9.9  $(19.2) $(29.5)
 
Level 1- Valuations based on quoted prices in active markets for identical assets and liabilities.
Level 2- Valuations based on observable inputs, other than Level 1 prices, such as quoted interest or currency exchange rates.
Level 3- Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow
                 methodologies based on internal cash flow forecasts.
(1)Income tax benefits generated on our Canadian operating losses were entirely offset by tax charges to increase our valuation allowance related to these tax benefits.
(2)Tax reserves of $5.3 million and $17.5 million were reversed during the three and nine months ended September 30, 2007 and the three and nine months ended September 30, 2006, respectively, as the statute of limitations associated with those tax matters had expired.
(3)We recorded a goodwill impairment charge of $200.0 million during the three and nine months ended September 30, 2006. No tax benefit is provided by this charge.
(4)Foreign taxes benefited by $0.3 million and $4.7 million in the three and nine months ended September 30, 2007 and $15.2 million in the nine months ended September 30, 2006 due to capital gains treatment of certain asset sales.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we decreased our liability for unrecognized tax benefits by $2.3 million, which was accounted for as a decrease to our January 1, 2007 retained deficit balance. Our liability for unrecognized tax benefits as of January 1, 2007 was $28.3 million, which included interest of $0.6 million. We recognize interest and penalties accrued related to unrecognized tax benefits as components of income tax expense. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $18.4 million. If recognized, these items would impact the Consolidated Statements of Operations and our effective tax rate. We anticipate that the total amount of unrecognized tax benefits will decrease by approximately $6.0 million to $7.0 million during the next twelve months due to certain U.S. statutes of limitations closing, primarily in the third quarter of 2008. The approximately $6.0 million to $7.0 million of unrecognized tax benefits is attributable to various U.S. income tax issues. We remain subject to income tax examination in Canada for tax years 2002-2006, in Korea for tax years 2005-2006 and in the U.S. for tax years 2004-2006.

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ABITIBIBOWATER INC.
NotesInformation regarding our outstanding derivative financial instruments is summarized in the table below. The notional amount of these contracts represents the amount of foreign currencies or natural gas to Consolidated Financial Statements — Unaudited
10.Financial Instruments
AbitibiBowater 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. Counterparty risk is limited to institutions with long-term debt ratings of A or better for North American financial institutions or ratings of AA or better for international institutions.
For derivatives that qualify for hedge accounting (currently only the Canadian dollar forward contracts), we designate the derivative as a cash flow hedge at the inception of the hedge. We formally document all relationships between the hedging instruments and the hedged items, as well as our risk-management objectives and strategies for undertaking the various hedge transactions. We link all hedges that are designated as cash flow hedges to forecasted transactions. Under the terms of our risk management policy, we may enter into derivative contracts to hedge forecasted transactions for a period not to exceed two years. We also assess, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. If it is determined that a derivative is no longer highly effective as a hedge, we discontinue hedge accounting prospectively.
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 U.S. and Canadian dollar exchange rate fluctuations, we periodically enter into and designate Canadian dollar forward contracts to hedge certain of the forecasted Canadian dollar cash outflows at our Canadian mill operations, which we believe are likely to occur. There were no hedging contracts outstanding at September 30, 2007. Hedge ineffectiveness associated with our Canadian dollar forward contracts was not material for the periods presented in our Consolidated Financial Statements.
British Pound Sterling Forward Contracts
We have entered into sales agreements denominated in British pound sterling. Beginning in the first quarter of 2007, we entered into currency forward contracts to partially limit our exposure to British pound sterling-U.S. dollar exchange rate fluctuations. These currency forward contracts, which do not currently meet the requirements for hedge accounting treatment, have been recorded at fair value in the Consolidated Statement of Operations. As a result, approximately $0.2 million and $0.9 million of pre-tax losses were recognized for the three and nine months ended September 30, 2007, respectively, for contracts that we entered into to economically hedge forecasted transactions expected to occur through December 31, 2007.
Natural Gas Swap Agreements
Beginning in the third quarter of 2006, we entered into natural gas swap agreements under our natural gas hedging program for the purpose of reducing the risk inherent in fluctuating natural gas prices. Our hedged natural gas costs are billed to us based on a publicly traded index plus a fixed amount. The natural gas swap agreements allow us to minimize the effect of fluctuations in those indices by contractually exchanging the publicly traded index upon which we are billed for a fixed index of natural gas cost. The swap agreements, which do not currently meet the requirements for hedge accounting treatment, have been recorded at fair value in the Consolidated Statement of Operations. As a result, approximately $0.6 million and $0.5 million of pre-tax losses were recognized for the three and nine months ended September 30, 2007, respectively, for contracts that we entered into in 2006 and 2007 to economically hedge forecasted transactions expected to occur through September 2008.
be purchased or sold at maturity or the principal amount used to calculate the amount of periodic payments and does not represent our exposure on these contracts.

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ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements — Unaudited
Information regarding our outstanding British pound sterling and natural gas swap contracts’ notional amount, fair market value, and range of exchange rates or natural gas price index prices 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.
                 
  
              Range Of 
              Natural Gas 
      Net Asset/      Index Prices, 
  Notional  (Liability)  SFAS 157  Interest Rates and 
  Amount of  Fair  Valuation  Exchange Rates 
(Unaudited, in million except rates and prices) Derivatives  Market Value  Hierarchy*  per US$ 
 
As of March 31, 2008:
                
Foreign Currency Exchange Agreements:
                
Buy Canadian dollars due in 2008
     $40      $2  Level 1 $1.008 - 1.061 
Sell Canadian dollars due in 2008
  40   -  Level 1  1.011 - 1.080 
Sell Euros due in 2008
  60   (3) Level 1  .6535 - .6800 
Sell British pound sterling due in 2008
  20   -  Level 1  .5034 - .5096 
                 
Natural Gas Swap Agreements:
                
Due in 2008
  3   1  Level 2  6.632 - 8.558 
Due in 2009
  -   -  Level 2  7.570 - 9.560 
                 
Receive Fixed Rate Interest Rate Swaps
  850   13  Level 2  2.53% - 4.73%
                 
As of December 31, 2007:                
Foreign Currency Exchange Agreements:                
Buy Canadian dollars due in 2008     $70      $6   n/a  $1.048 - 1.199 
Sell Canadian dollars due in 2008  70   (1)  n/a   1.004 - 1.199 
Natural Gas Swap Agreements due in 2008  6   -   n/a   6.56 - 9.87 
Receive Fixed Rate Interest Rate Swaps  850   (4)  n/a   2.53% - 4.73%
 
* We adopted SFAS 157 effective January 1, 2008. At December 31, 2007, the fair value of our derivative financial instruments was based on current termination values or quoted market prices of comparable contracts. The fair value of our derivative instruments was calculated using similar information, except that the values have been adjusted for the risk of non-performance of the obligor in the contract. The change in fair value of our derivative instruments as of January 1, 2008 as a result of adopting SFAS 157 was inconsequential.
           
          Range Of
          USD/CAD and
          USD/GBP
  Notional     Exchange Rates
  Amount of Asset /(Liability) and Natural Gas
(Unaudited, in millions of U.S. dollars except rates and prices) Derivatives Fair Market Value Index Prices
 
As of September 30, 2007:
          
Foreign Currency Exchange Agreements:
          
British pound sterling Due in 2007
 $20.1  $(0.7) $1.9553—1.9976
Natural Gas Swap Agreements:
          
Due in 2007
 $4.7  $(0.7) $6.34—9.53
Due in 2008
 $4.5  $(0.1) $6.34—9.87
           
As of December 31, 2006:          
Foreign Currency Exchange Agreements:          
Canadian dollar          
Due in 2007 $76.0  $(0.4) $.8592—.8801
Natural Gas Swap Agreements:          
Due in 2007 $9.0  $(1.1) $5.87—8.98
           
 
The counterparties to our derivative financial instruments are substantial and creditworthy multi-national financial institutions. We have entered into master netting agreements with those counterparties that provide that in the event of default, any amounts due to or from a counterparty will be offset. The risk of counterparty nonperformance is considered to be remote.
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 individual financial institution holds more than 35% of our derivative financial instruments.
The components of the cash flow hedges included in “Accumulated other comprehensive loss” are as follows:
         
  
  Three Months Ended 
  March 31 
(Unaudited, in millions) 2008  2007     
 
Losses reclassified on matured cash flow hedges     $6     $1 
Unrecognized losses for change in value on outstanding cash flow hedging instruments  (3)  - 
 
   3  1 
Income tax provision  (1)  - 
 
Net decrease in “Accumulated other comprehensive loss”     $2     $1 
 
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Unaudited, in millions) 2007 2006 2007 2006
         
(Gains) losses reclassified to earnings on matured cash flow hedges $—  $(5.0) $1.1  $(34.2)
Unrealized gains for change in value on outstanding cash flow hedges  —   0.5   0.2   4.9 
         
   —   (4.5)  1.3   (29.3)
                 
Income tax benefit (provision)  —   1.7   (0.5)  11.1 
         
                 
Net (increase) decrease in “Accumulated other comprehensive loss” $—  $(2.8) $0.8  $(18.2)
         
11.Long-term and Short-term Debt
On November 2, 2007, we obtained an amendment to Bowater’s U.S. and Canadian credit facilities allowing us to adjust 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
We expect to reclassify losses of $11 million ($8 million, net of tax) from “Accumulated other comprehensive loss” to the Consolidated Statements of Operations during the next twelve months as the hedged forecasted transactions occur.

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ABITIBIBOWATER INC.
Notes to Unaudited Consolidated Financial Statements — Unaudited
expense) for non-recurring gains or losses without limitation. In addition, the minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset dispositions) to interest expense was lowered from 2.00 to 1 to 1.50 to 1 effective October 1, 2007, increasing gradually back up to 2.00 to 1 by October 1, 2008.
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 (expense) income, net” on the accompanying Consolidated Statement of Operations.
12.14. Commitments and Contingencies
AbitibiBowater isWe are 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. Although the final outcome of any of these matters is subject to many variables and cannot be predicted with any degree of certainty, we establish reserves for a matter when we believe an adverse outcome is probable and the amount can be reasonably estimated. 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 aany given quarter or the year.
On September 30, 2005, the Ministry of Justice of the Province of Quebec (MOJ) cited one of Bowater’s subsidiaries, Bowater Canadian Forest Products, Inc. (“BCFPI”), in connection with effluent water quality of the Dolbeau mill. BCFPI settled this citation on March 29, 2007, by agreeing to pay a fine and costs totaling CDN$158,000. The Dolbeau mill has taken steps to improve its effluent quality and has experienced only two other exceedences since January 1, 2005.
On June 18, 2007, The Levin Group, L.P. filed a complaint against Bowater in the Supreme Court of New York, New York County, asserting claims for breach of contract and related claims relating to certain advisory services purported to have been provided by the plaintiff in connection with the Combination. This complaint was dismissed and the matter is now before the Court of Common Pleas in Greenville County, South Carolina, where the parties are currently involved in the initial stages of the litigation, including discovery and the maintaining of various procedural motions. The complaintLevin Group seeks damages of no less than $70 million, related costs and such other relief as the court deems just and proper. The management of AbitibiBowater believesWe believe this claim is entirely without merit and intendsintend to continue to contest this matter.matter vigorously.
On September 7, 2007, BCFPI received a decisionSince late 2001, Bowater, several other paper companies, and numerous other companies have been named as defendants in an arbitration relatedasbestos personal injury actions. These actions generally allege occupational exposure to numerous products. We have denied the 1998 sale to Weyerhaeuser Company (“Weyerhaeuser”)allegations and no specific product of Bowater’s former pulp and paper facilityours has been identified by the plaintiffs in Dryden, Ontario. As reported in Bowater’s Annual Report on Form 10-K, BCFPI and Weyerhaeuser had been arbitrating a claim regarding the cost of certain environmental matters related to the mill. The arbitrators awarded Weyerhaeuser approximately $42.9 million (CDN $44.0 million), including interest. As a resultany of the arbitrator’s decision, which is binding upon Bowateractions as having caused or contributed to any individual plaintiff’s alleged asbestos-related injury. These suits have been filed by approximately 1,800 claimants who sought monetary damages in civil actions pending in state courts in Delaware, Georgia, Illinois, Mississippi, Missouri, New York, Tennessee, and notTexas. Approximately 1,000 of these claims have been dismissed, either voluntarily or by summary judgment, and approximately 800 claims remain. Insurers are defending these claims and we believe that all of these asbestos-related claims are covered by insurance, subject to appeal,any applicable deductibles and our insurers’ rights to dispute coverage. While it is not possible to predict with certainty the outcome of these matters, we recordeddo not expect these claims to have a pre-tax chargematerial adverse impact on our business, financial position or results of $28.4 million (CDN $29.1 million) during the three and nine months ended September 30, 2007. We had previously established a reserve of approximately $14.5 million (CDN $14.9 million) in connection with these environmental matters at the time of the sale.operations.
There have been no other material developments to thosethe legal proceedings described in Bowater’sour Annual Report on Form 10-K filed on March 13, 2007.
13. Share-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. These plans are described more fully in Bowater’s 2006 Annual Report on Form 10-K.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R, “Share-based Payments” and related interpretations (“SFAS 123R”). The adoption of SFAS 123R resulted in a charge for the

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ABITIBIBOWATER INC.
Notes to Consolidated Financial Statements — Unaudited
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.
The following table details the share-based compensation expense (excluding the cumulative effect of accounting change) recorded in the Consolidated Statements of Operations by award:
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Unaudited, in millions) 2007 2006 2007 2006
 
Stock options $0.2  $0.2  $0.8  $0.4 
Restricted stock units  2.4   2.9   9.8   4.8 
EPRs  (0.8)  (0.5)  (0.5)  (3.4)
 
Stock-based compensation expense $1.8  $2.6  $10.1  $1.8 
 
The following table details the tax (benefit) provision by award:
                 
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Unaudited, in millions) 2007 2006 2007 2006
 
Stock options $(0.1) $—  $(0.4) $(0.1)
Restricted stock units  (0.6)  (0.7)  (2.6)  (1.1)
EPRs  0.2   0.1   0.1   0.8 
 
Tax benefit $(0.5) $(0.6) $(2.9) $(0.4)
 
Stock Options
On September 26, 2007, the terms of all outstanding stock options granted in 2006 (315,848 stock options) were modified to allow for accelerated vesting in full upon a grantee’s involuntary termination without cause. The modification was treated as a cancellation of the 2006 awards and a new grant of the modified awards. We have reversed cumulative compensation expense recognized through the date of the modification for those stock option grants for which future vesting was considered improbable under the original terms of the grant, but considered probable under the modified terms (“Type III Modifications”). Subsequent to the date of modification, we began recognizing compensation expense associated with the 24,850 stock options identified as Type III Modifications over the requisite service periods (based on the expected vesting date for each applicable grantee). Most of the modified stock options (290,998 stock options) were granted to employees who will continue to be employed by AbitibiBowater subsequent to the Combination. Future vesting of those stock options was considered probable under the original terms of the grant and is still considered probable under the modified terms (“Type I Modification”). As such, the original compensation expense will continue to be recognized over the requisite service period, which did not change as a result of the modification. The modification resulted in a net decrease of $0.1 million of compensation expense recognized during the three and nine months ended September 30, 2007.
On January 30, 2007, we granted 72,146 stock options. The awards cliff vest after three years and allow for accelerated vesting upon a grantee’s retirement. We have recognized compensation expense based on the requisite service period, which is less than three years for certain employees who are eligible for retirement as of the date of the grant or become eligible for retirement during the vesting period. We issued 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).

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Notes to Consolidated Financial Statements — Unaudited
10-K/A summary of option activity under our stock plans as of and for the nine months ended September 30, 2007 is presented below:
                 
          Weighted  
      Weighted Average Aggregate
  Number Of Average Remaining Intrinsic
  Options Exercise Contractual Value
(Unaudited) (000’s) Price Life (years) ($000)
 
Outstanding at December 31, 2006  4,982  $43.45         
Granted during the period  72   27.87         
Exercised during the period  —   —         
Canceled during the period  (255)  42.72         
 
Outstanding at September 30, 2007  4,799  $43.25   4.4  $— 
 
Exercisable at September 30, 2007  4,505  $44.29   4.1  $— 
 
In accordance with SFAS 123R, we estimated the fair value of each stock option granted during the nine months ended September 30, 2007 on the date of grant using a Black-Scholes option-pricing formula, applying weighted-average assumptions which are consistent with the assumptions described in “Note 21 Share-Based Compensation” included in Bowater’s most recent Annual Report on Form 10-K, and amortize that value to expense over the option’s requisite service period using the straight-line attribution approach. The weighted-average fair value of options granted during the nine months ended September 30, 2007 was $9.08.
During the three and nine months ended September 30, 2007 and 2006, all vested options had a strike price greater than the closing price of our common stock (i.e., were “out-of-the-money”), and there were no stock option exercises during those periods.
As of September 30, 2007, there was $1.6 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 1.6 years.
Restricted Stock Units
On September 26, 2007, the terms of all outstanding performance-based and service-based restricted stock units (“RSUs”) granted in 2006 except the awards granted on May 10, 2006 that cliff vest over 20 months were modified (205,707 RSUs) to allow for accelerated vesting in full upon a grantee’s involuntary termination without cause and to remove any performance conditions from the awards. The modification was treated as a cancellation of the 2006 awards and a new grant of the modified awards. We have reversed cumulative compensation expense recognized through the date of modification for those RSUs identified as Type III Modifications. Subsequent to the date of modification, we began recognizing compensation expense associated with the 64,929 RSUs identified as Type III Modifications over the requisite service periods (based on the expected vesting date for each applicable grantee). Most of the modified RSUs (140,778 RSUs) were granted to employees who will continue to be employed by AbitibiBowater subsequent to the Combination. As such, those RSUs are Type I Modifications, and the original compensation expense will continue to be recognized over the original requisite service period. The modification resulted in a net decrease of $0.4 million of compensation expense recognized during the three and nine months ended September 30, 2007.
On January 30, 2007, we granted 327,945 RSUs, all of which are service-based awards. The awards cliff vest after three years and allow for accelerated vesting upon a grantee’s retirement. We have recognized compensation expense based on the requisite service period, which is less than three years for certain employees who are eligible for retirement as of the date of the grant or will become eligible for retirement during the vesting period.

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Notes to Consolidated Financial Statements — Unaudited
On February 7, 2007, we granted 36,101 RSUs, all of which are performance-based awards. These awards vested upon closing of the merger of Bowater and Abitibi. Accounting guidance dictates that, for purposes of recognizing compensation expense for this type of award, the Combination was not considered “probable” until the date the merger was consummated. As vesting of these awards was predicated upon close of the merger, which occurred on October 29, 2007, no compensation expense was recorded for these awards in the three and nine months ended September 30, 2007. As a result of the consummation of the merger, compensation expense of $1.0 million was recognized on October 29, 2007 and will be reflected in our results for the year ended December 31, 2007. These awards are included in our outstanding RSUs at the end of the period.
On2007, filed on March 23, 2007, we granted 54,200 RSUs, all of which are performance-based awards. The vesting of these awards is contingent upon the realization of certain synergies within two years of consummation of the merger of Bowater and Abitibi. The key terms and conditions of these RSUs have not been finalized; therefore a grant date for FAS 123R purposes has not occurred. As such, no compensation expense was recorded during the three and nine months ended September 30, 2007, nor were these awards included in our outstanding RSUs at the end of the period.
On June 27, 2007, we granted 1,897 RSUs, all of which are service-based awards that cliff vest after three years.
On May 10, 2006, we issued four separate grants of restricted stock units totaling 775,529 shares, of which 43,530 shares are performance-based awards. The performance-based awards cliff vest after 32 months. The remaining shares, which are service-based awards, cliff vest after 32 months (178,342 shares), 20, months (503,657 shares) or 12 months (50,000 shares).
A summary of the status of our restricted stock units as of and for the nine months ended September 30, 2007, is presented below:
         
      Weighted Average
      Fair Value at
  Number Of Units Modification or
(Unaudited) (000’s) Grant Date
 
Outstanding at December 31, 2006  665  $24.92 
Granted during the period  366   27.84 
Vested during the period  (64)  26.38 
Canceled during the period  (13)  26.83 
 
Outstanding at September 30, 2007  954  $25.92 
 
As of September 30, 2007, there was $8.8 million of unrecognized compensation cost related to restricted stock units granted under our stock plans, excluding those granted on February 7, 2007 (discussed above). This unrecognized cost is expected to be recognized over a weighted-average period of one year. The total fair value of restricted stock units vested during the first nine months of 2007 was $1.4 million.
Equity Participation Rights
EPRs confer the right to receive cash based on the appreciation of our 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 (adjusted by the Bowater exchange ratio of 0.52 on October 29, 2007). 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

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ABITIBIBOWATER INC.
Notes to Consolidated Financial Statements — Unaudited
income or expense included in the consolidated statement of operations. As of September 30, 2007, the fair value of our EPRs liability is $0.1 million. The assumptions used to value the liability are consistent with those used in the past. There have been no significant changes to the number of EPRs outstanding or exercisable since December 31, 2006. Refer to Bowater’s most recent Annual Report on Form 10-K for additional details.2008.
14.15. Off-Balance Sheet Debt Guarantees
In connection with ourBowater’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). we guaranteeBowater guarantees approximately $6.6$6 million of the investor notes’ principal balance at September 30, 2007.March 31, 2008. 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 $30.4$29 million and obligations of approximately $26.3$25 million, which include the investor notes. WeBowater 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, neither of which has ever occurred.
15.16. Segment Information
We manage our business based on the products that we manufacture and sell to external customers. Our reportable segments are newsprint, coated papers, specialty papers, newsprint, market pulp and lumber.wood products.
None of the income or loss items following “Operating loss”(loss) income” in our Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management. For the same reason, impairments, employee termination costs, gains on dispositions of assets and other discretionary charges or credits are not allocated to the segments. Share-based compensation expense is, however, allocated to our segments. We also allocate depreciation expense to our segments, although the related fixed assets are not allocated to segment assets.

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Notes to Consolidated Financial Statements — Unaudited
The following tables summarize information about segment profit and lossoperating income (loss) for the three and nine months ended September 30, 2007March 31, 2008 and 2006:2007:
                                 
          Coated  Specialty  Market  Wood  Corporate  Consolidated 
(Unaudited, in millions)     Newsprint  Papers  Papers  Pulp  Products  and Other  Total 
 
Sales
                                
 
First quarter  2008  $809  $169  $459  $168  $123  $—  $1,728 
 
First quarter  2007   303   129   141   133   63   3   772 
 
                                 
Operating income (loss)(1)
                                
                                 
First quarter  2008  $(69) $34  $(39) $31  $(35) $(71) $(149)
 
First quarter  2007   (5)  9   (8)  19   (14)  24   25 
 
 
                                 
      Coated Specialty     Market     Corporate Consolidated
(Unaudited, in millions) Papers Papers Newsprint Pulp Lumber and Other Total
 
Sales
                                
Third quarter  2007  $152.4  $141.3  $295.8  $159.7  $62.3  $3.2  $814.7 
 
Third quarter  2006   154.4   153.9   349.1   144.2   71.1   3.2   875.9 
 
                                 
Year to date  2007   410.3   433.9   911.7   430.5   189.1   9.4   2,384.9 
 
Year to date  2006   463.5   426.6   1,089.9   410.3   261.6   16.6   2,668.5 
 
                                 
Operating income (loss)(1)                            
Third quarter  2007  $13.1  $(19.8) $(39.5) $29.3  $(10.6) $(54.6) $(82.1)
 
Third quarter  2006   15.6   (1.4)  30.9   17.4   (17.4)  (224.4)  (179.3)
 
                                 
Year to date  2007   26.6   (39.6)  (55.2)  66.5   (31.7)  (8.7)  (42.1)
 
Year to date  2006   60.3   (26.8)  67.1   16.1   (20.9)  (167.9)  (72.1)
 
(1) “Corporate and otherOther” operating loss(loss) income includes net gainsgain from dispositionsdisposition of assets of $17.1$23 million and $54.0$58 million for the three months ended September 30,March 31, 2008 and 2007, and 2006, respectively, and $139.6 million and $154.5 million for the nine months ended September 30, 2007 and 2006, respectively. Corporate and other operating loss includes an arbitration awardemployee termination costs of $28.4$8 million for the three and nine months ended September 30, 2007. CorporateMarch 31, 2008 and other operating loss also includes asset impairmentclosure and other related chargescosts of $46.8 million and goodwill impairment of $200.0$10 million for the three and nine months ended September 30, 2006.March 31, 2008.
16. Subsequent Events
On October 29, 2007, Bowater and Abitibi combined in an all-stock “merger of equals” (the combined company, which was formed in connection with the Combination, is AbitibiBowater Inc.). See Note 1 for additional information regarding the Combination.
In connection with the Combination, all Abitibi and Bowater stock options, stock appreciation rights and other stock-based awards outstanding at the effective time of the Combination, whether vested or unvested were converted into AbitibiBowater stock options, stock appreciation rights or stock-based awards. The number of shares subject to such converted Abitibi or Bowater stock options, stock appreciation rights and stock-based awards was adjusted by multiplying the number of shares subject to such Abitibi or Bowater stock option, stock appreciation right or stock-based award by 0.06261 in the case of Abitibi, and by 0.52 in the case of Bowater. Similarly, the exercise prices of the converted stock options or base prices of the stock appreciation rights were adjusted by dividing such price by 0.06261 in the case of Abitibi, and by 0.52 in the case of Bowater, rounded to the nearest one-hundredth of a cent. The stock options, stock appreciation rights and other stock-based awards to acquire AbitibiBowater common stock are subject to the same terms and conditions as were applicable under the respective Abitibi or Bowater plans pursuant to which each stock option, stock appreciation right or stock-based award was initially issued by taking into account any changes to such terms and conditions, including acceleration thereof, by reason of the Combination.
The Combination will be accounted for under the purchase method of accounting with Bowater treated as the acquirer for accounting purposes. Subsequent to the Combination, AbitibiBowater will assume the role as the acquirer for accounting purposes as they will become the successor to Bowater in the Combination. The total estimated purchase price is $1.4 billion. The results of operations of Abitibi will be consolidated with those of AbitibiBowater commencing October 29, 2007. Please refer to our 8-K and 8-K/A filed on October 29, 2007 for additional information regarding the Combination, as well as unaudited combined pro forma financial information as of June 30, 2007 and for the periods ending December 31, 2006 and June 30, 2007.

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Notes to Consolidated Financial Statements — Unaudited
Further, in connection with the Combination, we approved a retention and severance program for approximately 320 Bowater employees who could possibly be impacted by the Combination. This program provides a retention bonus for employees who remain with Bowater through the closing of the Combination and an additional retention bonus for employees who remain with Bowater for a transition period following the closing. The costs associated with these programs are expensed as incurred. Also in connection with the Combination, we have capitalized $17.5 million of direct acquisition costs in our Consolidated Balance Sheet as of September 30, 2007.
In connection with the review and approval of the transaction by the Canadian government, AbitibiBowater agreed, among other things, for a period of three years after closing, to maintain its headquarters in Montreal, Canada; to maintain at least five Canadians on its Board of Directors; and to apply for listing of its common stock on the Toronto Stock Exchange (TSX). In connection with the review and approval of the transaction by the U.S. Department of Justice, AbitibiBowater agreed, among other things, to divest one newsprint mill, Abitibi’s mill in Snowflake, Arizona. Abitibi and Bowater continued to operate separately until October 29, 2007.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.
AbitibiBowater Inc.Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data
The following management’s discussion and analysis of financial condition and results of operations (“AbitibiBowater”MD&A”) was incorporatedprovides information that we believe is useful in Delawareunderstanding our operating results, cash flows and financial condition for the three months ended March 31, 2008. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and related notes appearing in Item 1 of this Form 10-Q. As discussed in more detail in Note 1 to the Consolidated Financial Statements, on January 25, 2007. On October 29, 2007, pursuant toBowater and Abitibi combined in a Combination Agreement and Agreement and Planmerger of Merger, dated as of January 29, 2007, amongequals under a newly formed holding company, AbitibiBowater Abitibi-Consolidated Inc. (“Abitibi”), Bowater Incorporated (“Bowater”), Alpha-Bravo Merger Sub Inc. (“Merger Sub”) and Bowater Canada Inc. (now named AbitibiBowater Canada Inc.), as amended by the First Amendment, dated as of May 7, 2007 (as amended, the “Combination Agreement”), the following transactions (as well as additional related transactions) were consummated (collectively, the(the “Combination”):
•Merger Sub was merged with and into Bowater, with Bowater continuing as the surviving corporation, and each issued and outstanding share of Bowater common stock (excluding shares to be cancelled in accordance with the Combination Agreement) was converted into the right to receive 0.52 shares of AbitibiBowater common stock; and
•the Articles of Arrangement (as defined in the Combination Agreement) became effective pursuant to which, among other things, each outstanding common share of Abitibi (other than the Abitibi common shares exchanged for AbitibiBowater Canada Inc. exchangeable shares) were transferred to AbitibiBowater in exchange for 0.06261 shares of AbitibiBowater common stock.
As a result of these transactions, Abitibi and Bowater became subsidiaries of AbitibiBowater and AbitibiBowater issued approximately 57.5 million shares of AbitibiBowater common stock to the former shareholders of Abitibi and Bowater.
AbitibiBowater is deemed to be the successor to Bowater for purposes of U.S. securities laws and regulations governing financial reporting and, even though Abitibi and Bowater consider the Combination to have been a merger-of-equals,. Bowater is deemed to be the “acquirer” of Abitibi for accounting purposes. Therefore, Management’s Discussionpurposes; therefore, the financial information and Analysis of Financial Condition and Results of Operations and the accompanying consolidated financial statementsdiscussion below reflect the results of operations and financial position of Bowater for the periods presented. However, any references to amountsbefore the closing of the Combination and those of both Abitibi and Bowater for periods beginning on or after the closing of the Combination relate to AbitibiBowater. AbitibiBowater had no separateCombination. This means that our unaudited Consolidated Financial Statements, including related notes, reflect the operations and financial position of both Abitibi and Bowater as of March 31, 2008 and December 31, 2007 and for the three-month period ended March 31, 2008 and those of Bowater for the three-month period ended March 31, 2007. All share and share-related information has been restated for all periods presented.presented prior to the Combination to reflect the Bowater exchange ratio of 0.52 per share.
Unless the context otherwise requires, both Bowater and AbitibiBowater are referred to as the “Company”Statements in this Quarterly Report on Form 10-Q.
Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data
Statements contained in this Quarterly Report on Form 10-Qreport that doare not constitute historicalreported financial results or other factualhistorical information are forward-looking statements“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statementsThey include, for example, statements aboutrelating to our business outlook,refinancing activities, our plans to achieve operational improvements and efficiencies such as the planned reduction of newsprint and coated and specialty paper capacity, the closures of certain of our paper and sawmills, our ability to realize synergies from the combination of Abitibi and Bowater, the anticipated timing and progress of integration efforts related to the combination, our ability to meet our $1 billion debt reduction target (including the success of our program to sell non-core assets, consolidate operations and the success of other actions aimed at reducing our debt), our ability to maintain and improve customer service levels, and our assessment of market conditions, strategies,anticipated future plans, goals, objectives, expectationsfinancial performance and intentions,our business outlook generally. Forward-looking statements may be identified by the use of forward-looking terminology such as the words “will,” “could,” “may,” “expect,” “believe,” “anticipate,” and other terms with similar meaning indicating possible future sales, shipments and operating results, prices for our major products, inventory levels, cost reduction measures, manufacturing performance, product mix, capital spending and tax and exchange rates. Theseevents or potential impact on the business or shareholders of AbitibiBowater.
The reader is cautioned not to place undue reliance on these forward-looking statements, which are not guarantees of future performance. TheyThese statements are based on management’s current assumptions, beliefs and expectations, all of which involve a number of business risks and uncertainties any of whichthat could cause actual results to differ materiallymaterially. These risks and uncertainties include, but are not limited to, our ability to obtain financing or otherwise derive additional liquidity when needed in a timely fashion and on terms acceptable to the Company, if at all, our ability to reduce newsprint and specialty papers capacity as quickly as anticipated, our ability to obtain timely contributions to our cost reduction initiatives from those expressedour unionized and salaried employees, the continued strength of the Canadian dollar against the U.S. dollar, industry conditions generally and further growth in or implied byalternative media, actions of competitors, the demand for higher margin coated and uncoated mechanical paper, our ability to realize announced price increases, and the costs of raw materials such as energy, chemicals and fiber. In addition, with respect to forward-looking statements. Although it is not possiblestatements relating to predict all risks,the combination of Abitibi and Bowater, the following factors, among others, could cause actual results to differ materially from those set forth in ourthe forward-looking statements: the risk that Abitibi’s and Bowater’sthe businesses will not be integrated successfully;successfully or that the improved financial performance, product quality and product development will not be achieved; the risk that other combinations within the industry or other factors may limit our ability to improve our competitive position; the risk that the cost savings and other expected synergies from the Combinationcombination may not be fully realized or may take longer to realize than expected; possibleand disruption from the Combination, which could maketransaction making it more difficult to maintain relationships with customers, employees or suppliers; the risk that the required divestiture of our Snowflake, Arizona newsprint mill under our consent decree with the U.S. Department of Justice may take a significant amount of time and may not be on terms advantageous to us; thesuppliers. Additional risks associated with our substantial indebtedness and our ability to meet our debt service obligations and to repay, restructure and/or refinance our outstanding indebtedness as it becomes due; and the continuing strengthening of the Canadian dollar against the U.S. dollar. In addition to specific factors described in

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ABITIBIBOWATER INC.
connection with any particular forward-looking statement, factors that could cause actual results to differ materially include, butfrom forward-looking statements are not limited to, those described under the captionenumerated in Item 1A. “Risk Factors” in Part II of this Quarterly Report. We disclaimForm 10-Q. All forward-looking statements in this report are expressly qualified by information contained in this report and in the Company’s other filings with the SEC and the Canadian securities regulatory authorities. AbitibiBowater disclaims any obligation to publicly update or revise any forward-looking statements even if our situation changes in the future.information, whether as a result of new information, future events or otherwise.

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ABITIBIBOWATER INC.
Information about industry or general economic conditions contained in this report is derived from third party sources (i.e., the Pulp and Paper Products Council; RISI, Inc.; and certain trade publications) that we believe are widely accepted and accurate; however, we have 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 and should be read in conjunction with our unauditedUnaudited Consolidated Financial Statements included in this quarterly report. Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements in Bowater’sour Annual Report on Form 10-K10-K/A for the year ended December 31, 2006. Our critical accounting estimates are described under the caption “Critical Accounting Estimates” in Item 7 of Bowater’s Annual Report2007, filed on Form 10-K for the year ended December 31, 2006.March 20, 2008.
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.
Overview of Financial Performance
Through our subsidiaries, we manufacture newsprint, coated and specialty papers, market pulp and wood products, operating pulp and paper facilities and wood products facilities in Canada, the United States, the United Kingdom and South Korea. Our reportable segments, which correspond to our primary product lines, are newsprint, coated papers, specialty papers, market pulp and wood products.
Our net loss for the thirdfirst quarter of 20072008 was $142.1$248 million, or $2.47$4.32 per diluted share, as compared to a net loss of $216.1$250 million, or $3.76$5.09 per diluted share for the same period in 2006.fourth quarter of 2007 and a net loss of $35 million, or $1.19 per diluted share, for the first quarter of 2007.
Our sales in the thirdfirst quarter of 2008 were $1.7 billion, an increase of $956 million from the first quarter of 2007, primarily due to the inclusion of Abitibi’s operating results. Excluding sales of $906 million attributable to Abitibi, sales for the first quarter of 2008 amounted to $822 million, an increase of $50 million, or 6.5%, from the first quarter of 2007. Transaction prices for newsprint, coated papers, specialty papers and market pulp are higher than the first quarter of 2007 and the fourth quarter of 2007. Lumber prices in the first quarter of 2008 were $814.7 million,higher than the first quarter of 2007, although slightly lower than the fourth quarter of 2007. Excluding Abitibi’s shipments for the first quarter of 2008, on a decreasecomparable basis to the first quarter of $61.2 million2007, coated papers and specialty papers shipments were higher, while newsprint and market pulp shipments were flat and lumber shipments lower. Abitibi’s shipments of newsprint and specialty papers were higher compared to the third quarter of 2006 sales of $875.9 million. Average transaction prices decreased for all of our paper products, and shipments decreased for all of our major products except coated papers. Shipments of coated paper increased primarily due to increased demand as a result of capacity closures by some of our North American competitors and reduced offshore imports. The increased coated paper shipments were more than offset by a reduction in average coated paper transaction prices, resulting in a slight decrease in sales for the thirdfirst quarter of 2007, compared to the same period of 2006. Shipments of newsprintwhile lumber shipments were significantly lower in the third quarter of 2007 compared to the third quarter of 2006 due to the continued decline oflower.
In our Newsprint segment, North American newsprint consumption. We have increased our exportsconsumption continued to decline, but we are taking advantage of the stronger global markets by exporting more newsprint from North America into areas where market conditions are stronger, but those export sales have only partially offsetstronger. The supply-demand balance for coated mechanical papers continued to improve in the effectsfirst quarter of 2008. In specialty papers, excluding the North American decline. As such,impact of Abitibi’s operating results following the Combination, we realized approximately a 2.0% increase in shipments in the first quarter of 2008, as we continue to curtail paper production at several facilities. We indefinitely idled papershift machine no. 3 at our Gatineau, Quebec facility beginningcapacity from newsprint to specialty papers. The increase in March 2007 and indefinitely idled paper machine no. 2 at our Dolbeau, Quebec facility beginning in late May 2007. Shipments ofglobal demand for market pulp were slightly lower induring the thirdfirst quarter of 2007 as compared to the third quarter of 2006. However, the increase2008 was from offshore markets, particularly China. The market pulp market was also impacted by supply constraints in averagesome markets and a weak U.S. dollar. Higher transaction prices for market pulp resulted inhelped drive an increase ofin pulp sales of 10.7% for the third quarter 2007 compared to the same period in 2006. Shipments of lumber were lower in the thirdfirst quarter of 2007 as compared2008. Our Wood Products segment continues to the third quarter of 2006 due to weak demand in thebe negatively impacted by a weaker U.S. housing market and the impact of quotas imposed by the Softwood Lumber Agreement in January 2007.lower demand.

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Our costs increased $21.6operating loss in the first quarter of 2008 was $149 million, duringan improvement from an operating loss of $358 million in the thirdfourth quarter of 2007. Our loss by segment (newsprint, coated papers, specialty papers, market pulp and wood products) improved by approximately $80 million compared to the fourth quarter of 2007, as compared to the same time perioddriven by higher transaction prices per ton in 2006. The increase in costs was primarily due to a stronger Canadian dollar (which when compared to the U.S. dollar was on average 7.3% higher in the third quarter of 2007 compared to the third quarter of 2006, from an average rate of US$0.8919 to US$0.9568), higher wood costs (particularly recycled fiber), higher maintenance costsour newsprint, coated papers, specialty papers and reduced benefits from our Canadian dollar hedging program. These higher costs were onlymarket pulp segments, partially offset by lower costs resulting from reduced shipment volumes and lower labor, energy and chemicals costs. As a result, our operating costs per ton increasedin our coated papers, specialty papers and wood products segments.
The discussion of comparative historical financial information that follows in this “Overview of Financial Performance” section includes the combined operating results of Abitibi and Bowater for all our paper grades, except coated paper which is manufactured solelythe first quarter of 2008, but only Bowater results in the U.S., when compared to the third quarter of 2006. Direct costs per ton, net of recycled fiber costs and the impact of the stronger Canadian dollar, decreased in the thirdfirst quarter of 2007 as compared to the third quarter of 2006 for all of our paper grades as a result of our commitment to our operational improvement program and the progress we have made in reducing our controllable costs. Specifically, our Thunder Bay mill lowered its costs to produce paper and pulp by approximately $40 per metric ton since last September despite the rapid strengthening of the Canadian dollar and the significant increase in the cost of recycled wood fiber. Substantial improvement at Thunder BayCombination was achieved prior to Junecompleted on October 29, 2007, and realized duringBowater was deemed to be the third quarter. Additional information regarding the changes in our manufacturing and other costs is included below in the section “Consolidated Results of Operations.” In addition, on September 7, 2007, Bowater Canadian Forest Products Inc., a subsidiary of Bowater, received a decision from an arbitration related to the 1998 sale to Weyerhaeuser Company (“Weyerhaeuser”) of Bowater’s former pulp and paper facility in Dryden, Ontario. As reported in Bowater’s most recent Annual Report on Form 10-K, Bowater and Weyerhaeuser had been arbitrating a claim regarding the cost of certain environmental matters related to the mill. The arbitrators in the matter awarded Weyerhaeuser a final and unappealable judgment of approximately $42.9 million, including interest, which was paid in the third quarter of 2007 and resulted in a pre-tax charge of $28.4 million in the same quarter. We had previously established a reserve of approximately $14.5 million (CDN $14.9 million) in connection with these environmental matters at the time of the sale.acquirer for accounting purposes.
Business Strategy and Outlook
The Combination willIn our first full quarter as a combined company, we have a material impact on our results of operations, financial condition and liquidity going forward. Our immediate focus is to successfully integrate Abitibi’s and Bowater’s businesses in order to achieve annualized synergies of at least $250 million by the first quarter of 2009. We expect these synergies to be achieved from improved efficiencies in such areas as production, SG&A costs, distribution and procurement. In addition, one of the key rationales in combining Abitibi and Bowater was to create a global leader in newsprint manufacturing, one that would be well positioned to compete more effectively in an increasingly global market. Further, both companies desiredtaken major steps to create a stronger and a more efficient manufacturing platform that would bewe believe will better enabledenable us to address the challenges of continuingcreated by newsprint demand declines in North America and near-historic strength of the Canadian dollar. The ultimateAmerica. We continue to focus on our goal of the Combination is to create a low-cost, financially disciplined organization with a stronger financial profile and increased focusthat is focused on migrating to value-added products and growth markets. OurWe are executing our business strategy is to successfully execute onachieve this goal, the result of which we believe will be a more dynamic and competitive organization better able to meet the needs of our customers and deliverchallenges of the marketplace while delivering significant additional value to our shareholders.
From anDuring the first quarter of 2008, we completed the implementation of the first phase of our company-wide strategic review which reduced our newsprint and specialty papers production capacity by almost 1 million metric tons per year. The reductions included the permanent closure of the Belgo (Shawinigan, Quebec) and Dalhousie (New Brunswick) mills, as well as the indefinite idling of the Donnacona (Quebec) and Mackenzie (British Columbia) mills. We also indefinitely idled two sawmills that directly support the Mackenzie paper operation. These facilities in the aggregate represented capacity of approximately 600,000 metric tons of newsprint, 400,000 metric tons of specialty papers, and 500 million board feet of lumber, and were all cash flow negative. Additionally, we permanently closed previously idled paper mills at Fort William (Thunder Bay, Ontario) and Lufkin (Texas), as well as the No. 3 paper machine at the Gatineau (Quebec) facility. The previously idled operations and competitiveness perspective,had a total capacity of approximately 650,000 metric tons.
As previously announced, during the implementation of the action plan generated during the first phase of our strategic review, we have begunsimultaneously been working on phase two, which includes a company-wide strategic assessmentcomprehensive review of everyall aspects of our business we operate, which we believe will assist us in supplyingan effort to further reduce costs, improve our customers’ demandmanufacturing platform and better position the Company in the most cost-effective manner possible. As a component of this review, we will examine closely which machines are best positionedglobal marketplace. We recently announced the actions to produce which products and then take specific actions designed to ensure that our production is focused on our more profitable product lines from lower cost sites. In addition, we will establish our capital spending and preliminary operating plans for 2008 and revise our synergy targetsbe taken as a result of this review. We expect to report on the resultssecond phase of our company-wide strategic review and the actions we plan to take in December 2007.other announcements including:
Because we recognize that cash preservation is critical during this transformational period where, among other challenges, the Canadian dollar is expected to remain strong, we will continue to take a disciplined approach to capital spending and expect that capital spending will be significantly below depreciation. We expect that total capital spending for 2007 will be approximately $145 million, which is significantly below depreciation. While we have announced price increases for several of our products, we expect that any benefit from these increases in the fourth quarter will be largely offset by the impact of the stronger Canadian dollar on our costs.
§North American newsprint consumption continues to decline, however, business fundamentals have improved. Given the context and our continued dialogue with stakeholders at several manufacturing sites, additional production closure decisions have not been taken. We will continue to evaluate further action as the year progresses.
§Focus on the largest components of our combined business: newsprint, coated papers and specialty papers.
§Grow our international presence in newsprint. In 2007, the combined company exported approximately 1.6 million tons from North America. We intend to increase our export shipments in 2008 by about 10%.
§Restart of a specialty machine at our Dolbeau, Quebec facility in February, to significantly improve the site’s cost structure.
§The idling of nearly 50% of our lumber production and the consolidation of certain of our lumber operations in Eastern Canada.
§Increase in our target asset sales to $750 million by the end of 2009 including the sale of our Mokpo, South Korea paper mill, as well as additional sales including forest lands, sawmills, hydroelectric sites and other assets.
From a balance sheetfinancial perspective, financial stabilityimproving liquidity and reducing debt reduction arecontinue to be top priorities going forward. We expect to enter into newAs of March 31, 2008, our total liquidity is comprised of liquidity at our Abitibi and Bowater subsidiaries. See the “Liquidity and Capital Resources” section for discussion of our Bowater and Abitibi bank credit facilities and liquidity. On April 1, 2008 AbitibiBowater successfully completed a series of financing transactions designed to address near-term debt maturities and general liquidity requirementsneeds, at its Abitibi subsidiary. The transactions included:

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§$413 million senior secured notes.
§$400 million 364-day senior secured term loan. We were required to repay $50 million of the term loan with proceeds from the sale of our Snowflake, Arizona newsprint mill (discussed below).
§$455 million unsecured notes.
§$350 million convertible notes.
For additional information concerning these financing transactions, reference is made to the section entitled, “Liquidity and Debt — Refinancing.”
At March 31, 2008, we had cash on hand of approximately $292 million ($130 million for Bowater and $162 million for Abitibi).
Our availability under the Bowater U.S. bank credit facility was $84 million at March 31, 2008. Bowater’s Canadian credit facility, which has a commitment available of $94 million, matures on May 31, 2008. We are currently negotiating the renewal of this Canadian credit facility. The Bowater Canadian credit agreement is secured by liens on the inventory, accounts receivable and deposit accounts of Bowater Canadian Forest Products Inc. (“BCFPI”). We believe that this credit agreement will be extended, but cannot assume that such extension will be obtained. Bowater’s next significant maturity of long-term debt is its $248 million, 9% debentures due in August 2009.
Abitibi’s credit facilities were paid off and terminated in connection with the April 1, 2008 refinancing transactions. Abitibi received net proceeds of $217 million from the refinancing transactions excluding net proceeds from the sale of Snowflake and from cash held as collateral for late tenders. Approximately $74 million of this cash is restricted as collateralization of various letters of credit issued by financial institutions. As a result of the refinancing transactions and the repayment and cancellation of the Abitibi credit facilities, Abitibi is no longer subject to financial covenants on its recourse debt. Abitibi’s next significant maturity of debt is its $350 million, 364-day senior secured term loan due March 30, 2009.
We are making progress on achieving our targeted synergies as a result of the Combination and expect to generate annualized synergies of approximately $375 million by the end of 2009. At the end of the first quarter 2008, we had achieved an annual run rate of approximately $180 million in captured synergies. We will seek to implement additional measures as we enhance our operating efficiency and productivity through continual systems analyses and operational improvements. We believe that the synergies resulting from the Combination and these additional measures will enhance our ability to further decrease production costs per ton and to increase operating cash flow and margins. We expect these synergies to be achieved from improved efficiencies in such areas as production, selling and administrative expenses, procurement and logistics costs.
We have established an aggressive goal of reducing our debt by $1 billion within the next three years. We have increased our target for asset sales from approximately $500 million to $750 million by the end of 2009, which includes non-core facilities, U.S. timberlands, hydroelectric sites, the sale of our newsprint mill in Snowflake, Arizona and the sale of our Mokpo, South Korea paper mill. As part of this debt reduction initiative, we will continue to review non-core assets and seek to divest those that no longer fit within our long-term strategic business plan. In particular,
Because we recognize that cash preservation is critical, we will continue to take a disciplined approach to capital spending and expect that total capital spending will be in the range of $150 million to $200 million during 2008, which is significantly below depreciation.
We have successfully implemented each of the 2007 fourthannounced newsprint price increases between November of last year and May of this year. We are currently implementing announced second quarter price increases in additioncertain of our product lines. Our financial performance improved in the first quarter of 2008 compared to the continued sale of timberlands, we commenced the marketing of Abitibi’s Snowflake, Arizona newsprint mill and certain related assets. We are required to sell this mill under the terms of a settlement agreement with the United States Department of Justice (the “DOJ”), pursuant to which the DOJ approved the Combination.

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Business and Financial Review
Consolidated Results of Operations
                         
  Three Months Ended   Nine Months Ended 
  September 30,  September 30,
(In millions) 2007  2006  Change  2007  2006  Change 
 
Sales $814.7  $875.9  $(61.2) $2,384.9  $2,668.5  $(283.6)
Operating loss  (82.1)  (179.3)  97.2   (42.1)  (72.1)  30.0 
 
Significant items that impacted operating loss:                    
Product pricing         $(30.4)         $(75.9)
Shipment volume          (30.8)          (207.7)
                       
Change in total sales          (61.2)          (283.6)
Manufacturing costs          (14.1)          135.5 
Employee termination costs — manufacturing          (6.2)          (15.2)
                       
Change in total manufacturing costs and depreciation, amortization, and cost of timber harvested          (20.3)          120.3 
Distribution costs          (0.5)          7.8 
Selling and administrative expenses      (6.9)          (16.8)
Employee termination costs — selling and administrative  5.0           (0.8)
Arbitration award          (28.4)          (28.4)
Impairment and other related charges      246.4           246.4 
Gain on disposition of assets      (36.9)         $(14.9)
                       
          $97.2          $30.0 
                       
Three months ended September 30, 2007 versus September 30, 2006
Salesdecreased in the thirdfourth quarter of 2007 as compared toand we expect further improvement in the thirdsecond quarter of 2006 due primarily to lower transaction prices for coated papers, specialty papers and newsprint and decreased shipments2008. We believe that the combination of specialty papers, newsprint, market pulp and lumber, partially offset by higher transaction prices for market pulp and lumber and higher shipmentsrecently announced price improvements, continued integration efforts, implementation of coated paper as further noted in the “Segment Results of Operations” section.
Operating losswas lower in the third quarter of 2007 when compared to the third quarter of 2006. The above table analyzes the major items that comprise the change in operating loss. The predominant item impacting the comparison is the impairment and other related charges of $246.4 million recorded in 2006:
Impairment and other related chargesrelate to costs recorded in the third quarter of 2006 for impairment of goodwill ($200.0 million), the closureactions resulting from both phases of our Benton Harbor, Michigan facility ($27.5 million)strategic review, and further progress toward achievement of our synergy targets will result in material improvements throughout the write-down of a paper machine at our Thunder Bay, Ontario facility ($18.9 million). There were no impairment charges incurred in the third quarter of 2007.
A brief explanationbalance of the other major items follows:
Product pricingfor our coated papers, specialty papers and newsprint product groups was lower in the third quarter of 2007 as compared to the third quarter of 2006. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of product pricing.year.

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Shipment volumefor our specialty papers, newsprint, market pulpBusiness and lumber product groups was lowerFinancial Review
Consolidated Results of Operations
             
  Three Months Ended 
  March 31 
          
(Unaudited, in millions) 2008  2007  Change 
 
Sales $1,728  $772  $956 
Operating (loss) income  (149)  25   (174)
Net loss  (248)  (35)  (213)
Net loss per share – basic and diluted  (4.32)  (1.19)  (3.13)
 
             
Significant items that improved (lowered) operating income:            
Sales – Bowater          50 
Sales – Abitibi          906 
             
Change in sales
          956 
             
Manufacturing costs – Bowater          (27)
Manufacturing costs – Abitibi          (886)
             
Change in total manufacturing costs and depreciation, amortization, and cost of timber harvested
          (913)
             
Distribution costs – Bowater          (8)
Distribution costs – Abitibi          (116)
             
Change in distribution costs
          (124)
             
             
Change in selling and administrative expenses
          (48)
             
             
Closure costs, impairment and other related charges          (10)
Change in net gains on disposition of assets          (35)
             
          $(174)
            
Three months ended March 31, 2008 versus March 31, 2007
Sales
Sales increased in the thirdfirst quarter of 20072008 as compared to the thirdfirst quarter of 2006. Please refer2007 by $956 million primarily due to inclusion of Abitibi’s results. Excluding sales attributable to Abitibi of approximately $906 million, sales on a comparable basis to the discussionfirst quarter of “Segment Results of Operations”2007, increased by $50 million. Sales on a comparable basis increased due primarily to higher transaction prices for coated, specialty papers and market pulp, offset by lower prices for our lumber products. Shipments on a more detailed analysis of shipments.
Manufacturing costscomparable basis increased for our coated paper and specialty papers, were higherflat for newsprint and market pulp and were lower in lumber in the thirdfirst quarter of 20072008 as compared to the thirdfirst quarter of 2006 resulting primarily from a stronger Canadian dollar ($20.9 million), higher wood costs ($9.8 million), higher maintenance costs ($7.7 million) and reduced benefits from our Canadian dollar hedging program ($4.5 million), partially offset by lower labor costs ($7.0 million), lower volumes ($3.1 million), lower energy costs ($2.7 million), lower chemical costs ($1.9 million) and lower depreciation ($1.8 million).
Employee termination costswere higher in the third quarter2007. The impact of 2007 due to severance and pension and other postretirement related charges that exceeded amounts recorded in the third quarter of 2006. Please refer to the discussion of “Corporate and Other” for a more detailed analysis of employee termination costs.
Selling and administrative expenseswere higher in the third quarter of 2007 as compared to the same period of 2006, primarily as a result of merger-related costs recorded in 2007. Please refer to the discussion of “Corporate and Other” for a more detailed analysiseach of these costs.
Arbitration award costs were higher in the third quarter of 2007 due to an arbitration award relating to the sale of Bowater’s former Dryden, Ontario pulp and paper facility to Weyerhaeuser. Please refer to “Overview of Financial Performance” for a more detailed discussion of these costs.
Gain on disposition of assetsrelates primarily to land sales. The decreaseitems is due to lower net gains on land sold in the third quarter of 2007 compared to the same period of 2006.
Nine months ended September 30, 2007 versus September 30, 2006
Salesdecreased in the first nine months of 2007 as compared to the same period of 2006 due primarily to lower transaction prices for coated papers, specialty papers, newsprint and lumber and decreased shipments of coated papers, newsprint, market pulp and lumber, partially offset by higher transaction prices for market pulp and higher shipments of specialty papers asdiscussed further noted in the “Segment Results of Operations” section.section of this MD&A.
Operating losswas lower
Operating profit decreased to an operating loss in the first nine monthsquarter of 2007 when2008 as compared to the same periodfirst quarter of 2006.2007. The inclusion of Abitibi’s results in the first quarter of 2008 contributed an operating loss of $145 million. Excluding the impact of Abitibi’s results, the operating loss of $4 million in the first quarter of 2008 represents a decrease of $29 million from the operating income of $25 million from the first quarter of 2007. The above table analyzes the major items that comprise the changes indecreased operating loss. The predominant item impacting the comparison is the impairment and other related charges of $246.4 million recorded in 2006:
Impairment and other related chargesrelate to costs recorded in the first nine months of 2006 for impairment of goodwill ($200.0 million), the closure 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). There were no impairment charges incurred in the same period of 2007.
income. A brief explanation of the otherthese major items follows:
Product pricingfor our coated papers, specialty papers, newsprint and lumber product groups was lower in the first nine months of 2007 as compared to the same period of 2006. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of product pricing.
Shipment volumefor our coated papers, newsprint, market pulp and lumber product groups was lower in the first nine months of 2007 as compared to the same period of 2006. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of shipments.
Manufacturing costswere lower in the first nine months of 2007 as compared to the same period of 2006 resulting primarily from lower volumes ($113.5 million), lower labor costs ($27.3 million), lower maintenance

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Manufacturing costs excluding Abitibi’s results, increased in the first quarter of 2008 as compared to the first quarter of 2007 by $27 million resulting primarily from unfavorable currency exchange ($18.939 million), lower energy costsvolumes ($16.59 million) and increased costs for fiber and wood ($17 million), energy ($12 million) and chemicals ($7 million). These increased manufacturing costs were offset by lower costs for labor and benefits ($34 million), repairs ($14 million) and depreciation ($5.03 million).
Distribution costs excluding Abitibi’s results were higher in the first quarter of 2008 as compared to the first quarter of 2007, primarily from higher distribution costs per ton as a result of our market mix of domestic versus export shipments, higher fuel charges by our carriers and the destination of customers.
Selling and administrative costs increased in the first quarter of 2008 as compared to the first quarter of 2007 due primarily to the inclusion of Abitibi’s selling and administrative expenses. These costs are discussed further in the “Segment Results of Operations -Corporate and Other” section of this MD&A.
Additionally, in the first quarter of 2008 we incurred approximately $10 million in closure costs, primarily related to noncancelable contracts due to the completion of the permanent closing of our Bowater Dalhousie facility and the indefinite idling of our Donnacona operations in the first quarter. We realized $23 million in net gains on disposition of timberlands and other fixed assets in the first quarter of 2008 whereas we had net gains of $58 million in the same period of 2007. These costs and gains are discussed further in the “Segment Results of Operations -Corporate and Other” section of this MD&A.
Net loss
Net loss in the first quarter of 2008 was $248 million or $4.32 per common share, an increase in net loss of $213 million or $3.13 per common share, compared to the first quarter of 2007. The increase in net loss was a result of the increase in operating loss ($174 million) due primarily to the inclusion of Abitibi’s results for the first quarter of 2008 and as noted above, an increase in interest expense ($82 million), partially offset by higher wood costsan increased foreign exchange gain ($33.344 million), a stronger Canadian dollar ($26.6 million), reduced benefits from our Canadian dollar hedging program ($34.7 million) and higher chemical costs ($3.1 million).
Employee termination costswere higher Interest expenses increased $82 million in the first nine monthsquarter of 2008 compared to the first quarter of 2007 due to severance and pension and postretirement related charges that exceeded amounts recorded in the same periodinclusion of 2006. Please refer to the discussion of “Corporate and Other” for a more detailed analysis of employee termination costs.
Distribution costswere lower in the first nine months of 2007 as compared to the same period of 2006, primarily as a result of the reduced shipments of product and reduced lumber duties.
Selling and administrative expenseswere higher in the first nine months of 2007 as compared to the same period of 2006, primarily as a result of higher share-based compensation costs and merger-related costs. Please refer to the discussion of “Corporate and Other” for a more detailed analysis of these costs.
Arbitration awardcosts were higher in the first nine months of 2007 due to an arbitration award relating to the sale of Bowater’s former Dryden, Ontario pulp and paper facility to Weyerhaeuser. Please refer to “Overview of Financial Performance” for a more detailed discussion of these costs.
Gain on disposition of assetsrelates primarily to land sales. The decrease is due to lower net gains on land sold in the first nine months of 2007 compared to the same period of 2006.Abitibi’s results.
Segment Results of Operations
We manage our business based on the products that we manufacture and sell to external customers. Our reportable segments, which correspond to our primary product lines, are newsprint, coated papers, specialty papers, newsprint, market pulp, and lumber.wood products. 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.
The Combination will significantly impact None of the resultsincome or loss items following “Operating (loss) income” in our Consolidated Statements of Operations are allocated to our specialty papers, newsprint, market pulpsegments, since those items are reviewed separately by management. For the same reason, impairments, employee termination costs, gains on dispositions of assets and lumber segments beginning inother discretionary charges or credits are not allocated to the fourth quarter of 2007. Please refersegments. Share-based compensation expense and depreciation expense are, however, allocated to Abitibi’s periodic filings with the SEC forour segments. For further information regarding their segment results priorour segments, see Note 16 to the merger with Bowater on October 29, 2007.our Consolidated Financial Statements included in this Form 10-Q.

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Coated Papers
                         
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2007  2006  Change  2007  2006  Change 
Average price (per short ton) $711  $762  $(51) $704  $777  $(73)
Shipments (thousands of short tons)  214.2   202.6   11.6   582.8   596.8   (14.0)
Downtime (thousands of short tons)  4.5   10.1   (5.6)  28.3   46.1   (17.8)
Inventory at end of period (thousands of short tons)  32.6   40.0   (7.4)  32.6   40.0   (7.4)
(In millions)
                        
 
Sales $152.4  $154.4  $(2.0) $410.3  $463.5  $(53.2)
Segment income  13.1   15.6   (2.5)  26.6   60.3   (33.7)
                         
Significant items that impact segment income:                        
                         
Product pricing         $(10.7)         $(40.9)
Shipment volume          8.7           (12.3)
                       
Change in total sales          (2.0)          (53.2)
Manufacturing costs          (1.2)          17.7 
Distribution costs          (0.2)          (0.2)
Selling and administrative expenses          0.9           2.0 
                       
          $(2.5)         $(33.7)
                       
Three months ended September 30, 2007 versus September 30, 2006
Sales of coated papers decreased in the third quarter of 2007 as compared to the third quarter of 2006 primarily as a result of lower product pricing partially offset by higher shipments. Our average transaction price decreased 6.7% and our coated mechanical papers shipments increased 5.7% in the third quarter of 2007 as compared to the third quarter of 2006. The supply-demand balance for coated mechanical papers improved in the third quarter of 2007, despite the impact of the May 2007 postal increase on demand, primarily due to capacity closures by some of our North American competitors and reduced offshore imports. We are expecting a further reduction in imports from Asia as a result of the U.S. Department of Commerce’s levy of duties on Asian imports of coated mechanical papers. Coated mechanical markets have continued to improve since the end of the third quarter of 2007 as customers strive to secure product for the upcoming strong fall season. Bowater has already implemented two $60 price increases in the second half of 2007 and has announced a third $60 increase effective December 1.
Segment income decreased in the third quarter of 2007 as compared to the third quarter of 2006 primarily as a result of lower sales, as noted above.
Inventories declined by approximately 30% during the third quarter of 2007, the result of increased shipments for reasons noted above and as printers begin to restock in preparation for the typically strong fourth quarter.

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ABITIBIBOWATER INC.
Nine months ended September 30, 2007 versus September 30, 2006
Sales of coated papers decreased in the first nine months of 2007 as compared to the first nine months of 2006 as a result of lower product pricing and lower shipments. Our average transaction price declined 9.4% and our coated mechanical papers shipments decreased 2.3% in the first nine months of 2007 as compared to the first nine months of 2006.
Segment income decreased in the first nine months of 2007 as compared to the first nine months of 2006 primarily as a result of lower sales, as noted above. The lower sales were partially offset by lower manufacturing costs including the impact of lower volumes ($11.4 million), lower energy costs ($7.2 million), lower depreciation ($3.5 million), and lower maintenance costs ($2.0 million), partially offset by higher wood costs ($8.1 million).
Coated Papers Third Party Data:U.S. consumer magazine advertising pages decreased 1% in the nine months ended September 2007 compared to the same period of 2006. North American demand for coated mechanical papers increased 4.8% in the nine months ended September 30, 2007 compared to the same period in 2006.
Specialty Papers
                         
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2007  2006  Change  2007  2006  Change 
Average price (per short ton) $658  $679  $(21) $654  $667  $(13)
Shipments (thousands of short tons)  214.9   226.8   (11.9)  663.1   639.4   23.7 
Downtime (thousands of short tons)  36.5   3.0   33.5   50.9   5.0   45.9 
Inventory at end of period (thousands of short tons)  67.6   52.7   14.9   67.6   52.7   14.9 
(In millions)
                        
 
Sales $141.3  $153.9  $(12.6) $433.9  $426.6  $7.3 
Segment loss  (19.8)  (1.4)  (18.4)  (39.6)  (26.8)  (12.8)
                         
Significant items that impact segment loss:                        
                         
Product pricing         $(6.4)         $(11.7)
Shipment volume          (6.2)          19.0 
                       
Change in total sales          (12.6)          7.3 
Manufacturing costs          (6.6)          (17.9)
Distribution costs          (0.2)          (3.9)
Selling and administrative expenses          1.0           1.7 
                       
          $(18.4)         $(12.8)
                       

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ABITIBIBOWATER INC.
Three months ended September 30, 2007 versus September 30, 2006
Sales decreased in the third quarter of 2007 as compared to the third quarter of 2006 primarily as a result of a 5.2% decrease in shipments of specialty papers and a 3.1% decrease in product pricing. The decrease in shipments was primarily the result of our decision to indefinitely idle a specialty-producing machine at our Dolbeau facility in May 2007. This idling coincided with the restart of paper machine No. 4 at our Thunder Bay facility, which had been idled since September 2006. We have completed an operational restructuring at our Thunder Bay facility, which has reduced its cost to produce paper by approximately $40 per metric ton since September 2006, despite the rapid strengthening of the Canadian dollar and the significant increase in the cost of recycled wood fiber. Significant improvements were achieved prior to June 2007, which allowed us to realize nearly the full impact of those improvements in the third quarter of 2007. Going forward, we plan to produce both newsprint and specialty papers on Thunder Bay’s two operating machines. We believe these two machines and the unique multiple fiber furnishes available to them provide the opportunity to produce a variety of higher value-added specialty grades at Thunder Bay. Consequently, we began production of specialty papers at Thunder Bay late in the third quarter of 2007 and expect its shipments of specialty papers to increase in the fourth quarter of 2007. Demand for our supercalendered products, manufactured by our Dolbeau and Donnacona facilities, was strong in September, driven largely by the lack of supply of coated mechanical paper, and is expected to stay strong during the fourth quarter. We have informed our customers of a $60 per ton price increase for our supercalendered products effective December 1. We also announced a $60 per ton price increase for our high-brite products effective October 1. Additionally, we have price initiatives in place for most of our grades of uncoated mechanical papers.
We had a higher segment loss in the third quarter of 2007 when compared to the third quarter of 2006 primarily as a result of the decreased sales discussed above, and higher manufacturing costs. The higher manufacturing costs consisted of a stronger Canadian dollar ($5.0 million), higher wood costs ($4.6 million) and higher net volume variances ($4.4 million), partially offset by lower chemical costs ($3.4 million), lower energy costs ($1.9 million) and lower labor costs ($1.4 million).
Nine months ended September 30, 2007 versus September 30, 2006
Sales increased in the first nine months of 2007 as compared to the first nine months of 2006 as a result of a 3.7% increase in shipments of specialty papers, which were partially offset by a 1.9% decrease in product pricing. We continue to shift machine capacity from newsprint to specialty papers. We completed the conversion of a newsprint machine to specialty production at our Calhoun mill in July 2006. In addition, we increased production of specialty papers at our Thunder Bay mill beginning late in the third quarter of 2007. This increased production was offset slightly by the indefinite idle of paper machine no. 2 at our Dolbeau, Quebec facility in late May 2007.
Segment loss increased in the first nine months of 2007 as compared to the first nine months of 2006 primarily as a result of increased manufacturing costs, which were partially offset by higher sales, as discussed above. The higher manufacturing costs were a result of higher net volumes ($18.0 million), higher wood costs ($14.6 million), reduced benefits from our Canadian dollar hedging program ($7.6 million), a stronger Canadian dollar ($5.9 million) and higher depreciation ($5.9 million), partially offset by lower energy costs ($10.3 million), lower chemical costs ($8.6 million), lower maintenance costs ($2.8 million), and lower labor costs ($2.7 million).
Inventory levels were higher at September 30, 2007 as compared to September 30, 2006 due to increased capacity and a weaker market in the first nine months of 2007 as compared to the first nine months of 2006.
Specialty Papers Third Party Data:North American demand for supercalendered high gloss papers was up 5.9%; for lightweight or directory grades was up 1.2%; and for standard uncoated mechanical papers was down 6.5% for the nine months ended September 30, 2007 compared to the same period in 2006.

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ABITIBIBOWATER INC.
Newsprint
                         
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2007  2006  Change  2007  2006  Change 
Average price (per metric ton) $586  $643  $(57) $603  $635  $(32)
Shipments (thousands of metric tons)  504.7   542.5   (37.8)  1,511.9   1,716.9   (205.0)
Downtime (thousands of metric tons)  66.8   27.2   39.6   186.3   61.5   124.8 
Inventory at end of period (thousands of metric tons)  104.1   77.5   26.6   104.1   77.5   26.6 
(In millions)
                        
 
Sales $295.8  $349.1  $(53.3) $911.7  $1,089.9  $(178.2)
Segment (loss) income  (39.5)  30.9   (70.4)  (55.2)  67.1   (122.3)
                         
Significant items that impact segment (loss) income:                        
                         
Product pricing         $(28.9)         $(47.5)
Shipment volume          (24.4)          (130.7)
                       
Change in total sales          (53.3)          (178.2)
Manufacturing costs          (15.3)          53.3 
Distribution costs          (3.0)          (0.7)
Selling and administrative expenses          1.2           3.3 
                       
          $(70.4)         $(122.3)
                       
             
  Three Months Ended 
  March 31 
          
  2008  2007  Change 
 
Average price (per metric ton) $623  $618  $5 
Average cost (per metric ton) $676  $628  $48 
Shipments (thousands of metric tons)  1,299   490   809 
Downtime (thousands of metric tons)  45   63   (18)
Inventory at end of the quarter (thousands of metric tons)  208   94   114 
             
(Unaudited, in millions)
            
Sales $809  $303  $506 
Segment operating loss  (69)  (5)  (64)
 
             
Significant items that improved (lowered) segment operating loss:            
Product pricing – Bowater          2 
Shipments – Bowater          (2)
Sales – Abitibi          506 
             
Change in sales
          506 
             
Manufacturing costs – Bowater          (16)
Manufacturing costs – Abitibi          (479)
             
Change in total manufacturing costs and depreciation, amortization, and cost of timber harvested
          (495)
             
Distribution costs – Bowater          (3)
Distribution costs – Abitibi          (67)
             
Change in distribution costs
          (70)
             
             
Change in selling and administrative expenses
          (5)
             
          $(64)
            
Three months ended September 30,March 31, 2008 versus March 31, 2007 versus September 30, 2006
Sales decreasedincreased in the thirdfirst quarter of 20072008 as compared to the thirdfirst quarter of 20062007 primarily as a resultdue to the inclusion of Abitibi’s results. Sales for the first quarter of 2007 on an 8.9% decrease in product pricingunaudited combined basis for Abitibi and a 7.0% decrease inBowater were $796 million and shipments were 1,269 thousand metric tons.
Excluding sales of $506 million attributable to Abitibi, Bowater sales for 2008 amounted to $303 million, flat compared to the first quarter of 2007. Excluding shipments of newsprint. We shipped less809,000 metric tons attributable to Abitibi, Bowater’s newsprint product as we curtailed production in response toshipments for the decline in our customer orders and continued the shiftfirst quarter of machine capacity from the production of newsprint to the production of specialty paper grades.2008 were flat at 490,000 metric tons. While North American consumption remainscontinued its decline in decline,the first quarter of 2008, global newsprint demand excluding North America has increased through September. Export sales of newsprint increased by 17%1% in the thirdfirst quarter of 2007 compared to the same period in 2006, as we2008. We continue to take advantage of the stronger global markets by shipping more newsprint out of North America and into areas where market conditions are stronger. InAlthough the thirdfirst quarter average transaction price was only slightly higher than the comparable period in the prior year, our North American monthly newsprint price has increased significantly from December 2007 to March 2008. We have successfully implemented each of the announced newsprint price increases including the $25 per metric ton increase in November 2007 we had total downtimeand the $60 per metric ton increase implemented in January through March 2008 and April of 66,800 metric tons, including 7,600 metric tons of maintenance downtime. Wethis year and are currently implementing the previously announced $25 per tonNorth American price increase and expect to have it fully implemented byof $60 per metric ton over three equal monthly installments, beginning April 2008.
In the end of November.
Segment income decreased to a segment loss in the thirdfirst quarter of 2007 as compared2008, the total downtime was primarily related to the third quarterour indefinite idling of 2006 primarily as a result of the lower sales noted above and higher manufacturing costs. Manufacturing costs were higher as a result of increased wood and recycled fiber costs ($12.7 million), a stronger Canadian dollar ($9.9 million), higher maintenance costs ($1.9 million) and reduced benefits from our Canadian dollar hedging program ($1.8 million), partially offset by lower volumes ($4.3 million) and lower labor costs ($3.3 million).Mackenzie facility (34,000

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ABITIBIBOWATER INC.
Nine months ended September 30,metric tons). Inventory levels at March 31, 2008 of 208,000 metric tons decreased from 221,000 metric tons at December 31, 2007. Inventory levels at March 31, 2008 as compared to March 31, 2007 versus September 30, 2006were higher due to the inclusion of Abitibi’s newsprint inventory.
Sales decreasedSegment operating loss increased to $69 million in the first nine monthsquarter of 2008 compared to $5 million in the first quarter of 2007 primarily as a result of higher manufacturing costs for Bowater and an operating loss of $45 million contributed by Abitibi’s operations for the first quarter of 2008. Segment operating loss for Bowater, excluding Abitibi’s loss of $45 million increased from $5 million in the first quarter of 2007 to $24 million in the first quarter of 2008. The above table analyzes the major items that decreased operating income. A brief explanation of these major items follows:
Segment manufacturing costs excluding Abitibi’s results were $16 million higher in the first quarter of 2008 as compared to the first nine monthsquarter of 20062007 primarily asdue to slightly higher production volume ($4 million), a resultstronger Canadian dollar ($17 million), higher cost of purchased fiber ($12 million) and power ($6 million), partially offset by lower product pricinglabor and lower shipments of newsprint. Newsprint shipments were 11.9% lowerfringe benefits ($13 million) and maintenance expenses ($5 million).
Segment distribution costs increased in the first nine monthsquarter of 2008 compared to the first quarter of 2007 due to the inclusion of Abitibi’s results. Overall Bowater’s distribution costs were slightly higher when compared to the first nine monthsquarter of 2006 as we curtailed production in response2007 due to higher distribution costs per ton.
Overall segment selling and administrative costs increased due to the decline in our customer orders and continued the shiftinclusion of machine capacity from the production of newsprint to the production of specialty paper grades. InAbitibi’s expenses for the first nine monthsquarter of 2007, we had total downtime of 186,300 metric tons, including 20,400 metric tons of maintenance downtime primarily related to a major machine rebuild at one of our sites.
Segment income decreased to a segment loss in the first nine months of 2007 as compared to the first nine months of 2006 primarily as a result of lower sales noted above, partially offset by lower manufacturing costs. Manufacturing costs were lower as a result of lower volumes ($65.8 million), lower labor costs ($16.4 million), lower maintenance costs ($11.5 million), lower depreciation ($5.6 million) and lower energy costs ($3.9 million), partially offset by higher wood costs, particularly increased recycled fiber costs ($37.7 million), reduced benefits from our Canadian dollar hedging program ($13.9 million) and a stronger Canadian dollar ($13.3 million).
Inventory levels increased 34.3% at September 30, 2007 as compared to September 30, 2006 due to an increase in export warehouse inventory levels.2008.
Newsprint Third Party Data:ForIn the ninethree months ended September 30, 2007,March 31, 2008, total U.S.North American newsprint demand and consumption of newsprint decreased 11.3% and 10.6%declined 5.7%, respectively, as compared to the same period last year. North American net exports of newsprint were 14.7%2.1% higher than 20062007 levels. Total inventories (North American mills and U.S. users) at September 30, 2007March 31, 2008 were 1.21,149 million metric tons, or 3.7%,14.1% lower than September 30, 2006. At September 30, 2007 and 2006, theMarch, 31 2007. The days of supply at the U.S. daily newspapers was 3938 days and 41 days, respectively.at March 31, 2008, flat compared to March 31, 2007. The North American operating rate was 94%91.4% for the ninethree months ended September 30, 2007. Newspaper advertising linage declined 9.1% whenMarch 31, 2008.
Coated Papers
             
  Three Months Ended 
  March 31 
  2008  2007  2008 vs. 2007 
 
             
Average price (per short ton) $843  $713  $130 
Average cost (per short ton) $673  $663  $10 
Shipments (thousands of short tons)  201   181   20 
Downtime (thousands of short tons)  1   10   (9)
Inventory at end of the quarter (thousands of short tons)  27   51   (24)
             
(Unaudited, in millions)
            
Sales $169  $129  $40 
Segment operating income  34   9   25 
 
             
Significant items that improved (lowered) segment operating income:            
Product pricing         $26 
Shipment volume          14 
            
Change in sales
          40 
 
Change in manufacturing costs
          (13)
Change in distribution costs
          (2)
Change in selling and administrative expenses
          – 
            
          $25 
            

24

ABITIBIBOWATER INC.
Three months ended March 31, 2008 versus March 31, 2007
The Combination did not impact our coated papers segment results as Abitibi does not have any facilities that produce or sell coated papers.
Coated paper segment sales increased to $169 million in the first quarter of 2008 compared to $129 million the first quarter of 2007 as a result of significantly higher transaction prices and higher shipments. Our average transaction price increased by 18% and the shipments increased 11% in the first quarter of 2008 as compared to the first nine monthsquarter of 2006.2007. Price increases of $60 per short ton which were announced during the fourth quarter for our coated grades were fully implemented.
Segment income increased by $25 million in the first quarter of 2008 as compared to the first quarter of 2007 primarily due to increased sales as discussed above, partially offset by higher manufacturing costs. The above table analyzes the major items that impacted operating income. A brief explanation of these major items follows:
The higher manufacturing costs are due to increased volumes ($8 million) and increased costs for purchased fiber and wood ($2 million) and increased fuel and chemicals costs ($4 million).
Coated Papers Third Party Data(source: Pulp and Paper Products Council): U.S. consumer magazine advertising pages decreased 6.3% in the first quarter of 2008 compared to the first quarter of 2007. North American demand for coated mechanical papers increased 3.9% in the first quarter of 2008 compared to the same period of 2007. The industry operating rate was 99% in the first quarter of 2008 compared to 88% in the same period of 2007. North American coated mechanical mill inventories were at 11 days supply at March 31, 2008 compared to 25 days supply at March 31, 2007.

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ABITIBIBOWATER INC.
Market PulpSpecialty Papers
                         
 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2007  2006  Change  2007  2006  Change 
 
Average price (per metric ton) $672  $601  $71  $650  $562  $88 
Shipments (thousands of metric tons)  237.7   239.8   (2.1)  661.9   729.5   (67.6)
Downtime (thousands of metric tons)  8.9   3.4   5.5   32.0   22.1   9.9 
Inventory at end of period (thousands of metric tons)  51.4   59.1   (7.7)  51.4   59.1   (7.7)
(In millions)
                        
 
Sales $159.7  $144.2  $15.5  $430.5  $410.3  $20.2 
Segment income  29.3   17.4   11.9   66.5   16.1   50.4 
                         
Significant items that impact segment income:                        
                         
Product pricing         $16.1          $54.7 
Shipment volume          (0.6)          (34.5)
                       
Change in total sales          15.5           20.2 
Manufacturing costs          (1.4)          34.1 
Distribution costs          (1.9)          (3.0)
Selling and administrative expenses          (0.3)          (0.9)
                       
          $11.9          $50.4 
             ��         
Three months ended September 30, 2007 versus September 30, 2006
             
  Three Months Ended 
  March 31 
           
  2008  2007  Change 
 
Average price (per short ton) $710  $653  $57 
Average cost (per short ton) $770  $690  $80 
Shipments (thousands of short tons)  646   216   430 
Downtime (thousands of short tons)  47   6   41 
Inventory at end of the quarter (thousands of short tons)  146   57   89 
             
(Unaudited, in millions)
            
Sales $459  $141  $318 
Segment operating loss  (39)  (8)  (31)
 
             
Significant items that improved (lowered) segment operating loss:            
Product pricing – Bowater          10 
Shipments – Bowater          3 
Sales – Abitibi          305 
             
Change in sales
          318 
             
Manufacturing costs – Bowater          (3)
Manufacturing costs – Abitibi          (306)
             
Change in total manufacturing costs and depreciation, amortization, and cost of timber harvested
          (309)
             
Distribution costs – Bowater          (3)
Distribution costs – Abitibi          (35)
             
Change in distribution costs
          (38)
             
             
Change in selling and administrative expenses
          (2)
             
          $(31)
            
Sales of market pulp increased in the thirdfirst quarter of 2008 as compared to the first quarter of 2007 primarily due to the inclusion of Abitibi’s results. Sales for the first quarter of 2007 on an unaudited combined basis for Abitibi and Bowater were $426 million and shipments were 628 thousand short tons.
Excluding sales of $305 million attributable to Abitibi, Bowater sales for 2008 increased to $154 million from $141 million in the first quarter of 2007. Excluding shipments of 425,000 short tons attributable to Abitibi, Bowater’s specialty papers shipments for the first quarter of 2008 were 221,000 short tons. The increase in Bowater’s sales was due to higher shipments and higher product pricing. Price increases of $60 per short ton were announced during the fourth quarter for most of our uncoated mechanical grades.
Our downtime in the first quarter of 2008 was primarily for the indefinite idling of our Donnacona facility (30,000 short tons) and the idling of paper machine no. 2 at our Dolbeau, Quebec facility (11,000 short tons) which was restarted beginning in February 2008. Inventory levels at March 31, 2008 of 146,000 short tons decreased from 151,000 short tons at December 31, 2007. Inventory levels at March 31, 2008 as compared to March 31, 2007 were higher due to the inclusion of Abitibi’s inventory.
Segment loss increased in the first quarter of 2008 as compared to the first quarter of 2007 primarily as a result of the inclusion of Abitibi’s results for the first quarter of 2008, which contributed an operating loss of $39 million. Segment operating loss for

26

ABITIBIBOWATER INC.
Bowater, excluding Abitibi’s loss of $39 million decreased from $8 million in the first quarter of 2007 to a break-even point in the first quarter of 2008 due primarily to increased shipments, grade reallocation between mills and product pricing as discussed above. The above table analyzes the major items that decreased operating income. A brief explanation of these major items follows:
Segment manufacturing costs excluding Abitibi’s results were almost at the same level in the first quarter of 2008 as compared to the first quarter of 2007, with only a $3 million increase. Unfavorable costs including wood ($1 million), power ($3 million) and chemicals ($2 million) and a stronger Canadian dollar ($9 million), were offset by favorable volumes ($5 million), improved labor and benefit costs ($3 million) and lower maintenance expenses ($5 million).
Segment distribution costs increased in the first quarter of 2008 compared to the first quarter of 2007 due to the inclusion of Abitibi’s results.
Specialty Papers Third Party Data (source: Pulp and Paper Products Council):North American demand for supercalendered high gloss papers was up 5.3%, for lightweight or directory grades down 8.0%, and for standard uncoated mechanical papers up 9.8% in the first quarter of 2008 compared to the same period in 2006 as a result of higher product pricing, partially offset by slightly lower shipments. Our average price for market pulp2007. The industry operating rate was 11.8% higher91% in the thirdfirst quarter of 20072008 compared to 87% for the third quartersame period of 2006. The demand remained strong from both2007. North America and offshore markets, particularly China, primarily dueAmerican uncoated mechanical mill inventories were at 17 days supply at March 31, 2008 compared to 19 days supply constraints and a weak U.S. dollar. From July 1,at March 31, 2007.
Market Pulp
             
  Three Months Ended 
  March 31 
          
  2008  2007  Change 
 
Average price (per metric ton) $713  $627  $86 
Average cost (per metric ton) $583  $537  $46 
Shipments (thousands of metric tons)  236   212   24 
Downtime (thousands of metrics tons)  4   7   (3)
Inventory at end of the quarter (thousands of metrics tons)  59   55   4 
             
(Unaudited, in millions)
            
Sales $168  $133  $35 
Segment operating income  31   19   12 
 
             
Significant items that improved (lowered) segment operating income:            
Product pricing – Bowater          18 
Sales – Abitibi          17 
             
Change in sales
          35 
             
Manufacturing costs – Bowater          (6)
Manufacturing costs – Abitibi          (16)
             
Change in total manufacturing costs and depreciation, amortization, and cost of timber harvested
          (22)
             
Distribution costs – Bowater          (2)
             
Change in distribution costs
          (2)
             
             
Change in selling and administrative expenses
          1 
             
          $12 
            

27

ABITIBIBOWATER INC.
Three months ended March 31, 2008 versus March 31, 2007 through October 1, 2007, we implemented several price increases which totaled $40 per metric ton for both softwood and hardwood pulp grades and $60 per metric ton for fluff pulp.
Segment incomeSales increased in the secondfirst quarter of 20072008 as compared to the same period in 2006,first quarter of 2007 primarily as a resultdue to the inclusion of Abitibi’s results. Abitibi’s Fort Frances, Ontario mill produces approximately 116,000 metric tons annually. Sales for the first quarter of 2007 on an increase inunaudited combined basis for Abitibi and Bowater were $149 million and shipments were 239 thousand metric tons.
Excluding sales partially offset by higher manufacturing and distribution costs. The higher manufacturing costs consisted of higher maintenance costs ($6.5 million), higher energy costs ($2.8 million), a stronger Canadian dollar ($2.5 million) and reduced benefits$17 million attributable to Abitibi, Bowater sales for 2008 increased to $151 million from our Canadian dollar hedging program ($1.1 million), partially offset by lower wood costs ($7.0 million) and lower volumes ($4.2 million).
Nine months ended September 30, 2007 versus September 30, 2006
Sales of market pulp increased$133 million in the first nine monthsquarter of 2007 as compared2007. Excluding shipments of 25,000 metric tons attributable to the same period in 2006 as a result of higher product pricing, partially offset by lower shipments. Our average price forAbitibi, Bowater’s market pulp was 15.7% highershipments for the first quarter of 2008 were 211,000 metric tons. The increase in product selling price accounted for the total variance of $18 million as the product price increased from $627 per metric ton in the first nine monthsquarter of 2007 compared to $713 per metric ton in the first nine monthsquarter of 2006. The2008, an increase in demand isof 14%.
Inventory levels at March 31, 2008 of 59,000 metric tons increased from both North America50,000 metric tons at December 31, 2007 and offshore markets, particularly China. Our shipments decreased 9.2% and our inventories decreased 13% compared to 2006, due to reduced production from our Thunder Bay facility as a result of the permanent shut of our “A” kraft pulp mill in May 2006. Mill inventories remainwere 55,000 metric tons at low levels, particularly in softwood products, and consumer inventories are at near record lows as well.March 31, 2007. Currently, softwood grades have better market supply-demand dynamics than hardwood grades, but with the tight softwood grade market, demand for the hardwood grades is growing.

34

ABITIBIBOWATER INC. Price increases announced were fully implemented in the first quarter of 2008.
Segment income increased in the first nine monthsquarter of 20072008 as compared to the same period in 2006,2007, primarily as a result of the increase in sales, as noted above, and lower manufacturing costs. The loweroffset by increased manufacturing costs consistedfor Bowater. Segment income attributable to the inclusion of lower volumesAbitibi for the first quarter of 2008 was approximately $1 million. The above table analyzes the major items that decreased operating income. A brief explanation of these major items follows:
Segment manufacturing costs, excluding Abitibi’s costs of $16 million, were $6 million higher in the first quarter of 2008 as compared to the first quarter of 2007 primarily due to higher costs for wood ($27.95 million), lower woodfuel and chemicals costs ($16.6 million) and lower labor costs ($5.3 million), partially offset by reduced benefits from our Canadian dollar hedging program ($8.3 million), higher chemical costs ($4.6 million), higher energy costs ($4.54 million) and a stronger Canadian dollar ($2.96 million), partially offset by lower labor and benefits ($3 million), repairs ($2 million) and slightly lower volume ($1 million).
Market Pulp Third Party Data:Data(source: Pulp and Paper Products Council):World demand for market pulp increased 3%6.1% or 595,000 metrics tons in the nine months ended September 30, 2007first quarter of 2008 compared to the same period last year.of 2007. Demand was up 4.6% in Western Europe, the world’s largest pulp market, stable in North America, up 15.3% in China, 10.6% in Latin America and 11.8% in Africa and Asia other than China and Japan. World producers shipped at 94%90% of capacity duringin the nine months ended September 30, 2007first quarter of 2008 compared to 97% during the same period in 2006.
Lumber
                         
 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2007 2006Change  2007 2006  Change 
 
Average price (per mbf) $302  $297  $5  $285  $329  $(44)
Shipments (millions of mbf)  206.5   239.4   (32.9)  663.0   795.5   (132.5)
Downtime (millions of mbf)  75.8   69.4   6.4   144.4   181.3   (36.9)
Inventory at end of period (millions of mbf)  43.4   54.4   (11.0)  43.4   54.4   (11.0)
(In millions)
                        
 
Sales $62.3  $71.1  $(8.8) $189.1  $261.6  $(72.5)
Segment loss  (10.6)  (17.4)  6.8   (31.7)  (20.9)  (10.8)
                         
Significant items that impact segment loss:                        
                         
Product pricing         $0.5          $(29.8)
Shipment volume          (9.3)          (42.7)
                       
Change in total sales          (8.8)          (72.5)
Manufacturing costs          11.1           45.4 
Distribution costs          4.4           15.6 
Selling and administrative expenses          0.1           0.7 
                       
          $6.8          $(10.8)
                       
Three months ended September 30, 2007 versus September 30, 2006
Sales decreased92% in the thirdfirst quarter of 2007 as2007. World producer inventories were at 34 days supply at March 31, 2008, an increase of 3 days compared to the same period in 2006 as a result of a 13.7% decrease in lumber shipments primarily due to a weak U.S. housing market and restrictions imposed by quotas under the Softwood Lumber Agreement between the U.S. and Canada beginning in January31 days supply at March 31, 2007. The decrease in shipments was partially offset by a slight increase in average lumber prices, which were 1.7% higher. We are not expecting any significant improvements in the lumber market before late 2008.
Segment loss decreased in the third quarter of 2007 as compared to the same period in 2006 as a result of lower manufacturing and distributions costs, partially offset by the lower sales discussed above. The decrease in manufacturing costs consisted of lower volumes ($5.6 million), and lower wood ($6.1 million), labor ($2.3 million) and maintenance ($1.4 million) costs, partially offset by a stronger Canadian dollar ($3.1 million) and reduced benefits from our Canadian dollar hedging program ($0.6 million). The lower distribution costs are primarily due to lower shipments and a reduction in lumber duties paid to the U.S. Department of Commerce in the third quarter of 2007 as a result of the agreement that was implemented in January 2007 regarding Canadian softwood lumber exports to the U.S.

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Nine months ended September 30, 2007 versus September 30, 2006Wood Products
             
  Three Months Ended 
  March 31 
          
  2008  2007  Change 
 
Average price (per mbf) $283  $274  $9 
Average cost (per mbf) $363  $335  $28 
Shipments (millions of mbf)  435   230   205 
Downtime (millions of mbf)  213   25   188 
Inventory at end of the quarter (millions of mbf)  170   50   120 
             
(Unaudited, in millions)
            
Sales $123  $63  $60 
Segment operating loss  (35)  (14)  (21)
 
             
Significant items that improved (lowered) segment operating loss:            
Product pricing – Bowater          (5)
Shipments – Bowater          (14)
Sales – Abitibi          79 
             
Change in sales
          60 
             
Manufacturing costs – Bowater          12 
Manufacturing costs – Abitibi          (81)
             
Change in total manufacturing costs and depreciation, amortization, and cost of timber harvested
          (69)
             
Distribution costs – Bowater          2 
Distribution costs – Abitibi          (13)
             
Change in distribution costs
          (11)
             
             
Change in selling and administrative expenses
          (1)
             
          $(21)
            
Sales decreasedincreased in the first nine monthsquarter of 20072008 as compared to the same periodfirst quarter of 2007 primarily due to the inclusion of Abitibi’s results. Sales for the first quarter of 2007 on a pro forma combined basis for Abitibi and Bowater were $173 million and shipments were 629 million board feet.
Excluding sales of $79 million attributable to Abitibi, Bowater sales for 2008 decreased to $44 million from $63 million in 2006 asthe first quarter of 2007. Excluding shipments of 265 million board feet attributable to Abitibi, Bowater’s lumber shipments for the first quarter of 2008 were 170 million board feet. The decrease was a result of a 13.4% average lumber price decreaselower shipments of wood products by Bowater and lower product pricing due primarily to lower demand from a weaker U.S. housing market. Our lumber shipments decreased 16.7%We are not expecting any significant improvements in the wood products market in the short term. As such, during the first nine monthsquarter, we announced the curtailment of 2007 as compared toannualized capacity of approximately 1.3 billion board feet of lumber in the same period in 2006 mainly as aprovinces of Quebec and British Columbia.
Downtime at our sawmills is the result of sawmills that we sold in the first nine months of 2006, the restrictions imposed by quotas under the Softwood Lumber Agreement and a weaker U.S. housing market.weak lumber markets.
Segment loss increased in the first nine monthsquarter of 20072008 as compared to the same period in 2006first quarter of 2007 as a result of higher costs and the inclusion of Abitibi’s results for the first quarter of 2008, which contributed an operating loss of $17 million. The segment operating loss for Bowater, excluding Abitibi’s loss of $17 million, resulted in an operating loss increase of $4 million compared to the first quarter of 2007. The above table analyzes the major items that increased our operating loss. A brief

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explanation of these major items follows:
The significant decrease in shipments in the first quarter of 2008 was offset by slightly lower sales discussed above,distribution costs. Manufacturing costs were lower for Bowater in the first quarter of 2008 compared to the first quarter of 2007 primarily due to lower volumes ($6 million), lower costs for wood ($4 million), labor and benefits ($4 million) and repairs ($1 million) partially offset by lower manufacturing and distribution costs. The decrease in manufacturing costs consisted of lower volumes ($27.8 million) and lower wood ($15.7 million), labor ($5.9 million) and maintenance costs ($4.2 million), partially offset by reduced benefits from our Canadian dollar hedging program ($4.9 million) and a stronger Canadian dollar ($4.16 million). The lower
Segment distribution costs were primarilyincreased in the first quarter of 2008 compared to the first quarter of 2007 due to lower shipments and a reduction in lumber duties paid as a resultthe inclusion of the Softwood Lumber Agreement.Abitibi’s results.
LumberWood Products Third Party Data:Data (source: U.S. Census Bureau): U.S. housing starts decreased 31% from September 200630.2% to September225,000 units in the first quarter of 2008 compared to 322,000 units in the first quarter of 2007, and are at their lowest level in approximately 1417 years.
Corporate and Other
We exclude thenet gain on disposition of assets, closure costs, impairment and other related charges, employee termination costs and merger related charges from our internal review of product linesegment results. Also excluded from our product line reviewsegment results are corporate and other items which include timber sales and corporate general and administrative expenses. These items are analyzed separately from our product linesegment results. The following table is included in order to facilitate the reconciliation of our product linesegment sales and segment income (loss) to our total sales and operating loss in(loss) income on our Consolidated Statements of Operations.
                         
 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
(In millions) 2007  2006  Change  2007  2006  Change 
 
Sales $3.2  $3.2  $—  $9.4  $16.6  $(7.2)
Operating (loss) income:                        
Arbitration award $(28.4) $—  $(28.4) $(28.4) $—  $(28.4)
Net gain on disposition of assets  17.1   54.0   (36.9)  139.6   154.5   (14.9)
Impairment and other related charges  —   (246.4)  246.4   —   (246.4)  246.4 
Employee termination costs  (8.1)  (6.9)  (1.2)  (27.3)  (11.3)  (16.0)
Corporate and other  (35.2)  (25.1)  (10.1)  (92.6)  (64.7)  (27.9)
 
             
  Three Months Ended
  March 31
(Unaudited, in millions) 2008  2007  Change
 
Sales $–  $3   (3)
Corporate and other (loss) income  (71)  24   (95)
 
Sales
 –  3   (3)
 
Costs comprised of:            
Manufacturing costs  (10)  (2)  (8)
Manufacturing costs – Employee severance costs  (2)  (3)  1 
   
Total manufacturing costs
  (12)  (5)  (7)
             
Administrative expenses  (66)  (28)  (38)
Administrative expenses – Merger and severance related costs  (6)  (4)  (2)
   
Total administrative expenses
  (72)  (32)  (40)
             
Closure costs, impairment and other related charges  (10)  -   (10)
Net gain on disposition of assets  23   58   (35)
 
Total corporate and other (loss) income $(71) $24  $(95)
 
Arbitration award:SalesCosts recorded
Sales decreased in the thirdfirst quarter and first nine months of 2007 relate to an arbitration award relating to the sale of Bowater’s former Dryden, Ontario pulp and papers facility to Weyerhaeuser. Please refer to “Overview of Financial Performance” for a more detailed discussion of these costs.
Net gain on disposition of assets:During the three months and nine months ended September 30, 2007, Bowater recorded net pre-tax gains of $17.1 million and $139.6 million, respectively, related primarily to the sale of timberlands. During the first nine months of 2007, we completed the sale of approximately 119,200 acres of timberlands and other assets for proceeds of $166.6 million. During the three months and nine months ended September 30, 2006, Bowater recorded net pre-tax gains of $54.0 million and $154.5 million, respectively, related primarily to the sale of timberlands. During the first nine months of 2006, we completed the sale of approximately 519,000 acres of timberlands in the U.S. and Canada, two small Canadian sawmills and other non-core fixed assets for total proceeds of $296.5 million.

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Impairment and other related charges: Costs were recorded in the third quarter and first nine months of 2006 for 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 a paper machine at our Thunder Bay, Ontario facility ($18.9 million). There were no impairment charges incurred in the comparable periods of 2007.
Employee termination costs: During the third quarter and first nine months of 2007, we recorded $8.1 million and $27.3 million, respectively, of employee termination costs, primarily as a result of $7.8 million and $15.7 million, respectively, of pension and postretirement-related charges associated with mill-wide restructurings at our Thunder Bay, Ontario; Gatineau, Quebec and Dolbeau, Quebec facilities, lump-sum payouts to certain employees of the Company and certain changes to our U.S. postretirement benefit plans. The balance of the charge for each period is related to severance for a number of employees. During the third quarter and first nine months of 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
Corporate and other: The decrease in sales for the first nine months of 2007 as2008 when compared to the same period in 2006 isfirst quarter of 2007 due to lower timber sales, as the land that was producing the timberlands has been sold in our land sales program.
Manufacturing costs
Manufacturing costs included in corporate and other includes the cost of timberlands. Employee severance costs include the cost of employee reduction initiatives (severance and pension related) throughout the Company.
Administrative expenses
The increase in operating loss duringadministrative expenses in the three and nine months ended September 30,first quarter of 2008 as compared to the first quarter of 2007 iswas primarily due to merger relatedthe inclusion of Abitibi’s administrative expenses for the first quarter of 2008, increased costs ($9.5 millionfor stock-based compensation, annual incentive plan compensation and $19.8 million, respectively), incurred in 2007 in connectionone-time expenses associated with the Combination, integration and increased share-based compensation expense (increasesynergies.

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Closure costs, impairment and other related charges
Immediately upon the Combination, we began a comprehensive strategic review of $8.3our operations to reduce costs and improve our profitability. On November 29, 2007, we announced the results of the initial phase of our comprehensive review, which included a decision to reduce our newsprint and specialty papers production capacity by approximately one million metric tons per year. The reductions included the permanent closure of Bowater’s Dalhousie, New Brunswick facility and Abitibi’s Belgo, Quebec facility; Fort William, Ontario facility and Lufkin, Texas facility, as well as the indefinite idling of Bowater’s Donnacona, Quebec facility and Abitibi’s Mackenzie, British Columbia facility, including two sawmills that directly support the Mackenzie paper mill operations. Additionally, we decided to permanently close paper machine no. 3 at Bowater’s Gatineau, Quebec facility. The actions were completed in the first quarter of 2008. We recorded charges of $123 million for long-lived asset impairment, severance and termination costs associated with our Bowater mills in the ninefourth quarter of 2007. The costs associated with our Abitibi mills were included in liabilities assumed in the Combination.
During the three-month period ended March 31, 2008 we recorded additional closure costs and other related charges of $10 million for noncancelable contracts at our Bowater Dalhousie and Donnacona operations.
Net gain on disposition of assets
During the three months ended September 30, 2007).March 31, 2008, Bowater recorded a net pre-tax gain of $23 million related primarily to the sale of timberlands. During the first quarter of 2008, we completed the sale of approximately 14,916 acres of timberlands and other assets, mainly our Price sawmill. These asset sales generated aggregate proceeds of approximately $29 million. During the three months ended March 31, 2007, we recorded a net pre-tax gain of $58 million related primarily to the sale of approximately 52,200 acres of timberlands and other assets for proceeds of $65 million.
Interest Expense
The decreaseInterest expense increased $82 million from $47 million in the first quarter of 2007 to $129 million in the first quarter of 2008. This increase is entirely attributable to the inclusion of Abitibi for the first quarter of 2008. Due to the refinancing transactions (see Liquidity and Capital Resources below), we expect our quarterly interest expense to increase by $22 million beginning in the second quarter of $3.5 million and $7.6 million for the three and nine months ended September 30, 2007, respectively, is primarily attributable to lower average debt balances during the 2007 periods.2008.
Income Taxes
Our effective tax rate, which resulted in the recording of a tax provision on a pre-tax loss, for the first nine months of 2007 and 2006, was 0.3% for the third quarter of 2007 as compared to 4.4% for the third quarter of 2006 and was (8.8)(1.2)% for the first nine monthsquarter of 2007 as compared to (13.9)2008. Our effective tax rate, which resulted in the recording of a tax provision on a pre-tax loss, was (3.7)% for the first nine monthsquarter of 2006. We established a valuation allowance against our Canadian deferred tax assets in 2005. Our Canadian operations have continued to experience operating losses since then. Consequently,2007.
During the first quarter of 2008 and 2007, income tax benefits and tax credits of $34.1approximately $93 million and $18.2$13 million for the thirdgenerated on our current quarter of 2007 and 2006, respectively, and $71.4 million and $73.8 million for the first nine months of 2007 and 2006, respectively, which arose primarily fromCanadian operating losses at certain Canadian operations, were entirely offset by tax charges to increase our valuation allowance related to these tax valuation allowance. The effective tax rates for the three and nine months ended September 30, 2007 and 2006 were impacted primarily by the goodwill impairment charge (in 2006 only), which does not providebenefits. Additionally, any income tax benefit recorded on any future operating losses generated in these Canadian operations will probably be offset by additional increases to the valuation allowance (tax charge). This would have a negative impact on our overall effective income tax valuation charges as described above, the reversal of tax reserves upon the expiration of the statute of limitations associated with certain tax matters and the tax treatment on foreign currency gains and losses.

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ABITIBIBOWATER INC.rate in future periods.
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 the tax treatment on foreign currency gains and losses. We have a number of foreign subsidiaries whose unconsolidated foreign currency gains and losses are taxed in Canada. Upon consolidation, such income and gains are eliminated, but we are still liable for the Canadian taxes. 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. Additionally, we will likelyprobably not be recording income tax benefits on most of our 2007any 2008 operating losses generated in Canada, which would have the impact of increasing our overall effective income tax rate in future periods. To the extent that our Canadian operations become profitable, the impact of this valuation allowance would lessen or reverse and positively impact our effective tax rate in those periods.
Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES
The Combination will have a material impact on our liquidity. Following the acquisition of Abitibi, our cash balances increased by approximately $108.8 million and our debt levels increased by approximately $3.8 billion. Our primary sources of liquidity and capital resources are generallycash on hand, cash provided from operations and available borrowings under our subsidiaries’ credit facilities including the accounts receivable securitization program, which are discussed in more detail below. In addition, over the last several years, Bowater has soldWe also periodically review timberland holdings and sell timberlands and other non-strategic assets to generate additional liquidity. In the first nine months of 2007, the sale of timberlands and other assets generated proceeds of $166.6 million. Since late 2005, Bowater has generated approximately $539 million of proceeds from such sales. Currently, we are marketing approximately 34,400 acres of timberlands at Bowater and Abitibi, which is expected to generate proceeds of approximately $60 million. Additionally, we expect to generate proceeds of approximately $70 to $75 million from the sale of timberlands that we expect to market in the next few quarters. Our ability to continue utilizing timberland sales as a source of liquidityadditional liquidity. We have targeted approximately $750 million in asset sales by the future will decrease asend of 2009, including non-core facilities, U.S. timberlands, and the recent sale of our remaining inventory of timberland available for sale is depleted. Accordingly, going forward, the Company’s ability to meet its debt service obligations and to repay its outstanding indebtedness will dependnewsprint mill in Snowflake, Arizona. We believe that cash on hand, cash from operations, cash flow produced by divestitures of non-timberland assets and continued access to our credit facilities.
However, there can be no assurance that we will be able to generate sufficient cash flows from operations, particularly in light of the negative trends and dynamics currently impacting the forest products industry where our principal product, newsprint, is experiencing significant decreases in North American demand. Further, there can be no assurance that non-core divestitures will be consummated, or, if consummated, that the terms of such divestitures will be advantageous to the Company.
In July 2007, Abitibi amended its primary credit facilities to waive its interest coverage ratio requirement to the end of the second quarter of 2008. Accordingly, we expect that such credit facilities, which currently have approximately CDN$295 million in principal outstanding, will be required to be refinanced prior to the end of the second quarter of 2008. Moreover, Abitibi’s July 2007 amendment also waived certain other provisions of the credit facilities to permit the reorganization and rationalization of our corporate structure. Completing the reorganization will require that Bowater’s U.S. and Canadian credit facilities also be refinanced. While we are working to complete these arrangements, no assurance can be given that the transactions will be completed by such time or, if not, that further amendments can be agreed upon. Failure to timely complete the refinancing transactions, or to obtain an extension or waiver, would result in an event of default under Abitibi’s credit facilities, which would permit the lenders to accelerate the maturity of such indebtedness.
Additionally, Abitibi has 6.95% Notes, in the principal amount of $196 million, that mature by their terms in April 2008 and 5.25% Notes, in the principal amount of $150 million, that mature by their terms in June 2008.
On November 2, 2007, we obtained an amendment to Bowater’s U.S. and Canadian credit facilities allowing us to adjust 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) for non-recurring gains or losses without limitation. In addition, the minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset dispositions) to interest expense was lowered from 2.00 to 1 to 1.50 to 1 effective October 1, 2007, increasing gradually back up to 2.00 to 1 by October 1, 2008.
We expect to enter into new credit facilities to address near-term liquidity requirements as described in the preceding paragraphs. While we intend to restructure or refinance the indebtedness, we can make no assurances that

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replacement financing will be availablethe refinancing transactions and access to us on favorable terms, if at all. In particular, the availability of liquidity may be limited due to recent disruptions in the credit markets. These disruptions have adversely affected liquidity in the debt markets, making financing for borrowers, particularly non-investment grade borrowers such as the Company, difficult to obtain.
At September 30, on an Abitibi and Bowater combined basis, our availability under our credit facilities was approximately $750 million and we had approximately $180 million of cash on hand. We believe that cash generated from operations, cash on hand, sales of timberlands and non-core assets (as previously discussed) and the successful completion of new credit facilities will be sufficient to provide for our anticipated requirements for working capital, contractual obligations debt maturities,and capital expenditures and dividend payments, if any, for the next twelve months. Please also read “We have substantial indebtedness that could adversely affect our financial health, and our efforts to reduce this indebtedness may not be successful” under Item 1A Risk Factors of this Form 10-Q.
Cash (Used for) Provided byUsed for Operations
During the first ninethree months of 20072008 and 2006,2007, we had a net loss of $240.1$248 million and $245.5$35 million, respectively. Cash used for operating activities totaled $113.9$197 million in the first ninethree months of 20072008 compared to cash provided by operating activities$16 million in the first three months of $68.3 million during the same period of 2006.2007. The decreaseincrease in cash provided byused for operations was primarily related to lower sales for most ofthe significant increase in our products, higher costs to operate certain of our millsnet loss and the payment of a $42.9 million arbitration award to Weyerhaeuser for costs of certain environmental matters related to a pulp and paper facility sold to Weyerhaeuser in 1998. (Bowater had previously established a reserve of approximately $14.5 million in connection with these environmental matters at the time of the sale.) As noted in the discussion of our segment results of operations, transaction prices and shipments were lower for the majority of our products. Newsprint and specialty paper production has been curtailed as a result of the continued decline in newsprint demand and higher costs to operate our Canadian mills, primarily due to the stronger Canadian dollar and higher energy costs.
Working capital positively impacted our cash flows from operationsnet pension contributions in the first nine monthsquarter of 2007 primarily due to an increase in accounts payable and accrued liabilities related2008 compared to the timingfirst quarter of payments. These working capital changes were partially offset by an increase in inventories for newsprint and specialty papers, which resulted primarily from an increase in production, a weaker market for specialty papers and an increase in export warehouse inventory related to our significant increase in exports of newsprint, as well as an increase in accounts receivable which was primarily due to an increase in silviculture and road maintenance expenses to be reimbursed by the Canadian government.2007.
Cash (Used for) Provided by Investing Activities
Cash used in investing activities totaled $7 million for the first three months of 2008 compared to cash provided by investing activities totaled $76.8 million and $158.5of $29 million for the first ninethree months of 2007 and 2006, respectively.2007. The decrease in cash provided by investing activities during the first ninethree months of 20072008 is due primarily to fewer landincreased proceeds from timberland and other asset sales partially offset by decreased investment in our capital assets. Additionally, in connection with the Combination, we spent $17.2 million for direct acquisition costs during the first nine months of 2007. Capital expenditures for all periods include compliance, maintenance, and return-based projects to increase returns on production assets. We expect to maintain capital spending, on an annual basis, below $200 million until market conditions improve and totaled $72.6translate to strong positive cash flow. The only major project we have underway is a $61 million for the first nine months of 2007.
AbitibiBowater expectsboiler project at our Fort Frances facility. We have approximately $47 million in costs remaining to spend approximately $70 millionbe paid on capital projects during the remaining three months of 2007.this project.
Cash Provided by (Used for) Financing Activities
Cash provided by financing activities totaled $22.1$301 million for the first ninethree months of 20072008 compared to cash used for financing activities of $136.1$14 million for the first ninethree months of 2006.2007. The significant increase in the first three months of 2008 is due to increased borrowings to help pay for operating activities that used $197 million in cash during this period.
Liquidity and Debt
As of March 31, 2008, our total liquidity was comprised of liquidity from our Abitibi and Bowater paid cash dividendssubsidiaries.
As described in Notes 4 and 17 to our audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008, our Abitibi subsidiary was experiencing a liquidity shortfall and facing significant near-term liquidity challenges. As a result of $34.9these liquidity issues, we had concluded at December 31, 2007 that there was substantial doubt about Abitibi’s ability to continue as a going concern. As of March 31, 2008, Abitibi had a total of $346 million had net borrowings of $72.0 million on its short-term financing and made net payments of $15.0 million on its long-term debt duringmaturing in 2008: $196 million principal amount of its 6.95% Senior Notes due April 1, 2008 and $150 million principal amount of its 5.25% Senior Notes due June 20, 2008. Additionally, Abitibi had revolving bank credit facilities with commitments totalling $692 million maturing in the first nine monthsfourth quarter of 2007.2008. These amounts were successfully refinanced on April 1, 2008. SeeRefinancingsection below for a discussion of the financing transactions completed. While our April 1 refinancing has alleviated the substantial doubt about Abitibi’s ability to continue as a going concern, significant financial uncertainties remain for Abitibi to overcome including, but not limited to, Abitibi’s ability to repay or to refinance the $350 million 364-day term facility due on March 30, 2009, to service the considerable debt resulting from the April 1 refinancings and to overcome their expected ongoing net losses and negative cash flows.
As of April 1, 2008, upon completion of our refinancings, Abitibi had liquidity of $185 million, represented by cash on hand. As of April 15, 2008, after the sale of our Snowflake, Arizona newsprint facility and the repayment of certain debt, our Abitibi subsidiary had cash on hand of $277 million. Abitibi is forecasting improving quarterly operating results, but still expects a net use of cash for the balance of the year for operations and debt service. Although the refinancings have improved Abitibi’s liquidity situation, the $350 million 364-day senior secured term loan to Abitibi-Consolidated Company of Canada (“ACCC”), a wholly-owned subsidiary of Abitibi, is maturing on March 30, 2009. This senior secured term loan is guaranteed by Abitibi and secured by substantially all of Abitibi’s assets. In order to address the upcoming March 30, 2009 maturity, Abitibi and AbitibiBowater will be pursuing refinancing alternatives to renew or replace the existing 364-day senior secured term loan or entering into a new bank credit agreement. We have plansalso announced an asset sales program of approximately $750 million for AbitibiBowater, and any sales of Abitibi’s assets would be expected to review our dividend policybe used for debt reduction.
Management continues to believe that the liquidity constraints at Abitibi will not affect the financial condition of Bowater or AbitibiBowater.

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Refinancing
On April 1, 2008 AbitibiBowater successfully completed a series of financing transactions designed to address these upcoming debt maturities and may discontinuegeneral liquidity needs, principally at its Abitibi subsidiary. The transactions included:
§A private placement, by ACCC of $413 million of 13.75% senior secured notes due 2011 (“2011 Notes”). The senior secured notes are guaranteed by Abitibi and certain of its subsidiaries, and are secured by mortgages on certain pulp and paper mills owned by, and security interests in and pledges of certain other assets of, ACCC and the guarantors.
§A $400 million 364-day senior secured term loan (“Term Loan”) to ACCC, with interest at LIBOR + 800 basis points, with a 3.5% LIBOR floor. ACCC is required to repay $50 million of the Term Loan with certain proceeds from the sale of our Snowflake, Arizona newsprint mill (see note 8 “Assets Held for Sale and Liabilities Associated with Assets Held for Sale”). The senior secured term loan is secured primarily by the personal property (including accounts receivable and inventory, but excluding equipment, intellectual property and capital stock of subsidiaries) of ACCC, Abitibi and other guarantors, and by a first lien on substantially all of the assets of Donohue Corp., a direct subsidiary of AbitibiBowater (“D Corp.”), and D Corp’s subsidiaries, including fixed assets and certain other assets. The Term Loan ranks effectively senior to the 2011 Notes to the extent of the collateral securing the Term Loan.
§A private exchange offer whereby ACCC exchanged a combination of new senior unsecured notes and cash for an aggregate of a $455 million of outstanding notes issued by Abitibi, ACCC and Abitibi-Consolidated Finance L.P. (“ACF”), a wholly-owned subsidiary of Abitibi. The exchange included a combination of cash and new 15.5% unsecured notes, due 2010, issued by ACCC for three series of outstanding notes: (i) $175 million principal amount of 6.95% senior notes due April 1, 2008, issued by Abitibi, (ii) $138 million principal amount of 5.25% senior notes due June 20, 2008, issued by ACCC, and (iii) $142 million principal amount of 7.875% senior notes due August 1, 2009, issued by ACF. We expect this debt exchange transaction to result in an extinguishment gain during the second quarter of 2008 of approximately $30 million.
§Simultaneously with these transactions, AbitibiBowater consummated the sale of a private placement of $350 million of 8% convertible notes due 2013 (“Convertible Notes”) to Fairfax Financial Holdings Limited (“Fairfax”) and certain of its designated subsidiaries. The Convertible Notes bear interest at a rate of 8% per annum (10% per annum if we elect to pay interest through the issuance of additional convertible notes as “pay in kind”). Bowater provided a full and unconditional guarantee of the payment of principal and interest, and premium, if any, on the debentures. Bowater’s guarantee ranks equally in right of payment with all of our existing and future senior indebtedness. The Convertible Notes are not guaranteed by Abitibi or any of its respective subsidiaries. The Convertible Notes are convertible into shares of AbitibiBowater common stock at an initial conversion price of $10.00 per share. On April 15, 2008, Fairfax exercised its right to appoint the two directors to the Board of AbitibiBowater, pursuant to the terms of the purchase agreement.
As a result of the paymentrefinancings and the repayment and cancellation of dividendsthe Abitibi credit facilities, Abitibi is no longer subject to our shareholders in the future. In addition, the terms of any refinanced debt, as discussed earlier, may include restrictions on the payment of dividends.financial covenants.

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Short-term FinancingDebt
As of September 30, 2007, on an Abitibi and Bowater combined basis, we hadeach maintain separate bank credit facilities. As of March 31, 2008, our available borrowings under oursuch bank credit facilities and accounts receivable securitization programwere 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) 
Bowater:
                    
U.S. Credit Agreement $415.0  $72.0  $275.0   05/11   7.8%
Canadian Credit Agreement  165.0   —   131.5   05/08   n/a 
        
Abitibi:
                    
Credit agreement  715.0   297.3   342.6   12/08   7.4%
                     
Off-Balance Sheet:
                    
Accounts receivable securitization programs(3)
  425.0   340.2   —   10/08   6.1%
 
  $1,720.0  $709.5  $749.1         
 
                     
 
 
                  Weighted
      Amount Commitment Termination  Average
(Unaudited, in millions) Commitment Outstanding Available(1) Date  Interest Rate(2)
 
                     
Abitibi:
                    
Credit facilities(3)
 $692  $615  $3   11/08 & 12/08   7.4%
                     
Bowater:
                    
U.S. credit facility  415   240   84   05/11   6.8%
Canadian credit facility  165   39   94   05/08   7.0%
                     
 
  $1,272  $894  $181         
 
(1) The commitment available under each of thethese revolving bank credit facilities is subject to collateral requirements and covenant restrictions as described below or in our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008, and is reduced by outstanding letters of credit of $68.0$69 million for the Bowater U.S. credit agreement, $33.5facility, $32 million for the Bowater Canadian credit agreementfacility and $75.1$74 million for the Abitibi credit agreement,facility, while commitment fees for unused portions are 50, 25, and 70 basis points, respectively. As of September 30, 2007, we had sold $340.2 million of trade receivables, which represented the total commitment available at that time under the accounts receivable securitization programs based on the limitations discussed in note (3) below.
 
(2) Borrowings under the Abitibi and Bowater bank credit agreementsfacilities incur interest based, at our option, on specified market interest rates plus a margin. We had no borrowings under our Canadian credit agreement during the first nine months of 2007. Borrowings under the Abitibi credit agreement incur interest based, at our option, on specified market interest rates plus a margin. Advances under the Abitibi accounts receivable securitization programs incur cost based on the securitization provider’s funding cost plus a margin.
 
(3) We sell most of Abitibi’s trade accounts receivable through two securitization programs in order to reduce our working capital requirements. We have an ongoing securitization program committed until OctoberThe Abitibi credit facility was repaid and cancelled on April 1, 2008 to obtain aggregate proceeds of up to $300 million from North American accounts receivable as well as an ongoing uncommitted securitization program to obtain aggregate proceeds of up to $125 million from international accounts receivable, pursuant to sale agreements. We act as a service agent and administer the collection of the accounts receivable sold pursuant to these agreements. The fees received for servicing the accounts receivable approximate the value of services rendered. The amount that can be borrowed under our accounts receivables securitization arrangement depends on the amount and nature of the accounts receivable. The securitized amounts are treated as an off balance sheet transaction.discussed above.
Financial covenantsBowater’s 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 facility is limited to 75% of the net consolidated book value of our accounts receivable and inventory, excluding BCFPI and its subsidiaries.
Bowater’s Canadian credit agreement is secured by liens on the inventory, accounts receivable and deposit accounts of BCFPI. Availability under the Canadian credit facility is limited to 60% of the net book value of the accounts receivable and inventory of BCFPI and its subsidiaries. We believe that this credit agreement will be extended or a similar agreement entered into given the fact that the agreement is secured by liens on the inventory, accounts receivable and deposit accounts of BCFPI.
Amendments to Bank Credit Facilities
On March 31, 2008, AbitibiBowater, Bowater and Bowater’s subsidiaries entered into amendments to its U.S. and Canadian bank credit agreements are both based uponfacilities which principally (i) withdraws the requirement that was included in the February 25, 2008 amendment disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008, that Bowater move the Catawba, South Carolina mill assets into the Catawba Subsidiary, (ii) requires Bowater to transfer the stock in subsidiaries owning the Coosa Pines and Grenada mill assets to AbitibiBowater, and grant such lenders first-ranking mortgages on such assets, and (iii) requires AbitibiBowater to provide an unsecured guarantee of obligations under our Bowater U.S. Credit Facility.
On April 30, 2008, Bowater and Bowater’s subsidiaries entered into further amendments to its consolidated financial resultsU.S. and consistCanadian bank credit facilities which principally extended the dates for (1) granting the lenders first-ranking mortgages on the Coosa Pines and Grenada mill assets from April 30, 2008 to May 15, 2008, and (2) delivering other related documentation to the lenders from April 30, 2008 to various dates between May 22, 2008 and June 30, 2008. We fully anticipate meeting these commitments.
Our Bowater U.S. Credit facility permits Bowater to send distributions to AbitibiBowater to service interest on AbitibiBowater’s convertible debt provided that no default exists under this facility at the time of the following two ratios:
i.a maximum ratio of senior secured indebtedness (including all advancessuch payment 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
ii.a minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset dispositions ) to interest expense of 2.00 to 1. (See discussion of amendments to ratios in Liquidity section).
Financial covenants under Abitibi’s credit agreement are based upon its consolidated financial results and consist of the following two ratios:
i.a maximum ratio of net funded debt (including all advances under Abitibi’s facilities and the outstanding amount of any securitization programs, less cash equivalents) to total capitalization (generally defined as equity and net funded debt) of 70% until December 31, 2007 and 65% thereafter; and
ii.a minimum ratio of EBITDA (generally defined as net income, excluding extraordinary and non-recurring gains (or losses), gains (or losses) from assets sales or abandonments or reserves related thereto, and non-controlling interest items, plus interest expenses, plus income taxes plus amortization and depreciation) to interest expense of 1.50 to 1. This ratio has been waived until the end of the second quarter of 2008.
We believe we are in pro forma compliance with allthis facility’s financial covenants at the time of our covenants and other requirements set forth insuch payment. The lenders under our credit facilities.facilities have implemented a more traditional, more restrictive borrowing base, using more extensive eligibility criteria and imposing additional reporting obligations on us. We are not obligated to comply with the additional reporting requirements or the more restrictive borrowing base requirements until November 15, 2008.

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Both Bowater’s U.S. and Canadian credit agreements limit AbitibiBowater’s abilityIn addition to receive cash from Bowater.the limitations discussed above, Bowater may make dividends and distributions to AbitibiBowater sufficient to pay (1) taxes attributable to Bowater and its subsidiaries, (2) up to $75 million in aggregate annual dividends to the holders of common stock and exchangeable shares, and (3) up to $10 million more than 50% of certain AbitibiBowater’s annual overhead expenses, such as accounting and auditing costs, director fees, director and officer insurance premiums, franchise taxes, transfer agent fees, and legal and other expenses connected to AbitibiBowater’s status as a public company. Overhead expenses do not include management fees, salaries, bonuses, or debt service.
Abitibi’sAbitibi and Bowater and their subsidiaries may also, from time to time, subject to any applicable restrictions contained in any indebtedness documents, enter into transactions with related parties, including AbitibiBowater for management and other services (such as IT, environmental, human resources and legal services) and inter-company advances, loans and investments, intercompany product sales and purchases.
Considering the amendments to the Bowater credit agreement limits Abitibi’s abilityfacilities, we expect to provide financial assistancebe in favor of any person that is not an Abitibi subsidiary. However, Abitibi (including is subsidiaries) may (1) pay dividends or make other distributions to its shareholders and (2) guarantee the funded debt of any other person (certain subsidiaries of Abitibi are restricted, however, in their ability to incur funded debt and to guarantee funded debt of other persons).compliance through March 31, 2009.
Long-term Debt MaturitiesAccounts Receivable Securitization Program
AbitibiBowater’s wholly-owned subsidiaries are obligatedAs of March 31, 2008, our outstanding amounts under our accounts receivable securitization program was as follows:
                 
 
              Weighted 
  ��           Average 
      Amount Termination  Interest 
(Unaudited, in millions) Commitment Outstanding Date  Rate 
 
                 
Off-Balance Sheet:
                
Accounts receivable securitization programs $350  $272   07/09   6.2%   
                 
 
Abitibi sells most of its trade receivables through a securitization program in order to repay their indebtedness as it matures. Additionally, asreduce working capital requirements. We now maintain an ongoing securitization program committed until July 2009 to obtain aggregate cash proceeds of the dateup to $350 million from accounts receivable, pursuant to sale agreements.
As of the Combination, approximately $600 million of our subsidiaries’ debt matures inMarch 31, 2008, approximatelyAbitibi transferred $450 million of debt maturestrade receivables resulting in 2009,cash proceeds of $272 million, which represented the total available at that time under the securitization program. Accounts receivable are sold at discounted amounts based on the securitization provider’s funding cost plus a margin. Abitibi acts as a servicing agent and administer the collection of the accounts receivable sold pursuant to these agreements. The fees received for servicing the accounts receivable approximate the value of services rendered. The amount that can be obtained under our securitization programs depends on the amount and nature of the accounts receivable available to be sold.
Employees
As of March 31, 2008 AbitibiBowater employed approximately $700 million15,600 people, of debt matureswhom approximately 11,000 were represented by bargaining units. Our unionized employees are represented predominantly by the Communications, Energy and Paperworkers Union in 2010,Canada and approximately $1 billion of debt matures in 2011. We also have obligations under various supply and cutting rights agreements, guarantees, employment agreements, and purchase commitmentspredominantly by the United Steelworkers Union in the ordinary courseU.S. As we implement synergies in 2008, we expect to have some decline in employment.
One collective bargaining agreement, covering approximately 150 of business.our employees, which expired before December 31, 2007, is in the process of being renewed. In 2008, another nine collective bargaining agreements will expire, covering approximately 700 employees. A significant number of our collective bargaining agreements with respect to our paper operations in Eastern Canada will expire in the second quarter of 2009. The employees at the facility in Mokpo, South Korea have complied with all conditions necessary to strike. The possibility of a strike or lockout of those employees is not clear. While negotiations with the unions in the past have resulted in collective agreements being signed, as is the case with any negotiation, we may not be able to negotiate acceptable new agreements, which could result in strikes or work stoppages by

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Employees
Asaffected employees. Renewal of September 30, 2007, Bowater employed approximately 6,800 people, of whom approximately 4,600 were represented by bargaining units, and Abitibi employed approximately 13,000 people, of whom approximately 6,800 were represented by bargaining units. Our unionized employees in the U.S. are represented predominantly by the United Steelworkers Union and in Canada predominantly by the Communications, Energy and Paper Union.
In conjunction with our implementation of synergistic opportunities, we expect our employee base to decline over the next twelve months. We will pay approximately $11.1 million of retention bonuses in the fourth quarter of 2007 earned by Bowater employees through the date of the Combination, of which approximately $9.5 million was accrued as of September 30, 2007. Additional retention bonuses and severance will be paid throughout the next twelve months as integration plans are completed.
In October 2007, we announced the elimination of 49 positions at our Mersey newsprint mill in Liverpool, Nova Scotia. As required by the mill’s collective bargaining agreement, we gave four months notice of the action.
Labor agreements covering approximately 390 employees at our Coosa Pines facility expired in September 2007. In July 2007, we began negotiations with the union at our Mokpo facility covering approximately 149 employees over the terms of the wage reopener in their labor agreement. Three collective bargaining agreements covering approximately 215 employees at two of our sawmills and a woodlands operation expiredcould also result in 2007higher wage or will expire prior to the end of the year. In addition, two collective bargaining agreements covering approximately 375 employees at a sawmill and a woodlands operation expired on or before December 31, 2006. Discussions with the unions have begun. Whilebenefit costs. Therefore, we believe that these negotiations will be resolved satisfactorily, we can provide no assurance regarding the outcomes or the timing of these negotiations or their effect on our operations. Any protracted work stoppage at any of our facilities could result inexperience a disruption of our operations or higher ongoing labor costs which could negatively impact our ability to timely deliver certain products to our customers and thus adversely affect our results.
In July 2007, Bowater negotiatedhave a new labor agreement covering approximately 100 employees at our Saint-Félicien, Quebec sawmill facility. The new agreement, which was approved by union members, expires in May 2011.
In June 2007, Bowater notified the unions representing employees at our Dalhousie, New Brunswick facility of our intent to eliminate approximately 55 positions prior to the end of the year.
In June 2007, the labor contract covering approximately 110 employees at our Price, Quebec sawmill facility expired. This facility was indefinitely idled on March 30, 2007, and labor negotiations have been postponed until the re-start of operations.
In February 2007, the union members at our Thunder Bay, Ontario facility ratified an agreement that is expected to result in approximately CDN$16.0 million in annual labor savings. This plan was one of the cost reduction measures considered in making the decision to resume operation of a paper machine at our Thunder Bay facility in May 2007. As a result of a mill-wide restructuring of this facility, 157 jobs were eliminated. This reduction in jobs is partially offset by the recall of 40 previously laid-off employees as a result of the restart of one of the paper machines at this facility in May 2007.
At our Gatineau, Quebec mill approximately 175 jobs were eliminated in a mill-wide restructure to improve the cost competitiveness of the mill. One of Gatineau’s three paper machines is temporarily idled due to a combination of elevated costs for recycled fiber and insufficient demand for our newsprint product. In the event the idled machine is restarted, a portion of these employees would be called back to work.
At our Dolbeau, Quebec mill approximately 130 jobs were eliminated in a mill-wide restructure to improve the cost competitiveness of the mill. One of Dolbeau’s two paper machines is temporarily idled due to a combination of elevated costs for recycled fiber and insufficient demand for our book printing grades. In the event the idled machine is restarted, a portion of these employees are expected to be called back to work.
Exchange Rate Fluctuation Effect on Earnings
Canadian Dollar
Approximately half of our manufacturing costs and certain financial liabilities are denominated in Canadian dollars. 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 dependsmaterial adverse effect on our production and sales volume, the proportionbusiness, financial condition or results 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,

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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. dollars. The impact of a one-cent increase in the Canadian dollar exchange rate on our operating loss is discussed below in “Exchange Rate Hedging Programs – Canadian Dollars Forward Contracts.”
British Pound Sterling
We have entered into sales agreements denominated in the British pound sterling, representing less than 5% of our sales for the first nine months of 2007. In addition, Abitibi has manufacturing facilities in the U.K. Accordingly, changes in the British pound sterling-U.S. dollar exchange rate impact the amount of revenues and earnings we recognize. The magnitude and direction of the impact primarily depends on our sales volume under these sales agreements, our production and sales volumes in the U.K., our hedging levels, and the magnitude, direction and duration of changes in the British pound sterling-U.S. dollar exchange rate. The impact of a one-cent increase in the British pound sterling exchange rate on our operating loss is discussed below in “Exchange Rate Hedging Programs – British Pound Sterling.”
Exchange Rate Hedging Programs
Canadian Dollars Forward Contracts
We attempt to partially limit our exposure to Canadian-U.S. dollar exchange rate fluctuations through hedging transactions. Under the exchange rates and operating conditions that existed at September 30, 2007, for every one-cent increase in the Canadian-U.S. dollar exchange rate, Bowater’s operating income, before currency hedging, for the nine months ended September 30, 2007 would have been reduced by approximately $9.8 million. We expect exchange rate fluctuations to continue to impact costs and revenues; however, we cannot predict the magnitude or direction of this effect for any quarter, and there can be no assurance that the future effect will be similar to that set forth above. Based on operating conditions projected for the remainder of 2007, we project that a one-cent increase in the Canadian dollar exchange rate would reduce our operating results for the year ended December 31, 2007, before currency hedging, by approximately $15.9 million. Based on current operating conditions, we estimate that the impact of a one-cent change in the Canadian exchange rate on the combined operations of Abitibi and Bowater would be approximately $33.0 million.
At December 31, 2006, we had approximately $0.4 million of unrealized losses recorded on our Canadian dollar hedging program. With the Canadian dollar strengthening to historically high levels, we had been entering into short-term hedging contracts that extend out only a few months at a time. As of September 30, 2007, all of our outstanding contracts had expired. As of September 30, 2007, Abitibi had approximately $576.3 million notional amount of derivative instruments outstanding related to their Canadian-U.S. dollar hedging program. Future hedging programs of the Company will be reviewed in the fourth quarter and may be different than those currently in place. For a further description of Bowater’s hedging activities, see Note 10 to our Consolidated Financial Statements.
British Pound Sterling Forward Contracts
Beginning in the first quarter of 2007, we entered into currency forward contracts to partially limit our exposure to British pound sterling-U.S. dollar exchange rate fluctuations. Based on sales volumes projected for the remainder of 2007, we project that a one-cent increase in the British pound sterling exchange rate would increase our operating results for the year ended December 31, 2007, before currency hedging, by approximately $0.6 million. Abitibi does not currently use derivative instruments to hedge their exposure to the British pound sterling. We expect exchange rate fluctuations to continue to impact revenues and operating income; however, we cannot predict the magnitude or direction of this effect for any quarter, and there can be no assurance that the future effect will be similar to that set forth above. All of the existing contracts will mature on or before December 2007.

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These contracts do not currently qualify for hedge accounting treatment and have been adjusted to fair value through the Consolidated Statements of Operations. Approximately $0.2 million and $0.9 million of pre-tax losses were recognized for the three and nine months ended September 30, 2007, respectively, for contracts that we purchased to economically hedge forecasted sales expected to occur in 2007. Hedging contracts outstanding at September 30, 2007 have been established to hedge forecasted transactions through the fourth quarter of 2007. As of September 30, 2007, the fair value of our outstanding British pound sterling forward contracts, which have a notional value of $20.1 million, is a liability of $0.7 million. Future hedging programs of the Company will be reviewed in the fourth quarter and may be different than those currently in place. For a further description of Bowater’s hedging activities, see Note 10 to our Consolidated Financial Statements.
Commodity Hedging Program
Natural Gas Swap Agreements
Beginning in the third quarter of 2006, Bowater entered into natural gas swap agreements under our natural gas hedging program for the purpose of reducing the risk inherent in fluctuating natural gas prices. Our hedged natural gas costs are billed to us based on a publicly traded index plus a fixed amount. The natural gas swap agreements allow us to minimize the effect of fluctuations in those indices by contractually exchanging the publicly traded index upon which we are billed for a fixed index of natural gas cost. The swap agreements, which did not qualify for hedge accounting treatment during the first nine months of 2007, have been adjusted to fair value through the Consolidated Statements of Operations. As a result, approximately $0.6 million and $0.5 million of pre-tax losses were recognized for the three and nine months ended September 30, 2007, respectively, for contracts that we entered into to economically hedge forecasted transactions expected to occur through September 2008. As of September 30, 2007, the fair value of our outstanding natural gas swap agreements, which have a notional amount of $9.2 million, is a liability of $0.8 million. Abitibi does not currently use derivative instruments to hedge their exposure to fluctuations in natural gas prices. Future hedging programs of the Company will be reviewed in the fourth quarter and may be different than those currently in place. For a further description of Bowater’s hedging activities, see Note 10 to our Consolidated Financial Statements.
Debt Hedging Program
Interest Rate Swaps
Abitibi has outstanding interest rate swap contracts, which are designated as fair value hedges which offset the variations in the fair value of Abitibi’s long-term debt due to change in LIBOR interest rates. Future hedging programs of the Company will be reviewed in the fourth quarter and may be different than those currently in place at Abitibi.operations.
Recent Accounting Pronouncements
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides enhanced guidanceReference is made to Note 1 to our Consolidated Financial Statements included in this Form 10-Q, “Organization and Basis of Presentation — New accounting pronouncements” for using fair value to measure assets and liabilities. SFAS 157 also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effecta discussion of fair value measurements on earnings. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to othernew accounting pronouncements that require or permit fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact of this statement on our results of operations and financial position.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value. The fair value option established by SFAS 159 permits all companies to choose to measure

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eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings at each subsequent reporting date. The decision to elect the fair value option may be applied on an instrument by instrument basis, with a few exceptions, is irrevocable, unless a new election date occurs, and is applied to entire instruments only,but not to portions of instruments. SFAS 159 is effective for fiscal years beginning after November 1, 2007. We are currently evaluating the impact of this statement on our results of operations and financial position.yet adopted.
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
AbitibiBowater is exposed to risks associated with foreign currency exchange rates, commodity price risk and changes in interest rates.
Foreign Currency Exchange Risk
We have manufacturing operations in Canada, the United States, Canada,the United Kingdom (after the Combination) and South Korea and sales offices located throughout the world. As a result, we are exposed to movements in foreign currency exchange rates in countries outside the United States. Our most significant foreign currency exposure relates to Canada. Approximately 56%Over half of our pulp and paper production capacity and a significant portion of our lumberwood products production are in Canada, with manufacturing costs primarily denominated in Canadian dollars. Also, certain other assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. As a result, our earnings are affected by increases or decreases in the value of the Canadian dollar. Increases in the value of the Canadian dollar versus the United States dollar will tend to reduce reported earnings, and decreases in the value of the Canadian dollar will tend to increase reported earnings. See the information set forth under “Item 1APart II, Item 1A., “Risk Factors — Risk Factors – Currency fluctuations may adversely affect our results of operations and financial condition, and changes in foreign currency exchange rates can affect our competitive position, selling prices and manufacturing costs” in Part II of this Form 10-Q and under section “Exchange Rate Fluctuation Effect on Earnings” in this Form 10-Q for further information on foreign exchange risks related to our sales and operating costs. In the past, toTo reduce our exposure to differences in Canadian dollar and British pound sterling exchange rate fluctuations, we periodically enteredenter into and designateddesignate Canadian dollar forward contracts and British pound sterling forwarddollar-forward contracts to hedge certain of our forecasted Canadian dollar cash outflows. We estimate the monthly forecasted Canadian dollar outflows on a rolling 24-month basis and, depending on the level of the Canadian dollar, hedge the first monthly Canadian dollar outflows of manufacturing costs up to 90% of such monthly forecasts in each of the first twelve months and up to 80% in the following twelve months of total forecasted Canadian dollar outflows. At March 31, 2008 and December 31, 2007, we had Canadian dollar forward contracts and offsetting forward contracts outstanding for a notional amount of $40 million and $70 million each. Based on exchange rates and hedging levels during the three months ended March 31, 2008, a one cent increase in the Canadian dollar exchange rate would have reduced our operating income by approximately $8 million. We also enter into Euro and British pound sterling cash inflows, respectively. Future hedging programsforward contracts for an amount equal to up to 75% of outstanding sales contracts with customers, depending on the levels of the Company will be reviewed in the fourth quarterrespective currencies. At December 31, 2007, we had no Euro or British pound sterling forward contracts outstanding while at March 31, 2008 we had $60 million and may be different than those already in place.$20 million, respectively, outstanding. Information regarding the carrying value and fair market value of Bowater’s outstandingthe contracts is set forth in Note 1013 to our Consolidated Financial Statements.Statements included in this Form 10-Q.

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Interest Rate Risk
We are exposed to interest rate risk on our fixed-rate and variable-rate long-term debt and our short-term variable-rate bank 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,March 31, 2008 and December 31, 2007, Bowaterwe had $1,997.7 million$4.7 billion of fixed rate long-term debt and $339.9 million$1.2 billion and $1.0 billion, respectively, 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 short and long-term 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 outstanding short and long-term variable rate debt, a 100 basis-point increase in interest rates would have increased our interest expense infor the first ninethree months of 2007ended March 31, 2008 by approximately $2.2 million. At September 30, 2007,$3 million before the impact of our interest rate swaps. In addition, Abitibi had $3,216.9has $850 million of fixed-rate long-term debt and $494.3 millionnotional amount of short- and long-terminterest rate swaps that exchange a variable rate debt. Based on Abitibi’s outstanding debt,for a fixed rate. These swaps do not qualify for hedge accounting. A 100 basis-pointbasis point increase in short-term interest rates would have increased Abitibi’s interest expenseour cash disbursements for these swaps by approximately $2 million in the first nine monthsquarter of 2007, before hedging, by approximately $4.9 million. To reduce their exposure to fluctuations2008. The change in the fair value of their debt, Abitibi periodically entered intothe instruments is recorded in interest rate swaps. Future hedging programsexpense in our Consolidated Statement of the Company will be reviewed in the fourth quarter and may be different than those already in place.Operations.
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

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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 order to offset some of this inherent risk for energy, we have also entered into natural gas swap arrangements. The natural gas swap agreements allow us to minimize the effect of fluctuations in those indices by contractually exchanging the publicly traded index upon which we are billed for a fixed index of natural gas cost.
Item 4. Controls and Procedures.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, 2007. Based on that evaluation, the Executive Chairman 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:
(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 March 31, 2008. Based on that evaluation, the Executive Chairman and Chairman of the Board of Directors and the Senior Vice President and 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.

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PART II — OTHER INFORMATION
Item 1.Legal Proceedings.Proceedings
(a)Bowater is involved in various legal proceedings relating to contracts, commercial disputes, taxes, environmental issues, employment and workers’ compensation claims and other matters. We periodically review the status of these proceedings with both inside and outside counsel. We believe that the ultimate disposition of these matters will not have a material adverse effect on our financial condition, but it could have a material adverse effect on the results of operations in a given quarter or the year.
(b)On September 30, 2005, the Ministry of Justice of the Province of Quebec (MOJ) cited one of our subsidiaries, Bowater Canadian Forest Products, Inc. (“BCFPI”), in connection with effluent water quality of the Dolbeau mill.  BCFPI settled this citation on March 29, 2007, by agreeing to pay a fine and costs totaling CDN $158,000 (approximately US $136,000).  The Dolbeau mill has taken steps to improve its effluent quality and has experienced only two other exceedences since January 1, 2005.
(c)On June 18, 2007, The Levin Group, L.P. filed a complaint against Bowater in the Supreme Court of New York, New York County, asserting claims for breach of contract and related claims relating to certain advisory services purported to have been provided by the plaintiff in connection with the Combination. The complaint seeks damages of no less than $70 million, related costs and such other relief as the court deems just and proper. The management of Bowater believes this claim is entirely without merit and intends to contest this matter vigorously.
(d)On September 7, 2007, Bowater Canadian Forest Products Inc., a subsidiary of Bowater, received a decision from an arbitration related to the 1998 sale to Weyerhaeuser Company of Bowater’s former pulp and paper facility in Dryden, Ontario. As reported in Bowater’s most recent Annual Report on Form 10-K, Bowater and Weyerhaeuser had been arbitrating a claim regarding the cost of certain environmental matters related to the mill. The arbitrators in the matter awarded Weyerhaeuser approximately $42.9 million. This decision resulted in a pre-tax charge of $28.4 million in the third quarter of 2007. Bowater had previously established a reserve of approximately $14.5 million in connection with these environmental matters at the time of the sale.
We are 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. Although the final outcome of any of these matters is subject to many variables and cannot be predicted with any degree of certainty, we establish reserves for a matter when we believe an adverse outcome is probable and the amount can be reasonably estimated. 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 any given quarter or year.
On June 18, 2007, The Levin Group, L.P. filed a complaint against Bowater in the Supreme Court of New York, New York County, asserting claims for breach of contract and related claims relating to certain advisory services purported to have been provided by the plaintiff in connection with the Combination. This complaint was dismissed and the matter is now before the Court of Common Pleas in Greenville County, South Carolina, where the parties are currently involved in the initial stages of the litigation, including discovery and the maintaining of various procedural motions. The Levin Group seeks damages of no less than $70 million, related costs and such other relief as the court deems just and proper. We believe this claim is entirely without merit and intend to continue to contest this matter vigorously.
Since late 2001, Bowater, several other paper companies, and numerous other companies have been named as defendants in asbestos personal injury actions. These actions generally allege occupational exposure to numerous products. We have denied the allegations and no specific product of ours has been identified by the plaintiffs in any of the actions as having caused or contributed to any individual plaintiff’s alleged asbestos-related injury. These suits have been filed by approximately 1,800 claimants who sought monetary damages in civil actions pending in state courts in Delaware, Georgia, Illinois, Mississippi, Missouri, New York, Tennessee, and Texas. Approximately 1,000 of these claims have been dismissed, either voluntarily or by summary judgment, and approximately 800 claims remain. Insurers are defending these claims and we believe that all of these asbestos-related claims are covered by insurance, subject to any applicable deductibles and our insurers’ rights to dispute coverage. While it is not possible to predict with certainty the outcome of these matters, we do not expect these claims to have a material adverse impact on our business, financial position or results of operations.
There have been no other material developments to the legal proceedings described in our Annual Report on Form 10-K/A for the year ended December 31, 2007, filed on March 20, 2008.
Item 1A.Risk Factors
The following risk factors are intended to update the risk factors set forth in our Annual Report onForm 10-K/A for the year ended December 31, 2007, filed on March 20, 2008.
In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition or future results. The risks described below are not the only risks we are facing. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition or results of operation.

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We have substantial indebtedness that could adversely affect our financial health, and our efforts to reduce and restructure this indebtedness may not be successful.
We have a significant amount of indebtedness. As of March 31, 2008, AbitibiBowater had outstanding total debt of approximately $5.9 billion, of which approximately $0.6 billion was secured debt, and shareholders’ equity of $1.6 billion. Each of our Abitibi and Bowater subsidiaries has outstanding long-term notes and also utilizes bank credit facilities for working capital and other operating needs. Our substantial amount of debt could have important negative consequences. For example, it could:
(e)• There have been nolimit our ability to obtain additional financing, if needed, or refinancing, when needed, for debt service requirements, working capital, capital expenditures, acquisitions, or other material developmentspurposes;
•increase our vulnerability to adverse economic and industry conditions;
•require us to dedicate a substantial portion of our cash flows from operations to make payments on our debt;
•cause us to monetize assets such as timberland or production facilities on terms that may be unfavorable to us;
•cause us to offer debt or equity securities on terms that may not be favorable to the legal proceedings describedCompany or its shareholders;
•reduce funds available for operations, future business opportunities or other purposes;
•limit our flexibility in planning for, or reacting to, changes and opportunities in our Annual Report on Form 10-K filed on March 1, 2007.business and our industry;
•increase employee turnover and uncertainty, divert management’s attention from routine business, and hinder our ability to recruit qualified employees; and
•place us at a competitive disadvantage compared to our competitors that have less debt.
Item 1A. Risk Factors
SomeBowater’s Canadian facility is a 364-day facility that is currently scheduled to expire on May 30, 2008. Under the terms of the matters discussedBowater Canadian facility, so long as lenders holding a majority of the facility commitments agree to renew their commitments for a period of 364 days, Bowater has the right either to replace any lender who declines to renew its commitment with a substitute lender or to renew the facility with only the commitments of the lenders who have agreed to renew their commitments. In the event that lenders holding a majority of the commitments do not agree to extend, we would be forced to seek a new facility for the Bowater Canada operations. No assurance can be given that we will be able to obtain a new facility should a majority of the lenders decline to renew or that we will be able to replace the lender who has notified us that it will not renew.
We intend to sell approximately $750 million of our assets in this Quarterly Report on Form 10-Q concerning, amongorder to reduce our indebtedness. On April 10, 2008, we sold our Snowflake, Arizona mill and related assets to Catalyst Paper Corporation for approximately $161 million. This sale was required to comply with the requirements set forth by the U.S. Department of Justice (“DOJ”) in October 2007 for approval of Abitibi’s combination with Bowater. We continue to explore opportunities for the sale of other things,assets such as timberland or production facilities, but can make no assurances that we will be able to complete any such sales or that the synergies expected fromterms of any such sales would be favorable to us.
Our bank credit facilities, the Combinationindentures governing our various notes, debentures and other debt securities and the Company’s business outlookterms and strategies, anticipated financialconditions of our other indebtedness may permit us or our subsidiaries to incur or guarantee additional indebtedness, including secured indebtedness in some circumstances. The terms of this indebtedness also restrict our ability to sell assets, apply the proceeds of such sales, and operating results, contingencies, spending, financingsreinvest in our business. To the extent we incur additional or replacement indebtedness, some or all of the risks discussed above may increase.
Although management believes that we will be able to comply with the terms of its debt agreements, there can be no assurance that we will not be required to refinance all or a portion of our debt or to obtain additional financing. We may be unable to refinance or obtain additional financing because of our high levels of debt and contemplated transactions constitute forward-looking statementsthe debt incurrence restrictions under our debt agreements. We may be forced to default on our debt obligations if cash flow is insufficient and are based upon management’s expectations and beliefs concerning future events impactingrefinancing or additional financing is unavailable. If we default under the Company. terms of some of our indebtedness, the relevant debt holders may accelerate the maturity of its obligations, which could cause cross-defaults or cross-acceleration under our other obligations.
There can be no assurance that these events will occur or that the Company’s resultswe will be as estimated. In some cases,able to generate sufficient cash flows to repay our outstanding indebtedness when it matures, in light of (1) the forward-looking statements containedsignificant decreases in this Form 10-Q can be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” or “estimates,” orNorth American demand for newsprint, which is our principal product, (2) the negative of these terms or other comparable terminology.
Forward looking statements are inherently uncertain and may prove to be incorrect. Therefore, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Moreover,current weakness in the future,housing and lumber markets, and (3) the Company, through its senior management team, may make forward-looking statements aboutstrength of other currencies, particularly the matters described in this document. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances afterCanadian dollar, against the date hereof or to reflect the occurrence of unanticipated events.U.S. dollar.

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Actual events or future results may differ materially as a result of the following factors, as well as other factors described elsewhere in this Quarterly Report on Form 10-Q, or in the Company’s other SEC filings, which are incorporated herein by this reference. The following factors, which the Company cautions are not exclusive, are described in accordance with the provisions of the Private Securities Litigation Reform Act of 1995, which encourages companies to disclose these factors.
ABITIBIBOWATER INC.
We may experience difficulties in integrating the businesses of Abitibi and Bowater and may not realize the anticipated synergies, efficiencies and cost savings from the Combination.
The success of the Combination will depend, in significant part, on our ability to realize the anticipated synergies, efficiencies and cost savings from integrating the businesses of Abitibi and Bowater. At the end of the first quarter 2008, we had achieved an annual run rate of approximately $180 million in captured synergies. Our success in realizingcontinuing to realize these synergies, efficiencies and cost savings, and the timing of this realization, depend on the successful integration of such businesses and operations. We may not be able to accomplish this integration process smoothly or successfully. The necessity of coordinating geographically disparate organizations and addressing possible differences in corporate and regional cultures and management philosophies may increase the difficulties of integration. The integration of certain operations following the Combination will take time and will require the dedication of significant management resources, which may temporarily distractdivert management’s attention from the routine business of AbitibiBowater. Employee uncertainty and lack of focus during the integration process may also disrupt the business of AbitibiBowater. In addition, restrictions on the exchange of competitively sensitive information between Abitibi and Bowater prior to consummation of the Combination have precluded a complete evaluation of these anticipated synergies and efficiencies.
Even if we are able to integrate such businesses and operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, efficiencies and cost savings that we currently expect from this integration or that these benefits will be achieved within the time frame or in the manner anticipated. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Combination may be offset by the costs incurred in integrating the businesses and operations or adverse conditions imposed by regulatory authorities on the combined business in connection with granting approval for the Combination. If we do not realize our anticipated synergies and efficiencies, in the amounts or in the time frame expected, or if our management cannot integrate successfully the operations of the two companies, our business and results of operations willmay be adversely affected.

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We have substantial indebtedness thatDevelopments in alternative media could continue to adversely affect the demand for our financial health,products, especially in North America, and our effortsresponses to reduce this indebtednessthese developments may not be successful.
Trends in advertising, electronic data transmission and storage and the Internet could have further adverse effects on traditional print media, including our products and those of our customers, but neither the timing nor the extent of those trends can be predicted with certainty. Our newspaper, magazine and catalog publishing customers may increasingly use, and compete with businesses that use, other forms of media and advertising and electronic data transmission and storage, including television and the Internet, instead of newsprint, coated paper, uncoated specialty papers or other products made by us. The demand for certain of our products weakened significantly over the last several years. For example, industry statistics indicate that North American newsprint consumption has been in decline for several years and has experienced annual declines of 5.1% in 2005, 6% in 2006 and 9.8% in 2007. We havebelieve, and certain third party forecasters indicate, that these declines in newsprint demand could continue in 2008 and beyond due to conservation measures taken by publishers, reduced North American newspaper circulation, less space devoted to advertising and substitution to other uncoated mechanical grades.
Between November 29, 2007 and February 29, 2008, we reduced our newsprint and specialty papers production capacity by almost 1 million metric tons per year. As a significant amountresult of indebtedness. Asour continuing review of June 30, 2007, on a pro forma basis, AbitibiBowater had outstanding total debtour business to reduce cost, improve our manufacturing platform, and better position ourselves in the global marketplace, it may be necessary to curtail even more production or permanently shut down even more machines or facilities. Such curtailments and shut downs would become increasingly likely as North American newsprint demand continues to decline or if market conditions otherwise worsen. Curtailments or shutdowns could result in goodwill or asset write-downs at the affected facilities and could negatively impact our cash flows and materially affect our results of approximately $5.5 billion, of which $0.3 billion was secured debt, and shareholders’ equity of $2.1 billion. The Company’s ability to meet its debt service obligations and to repay its outstanding indebtedness will depend in part on cash from operations and in part on cash flow produced by divestitures of some of the Company’s assets. There can be no assurance that such divestitures will be consummated, or, if consummated, that the terms of such divestitures will be advantageous to the Company. Further, there can be no assurance that the Company will be able to generate sufficient cash flows, particularly in light of the negative trends and dynamics currently impacting the forest products industry where the Company’s principal product, newsprint, is experiencing significant decreases in North American demand. Our substantial amount of debt could have important negative consequences. For example, it could:
•limit our ability to obtain additional financing, if needed, for working capital, capital expenditures, acquisitions, debt service requirements or other purposes;
•increase our vulnerability to adverse economic and industry conditions;
•require us to dedicate a substantial portion of our cash flows from operations to make payments on our debt;
•cause us to monetize assets such as timberland or production facilities on terms that may be unfavorable to us;
•reduce funds available for operations, future business opportunities or other purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
•place us at a competitive disadvantage compared to our competitors that have less debt.
In July 2007, Abitibi amended its primary credit facilities to waive its interest coverage ratio requirement to the end of the second quarter of 2008. Accordingly, the Company expects that such credit facilities, which currently have CDN$295 million in principal outstanding, will be required to be refinanced prior to the end of the second quarter of 2008. Moreover, Abitibi’s July 2007 amendment also waived certain other provisions of the credit facilities to permit the reorganization and rationalization of its corporate structure. Completing the reorganization will require that Bowater’s U.S. and Canadian credit facilities also be refinanced. While the Company is working to complete these arrangements, no assurance can be given that the transactions will be completed by such time or, if not, that further amendments can be agreed upon. Failure to timely complete the refinancing transactions, or to obtain an extension or waiver, would result in an event of default under Abitibi’s credit facilities, which would permit the lenders to accelerate the maturity of such indebtedness.
Additionally, Abitibi has 6.95% Notes, in the principal amount of $196 million, that mature by their terms in April 2008 and 5.25% Notes, in the principal amount of $150 million, that mature by their terms in June 2008.
On November 2, 2007, we obtained an amendment to Bowater’s U.S. and Canadian credit facilities allowing us to adjust 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) for non-recurring gains or losses without limitation. In addition, the minimum ratio of EBITDA (defined as EBITDA, plus gains (or minus losses) from asset dispositions) to interest expense was lowered from 2.00 to 1 to 1.50 to 1 effective October 1, 2007, increasing gradually back up to 2.00 to 1 by October 1, 2008.
We expect to enter into new credit facilities to address near-term liquidity requirements as described in the preceding paragraphs. While we intend to restructure or refinance the indebtedness, we can make no assurances that replacement financing will be available to us on favorable terms, if at all. In particular, the availability of liquidity may be limited due to recent disruptions in the credit markets. These disruptions have adversely affected liquidity in

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the debt markets, making financing for borrowers, particularly non-investment grade borrowers such as the Company, difficult to obtain.
Our credit facilities, the indentures governing our various notes, debentures and other debt securities and the terms and conditions of our other indebtedness may permit us or our subsidiaries to incur or guarantee additional indebtedness, including secured indebtedness in some circumstances. To the extent we incur additional indebtedness, some or all of the risks discussed above will increase.
Although management believes that the Company will be able to comply with the terms of its debt agreements, there can be no assurance that the Company will not be required to refinance all or a portion of its debt or to obtain additional financing. The Company may be unable to refinance or obtain additional financing because of its high levels of debt and the debt incurrence restrictions under its debt agreements. The Company may be forced to default on its debt obligations if cash flow is insufficient and refinancing or additional financing is unavailable. If the Company defaults under the terms of some of its indebtedness, the relevant debt holders may accelerate the maturity of its obligations, which could cause cross-defaults or cross-acceleration under the Company’s other obligations.financial condition.
Currency fluctuations may adversely affect our results of operations and financial condition, and changes in foreign currency exchange rates can affect our competitive position, selling prices and manufacturing costs.
We compete with North American, European and Asian producers in most of our product lines. Our products are sold and denominated in U.S. dollars, Canadian dollars and selected foreign currencies. A substantial portion of our manufacturing costs are denominated in Canadian dollars. In addition to the impact of product supply and demand, changes in the relative strength or weakness of the U.S. dollar may also affect international trade flows of these products. A stronger U.S. dollar may attract imports into North America from foreign producers, increase supply and have a downward effect on prices, while a weaker U.S. dollar may encourage U.S. exports and increase manufacturing costs that are in Canadian dollars or other foreign currencies. Variations in the exchange rates between the U.S. dollar and other currencies, particularly the Euro and the currencies of Canada, United Kingdom, Sweden Finland and certain Asian countries, will significantly affect our competitive position compared to many of our competitors. Also, if the Canadian dollar remains strong for an extended period of time, it could influence the foreign exchange rate assumptions that we use in our evaluation of goodwill impairment and, consequently, result in goodwill impairment charges.

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We are particularly sensitive to changes in the value of the Canadian dollar versus the U.S. dollar. The impact of these changes depends primarily on our production and sales volume, the proportion of our production and sales that occur in Canada, the proportion of our financial assets and liabilities denominated in Canadian dollars, our hedging levels and the magnitude, and direction and duration of changes in the exchange rate. We expect exchange rate fluctuations to continue to impact costs and revenues; however, we cannot predict the magnitude or direction of this effect for any quarter, and there can be no assurance of any future effects. During the first quarter of 2008, the relative value of the Canadian dollar, based on the end of day rate based on New York City composite as reported by Bloomberg, ranged from a low of US$0.9753 on February 28, 2008 to a high of US$1.0349 on January 21, 2008.
Based on operating conditions projected forexchange rates and hedging levels during the remainder of 2007, we project thatthree months ended March 31, 2008, a one-centone cent increase in the Canadian dollar exchange rate would reducehave reduced our operating results for the year ended December 31, 2007, before currency hedging,income by appproximately $15.9approximately $8 million. Based on current operating conditions, we estimate that the impact of a one-cent change in
If the Canadian dollar remains strong for an extended period of time, it could influence the foreign exchange rate on the combined operationsassumptions that are used in our evaluation of Abitibigoodwill and Bowater would be approximately $33.0 million.long-lived assets for impairment and, consequently, result in additional goodwill or asset impairment charges.
The divestiture of our Snowflake, Arizona newsprint mill under our consent decree with the U.S. Department of Justice may take a significant amount of time, may not be on terms advantageous to us and may adversely affect our results of operations.
In order to receive U.S. regulatory approval of our Combination, we entered into a settlement agreement with the Antitrust Division of the United States Department of Justice (the “DOJ”). We refer to this settlement agreement as the “Consent Decree.” Under the Consent Decree, we are required to sell our Snowflake, Arizona newsprint mill and certain related assets. Divestitures of assets under these circumstances can be time consuming. Further, because there may be a limited number of potential buyers for our Snowflake mill and because potential buyers will be aware of the circumstances of the sale, this mill could be sold at a price lower than its fair market value.
If we cannot complete the sales process within the time period provided under the Consent Decree, the DOJ may ask a court to appoint a trustee, who will be empowered to complete the sale to a purchaser acceptable to the DOJ, on terms then obtainable by the trustee using its reasonable efforts. Because any proposed sale is subject to the prior consent of the DOJ, the DOJ may reject a proposed buyer or seek amendments to the sales agreement or place restrictions on the buyer. Consequently, we may be required to sell our newsprint mill on terms that we do not believe are advantageous to us, and on terms that may adversely affect our results of operations.

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The Company may not be successful in itsour strategy of increasing itsour share of value-added productscoated and specialty papers and competing in growth markets with higher returns.
One of the components of the Company’sour long-term strategy is to improve itsour portfolio of businesses by focusing on value-added productscoated and specialty papers and competing more aggressively in growth markets with higher returns. There are risks associated with the implementation of the Company’sthis strategy, which is complicated and which involves a substantial number of mills, machines and personnel. IfFull implementation of this strategy may also require significant capital investment. To the extent we are not successfulunsuccessful in achieving this strategy, our results of operations willmay be adversely affected.
Developments in alternative media could continue to adversely affect the demand for our products.
Trends in advertising, electronic data transmission and storage and the Internet could have further adverse effects on traditional print media, including our products and those of our customers, but neither the timing nor the extent of those trends can be predicted with certainty. Our newspaper, magazine and catalog publishing customers may increasingly use, and compete with businesses that use, other forms of media and advertising and electronic data transmission and storage, including television and the Internet, instead of newsprint, coated paper, uncoated specialty papers or other products made by us. The North American and global economies and the demand for certain of our products weakened significantly over the last several years. For example, industry statistics indicate that North American newsprint consumption has been declining. We believe that this decline in demand could continue due to conservation measures taken by publishers, reduced North American newspaper circulation, less space devoted to advertising and substitution to other uncoated mechanical grades. As a result of such competition, both Abitibi and Bowater have experienced decreased demand for some of their existing pulp and paper products in North America. As the use of these alternatives grows, demand for pulp and paper products is likely to further decline in North America.
If market conditions continue to worsen, it may be necessary to curtail even more production or permanently shut down machines or facilities. Curtailments or shutdowns could result in goodwill or asset write-downs at the affected facilities and could negatively impact our cash flows and materially affect our results of operations and financial condition.
We face intense competition in the forest products industry and the failure to compete effectively would have a material adverse effect on our business, financial condition and results of operations.
We compete with numerous forest products companies, some of which have greater financial resources than we do. There has been a continued trend toward consolidation in the forest products industry, leading to new global producers. These global producers are typically large, well-capitalized companies that may have greater flexibility in pricing and financial resources for marketing, investment and expansion than we do. The markets for our products are all highly competitive. Actions by competitors can affect our ability to sell our products and can affect the volatility of the prices at which our products are sold. While the principal basis for competition is price, we also compete on the basis of customer service, quality and product type. There has also been an increasing trend toward consolidation among our customers. With fewer customers in the market for our products, our negotiation position with these customers could be weakened.
In addition, our industry is capital intensive, which leads to high fixed costs. Some of our competitors may be lower-cost producers in some of the businesses in which we operate. Global newsprint capacity, particularly Chinese and European newsprint capacity, has been increasing, which is expected to result in lower prices, volumes or both for our exported products. We believe that new hardwood pulp capacity at South American pulp mills has unit costs that are significantly below those of our hardwood kraft pulp mills. Other actions by competitors, such as reducing costs or adding low-cost capacity, may adversely affect our competitive position in the products we manufacture and, consequently, our sales, operating income and cash flows. We may not be able to compete effectively and achieve adequate levels of sales and product margins. If we are unableFailure to compete effectively such failure would have a material adverse effect on our business, financial condition and results of operations.

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The forest products industry is highly cyclical. Fluctuations in the prices of, and the demand for, our products could result in smaller or negative profit margins, and lower sales volumes.volumes, and curtailment or closure of operations.
The forest products industry is highly cyclical. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume and margins for our products. Most of our paper and wood products are commodities that are widely available from other producers and even our commercial printingcoated and specialty paper is susceptible to these fluctuations. Because our commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. The overall levels of demand for the products we manufacture and distribute and, consequently, our sales and profitability, reflect fluctuations in levels of end-user demand, which depend in part on general economic conditions in North America and worldwide, as well as competition from electronic substitution.worldwide. In 2007, we experienced lower demand and decreased pricing for our wood products due to a weaker U.S. housing market. We are not expecting any significant improvements in the wood products market before 2009. As such, we have recently curtailed annualized capacity of approximately 1.3 billion board feet of lumber in the provinces of Quebec and British Columbia. We continue to review our wood products business with the objective of selling non-core assets, consolidating facilities, and curtailing or closing non-contributing operations. Curtailments or shutdowns could result in goodwill or asset write-downs at the affected facilities and could negatively impact our cash flows and materially affect our results of operations and financial condition. See also “Developments in alternative media could continue to adversely affect the demand for our products.products, especially in North America and our responses to these developments may not be successful.”
Our manufacturing businesses may have difficulty obtaining fiber at favorable prices, or at all.
Fiber is the principal raw material we use comprising, on a pro forma basis for 2006 (refer toin our 8-K filed October 29, 2007 for unaudited combined pro forma financial information as of June 30, 2007 and for the periods ended December 31, 2006 and June 30, 2007), approximately 33% of cost of sales, excluding depreciation, amortization and cost of timber harvested.business. We use both virgin fiber (wood chips and logs) and recycled fiber (old newspapers and magazines) as fiber sources for our paper mills. Wood fiber is a commodity and prices historically have been cyclical. The primary source for wood fiber is timber. Environmental litigation and regulatory developments have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest in Canada and the United States and Canada.States. In addition, future domestic or foreign legislation, litigation advanced by aboriginal groups and litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest healthbiodiversity and the response to and prevention of catastrophic wildfires could also affect timber supplies. Availability of harvested timber may further be limited by factors such as fire and fire prevention, insect infestation, disease, ice storms, wind storms, drought, flooding and other natural and man-made causes, thereby reducing supply and increasing prices.
Wood fiber pricing is subject to market influences and our cost of wood fiber may increase in particular regions due to market shifts. We are not expecting any significant improvements in the wood products market before 2009. As such, we recently curtailed annualized capacity of approximately 1.3 billion board feet of lumber in the provinces of Quebec and British Columbia. Other wood products producers have also announced closures or curtailments of sawmills. Continued closures and curtailments are likely to reduce the supply and increase the price of wood fiber.
Pricing of recycled fiber has recently been increasing.fluctuates. For example, prices of old newspapers have increasedfluctuated from an average of $88 per ton in December 2006, to $125$132 per ton in March 2007, to $108$118 per ton in JuneDecember 2007, and to $111$137 per ton in September 2007.March 2008. We believe that these price increases are related to expanding paper and packaging capacity in Asia, as well as strong North American demand, and that prices may remain at elevated levels. Any sustained increase in fiber prices would increase our operating costs and we may be unable to increase prices for our products in response.
Although we believe that the balance of fiber supply between our internal sources and the open market is adequate to support our current wood products and paper and pulp production requirements, there is no assurance that access to fiber will continue at the same levels achieved in the past. The cost of softwood fiber and the availability of wood chips may be affected. If our cutting rights pursuant to the forest licenses or forest management agreements of Abitibi and Bowater are reduced or if any third-party supplier of wood fiber stops selling or is unable to sell wood fiber to us, our financial condition and operating results would suffer.

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An increase in the cost of our purchased energy, chemicals and other raw materials wouldcould lead to higher manufacturing costs, thereby reducing our margins.
Our operations consume substantial amounts of energy such as electricity, natural gas, fuel oil, coal and wood waste. We buy energy and raw materials, including chemicals, wood, recovered paper and other raw materials, primarily on the open market. The prices for raw materials and energy are volatile and may change rapidly, directly affecting our results of operations. The availability of raw materials and energy may also be disrupted by many factors outside our control, adversely affecting our operations. Energy comprised approximately 17% of cost of sales, excluding depreciation, amortization and cost of timber harvested for our business on a pro forma basis during 2006. Energy prices, particularly for electricity, natural gas and fuel oil, have been volatile in recent years and prices for 2005, 2006, 2007 and 2006the first quarter of 2008 exceeded historical averages. As a result, fluctuations in energy prices will impact our manufacturing costs and contribute to earnings volatility. Additionally, we
We are a major user of renewable natural resources such as water and

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wood. Accordingly, significant changes in climate and agricultural diseases or infestation could affect our financial condition and results of operations. The volume and value of timber that we can harvest or purchase may be limited by factors such as fire and fire prevention, insect infestation, disease, ice storms, wind storms, flooding, other weather conditions and other causes. As is typical in the industry, we do not maintain insurance for any loss to our standing timber from natural disasters or other causes. Also, we can provide no assurance that we will be able to maintain our rights to utilize water or to renew them at conditions comparable to those currently in effect.
For our commodity products, the relationship between industry supply and demand for these products, rather than changes in the cost of raw materials, will determine our ability to increase prices. Consequently, we may be unable to pass along increases in our operating costs to our customers. Any sustained increase in energy, chemical or raw material prices without any corresponding increase in product pricing wouldcould reduce our operating margins and potentially require us to limit or cease operations of one or more of our machines.
We could experience disruptions in operations and/or increased labor costs due to labor disputes.
We believe we are the largest employer in the Canadian pulp and paper sector and have the sector’s largest representation by unions. A significant number of our collective bargaining agreements with respect to our newsprint and commercial printing paper operations in Eastern Canada will expire on the same date in 2009. In Canada, the largest employer has traditionally acted as a “pattern setter” for the sector. While relationshipsearly 2008, we initiated negotiations with the variousunion representing the majority of our Eastern Canadian employees on the 2009 agreements. Those negotiations occurred in March 2008 and were not successful in reaching an early agreement. The employees at the facility in Mokpo, South Korea have complied with all conditions necessary to strike, but the possibility of a strike or lockout of those employees is not clear. Furthermore, our collective agreements for our employees at our facilities in Coosa Pines and Calhoun, located in Southeast U.S., and Bridgewater, U.K. will be renewed in 2008. While negotiations with the unions generallyin the past have been good,resulted in collective agreements being signed, as is the case with any negotiation, we may not be able to negotiate acceptable new agreements, which could result in strikes or work stoppages by affected employees. Renewal of collective bargaining agreements could also result in higher wage or benefit costs. Therefore, we could experience a disruption of our operations or higher ongoing labor costs which could have a material adverse effect on our business, financial condition or results of operations.
Our operations require substantial capital and we may not have adequate capital resources to provide for all of our capital requirements.
Our businesses are capital intensive and require that we regularly incur capital expenditures in order to maintain our equipment, increase our operating efficiency and comply with environmental laws. If our available cash resources and cash generated from operations are not sufficient to fund our operating needs and capital expenditures, we would have to obtain additional funds from borrowings or other available sources or reduce or delay our capital expenditures. We may not be able to obtain additional funds on favorable terms or at all. In addition, our debt service obligations will reduce our available cash flows. If we cannot maintain or upgrade our equipment as we require, we may become unable to manufacture products that compete effectively in one or more of our product lines.
We are exposed to changes in banking and capital markets and changes in interest rates.
We require both short-term and long-term financing to fund our operations, including capital expenditures. Changes in banking or capital markets, or to our credit rating, could affect the cost or availability of financing. In addition, we are exposed to changes in interest rates with respect to our floating rate debt and the interest rate of any new debt issues. Changes in the capital markets or prevailing interest rates can increase or decrease the cost or availability of financing.
Changes in laws and regulations could adversely affect our results of operations.
We are subject to a variety of foreign, federal, state, provincial and local laws and regulations dealing with trade, employees, transportation, taxes, timber and water rights and the environment. Changes in these laws or regulations or their interpretations or enforcement have required in the past, and could require in the future, substantial expenditures by us and adversely affect

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our results of operations. For example, changes in environmental laws and regulations have in the past, and could in the future, require us to spend substantial amounts to comply with restrictions on air emissions, wastewater discharge, waste management and landfill sites, including remediation costs. Environmental laws are becoming increasingly stringent. Consequently, our compliance and remediation costs could increase materially.

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Changes in the political or economic conditions in Canada, the United States or other countries in which our products are manufactured or sold could adversely affect our results of operations.
We manufacture products in Canada, the United States, the United Kingdom and South Korea and sell products throughout the world. Paper prices are tied to the health of the economies of North and South America, Asia and Europe, as well as to paper inventory levels in these regions. The economic and political climate of each region has a significant impact on our costs and the prices of, and demand for, our products. Changes in regional economies or political instability, including acts of war or terrorist activities, can affect the cost of manufacturing and distributing our products, pricing and sales volume, directly affecting our results of operations. Such changes could also affect the availability or cost of insurance.
We may be subject to environmental liabilities.
We are subject to a wide range of general and industry-specific laws and regulations relating to the protection of the environment, including those governing air emissions, wastewater discharges, timber harvesting, the storage, management and disposal of hazardous substances and waste, the clean-up of contaminated sites, landfill operation and closure, obligations, forestry operations, and endangered species habitat, and health and safety matters.safety. As an owner and operator of real estate and manufacturing and processing facilities, we may be liable under environmental laws for cleanup and other costs and damages, including tort liability and damages to natural resources, resulting from past or present spills or releases of hazardous or toxic substances on or from our current or former properties. We may incur liability under these laws without regard to whether we knew of, were responsible for, or owned the property at the time of, any spill or release of hazardous or toxic substances on or from our property, or at properties where we arranged for the disposal of regulated materials. Claims may arise out of currently unknown environmental conditions or aggressive enforcement efforts by governmental or private parties.
We have net liabilities with respect to our pension plans and the actual cost of our pension plan obligations could exceed current provisions.
As of December 31, 2006,2007, our defined benefit pension plans were under-funded by an aggregate of approximately $940$496 million on a financial accounting basis. Abitibi and Bowater used different measurement dates and assumptions in determining their combined pension plan obligations. Our future funding obligations for the defined benefit pension plans depend upon changes to the level of benefits provided by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine minimum funding levels, actuarial data and experience and any changes in government laws and regulations. Any adverse change to any of these factors may require AbitibiBowaterus to increase our cash contributions to our pension plans and those additional contributions could have a material adverse effect on our cash flows and results of operations.

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Item 6. Exhibits.Exhibits

Exhibits (numbered in accordance with Item 601 of Regulation S-K):
   
Exhibit No. Description
2.1Asset and Stock Purchase Agreement, dated as of February 10, 2008, by and between Abitibi Consolidated Sales Corporation and Catalyst Paper Corporation.
10.1Fifth Amendment, dated as of April 30, 2008, to the Credit Agreement dated as of May 31, 2006 by and among Bowater Incorporated, certain subsidiaries of Bowater party thereto, AbitibiBowater Inc., the Lenders and the Canadian Lenders party thereto and Wachovia Bank, National Association, as administrative agent for the Lenders party thereto.
10.2Fifth Amendment, dated as of April 30, 2008, to the Credit Agreement dated as of May 31, 2006 by and among Bowater Canadian Forest Products Inc., Bowater Incorporated, certain subsidiaries and affiliates of Bowater party thereto, AbitibiBowater Inc., the Lenders and the U.S. Lenders party thereto and The Bank of Nova Scotia, as administrative agent for the Lenders party thereto.
31.1 Certification of Executive ChairmanCEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.
ABITIBIBOWATER INC.
By  /s/ William G. Harvey
  William G. Harvey
  Senior Vice President and Chief
  Financial Officer
By  /s/ Joseph B. Johnson
  Joseph B. Johnson
  Vice President and Controller
Dated: May 12, 2008

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INDEX TO EXHIBITS
Exhibit No.Description
2.1Asset and Stock Purchase Agreement, dated as of February 10, 2008, by and between Abitibi Consolidated Sales Corporation and Catalyst Paper Corporation.
10.1Fifth Amendment, dated as of April 30, 2008, to the Credit Agreement dated as of May 31, 2006 by and among Bowater Incorporated, certain subsidiaries of Bowater party thereto, AbitibiBowater Inc., the Lenders and the Canadian Lenders party thereto and Wachovia Bank, National Association, as administrative agent for the Lenders party thereto.
10.2Fifth Amendment, dated as of April 30, 2008, to the Credit Agreement dated as of May 31, 2006 by and among Bowater Canadian Forest Products Inc., Bowater Incorporated, certain subsidiaries and affiliates of Bowater party thereto, AbitibiBowater Inc., the Lenders and the U.S. Lenders party thereto and The Bank of Nova Scotia, as administrative agent for the Lenders party thereto.
31.1Certification 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 Executive ChairmanCEO 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.

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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.
      ABITIBIBOWATER INC.
By  /s/ William G. Harvey  
William G. Harvey 
Senior Vice President and Chief Financial Officer
By  /s/ Joseph B. Johnson  
Joseph B. Johnson 
Vice President and Controller 
Dated: November 9, 2007

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INDEX TO EXHIBITS
Exhibit No.Description
31.1Certification of Executive Chairman Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Executive Chairman Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.