Dear Fellow Shareholders,

I am very pleased to be writing my first letter to you at such an exciting and important time for Bowater. We have announced our definitive agreement, subject to your approval and approval by regulatory agencies, to combine Bowater with Abitibi-Consolidated in an all-stock merger of equals.

We are excited about the potential for this combination. I firmly believe that joining forces with Abitibi is the best way to deliver value to you, address the realities of today’s global marketplace, accelerate the return of the Company to positive financial performance and provide increased financial flexibility. In short, our merger with Abitibi will make us a stronger and more viable global competitor.

When I joined Bowater last year, I was struck by the opportunity to drive new levels of operating performance at our company. To yield these performance improvements, we immediately brought new focus and alignment to our organization, moving away from a division-based structure to one organized by function and focused on operating excellence. We also realigned and strengthened our leadership team by bringing in industry veterans with a proven track record of success.

With operational excellence as our goal, Bowater has been implementing streamlined manufacturing and business processes, which will provide maximum efficiency and superior customer service. Operational excellence demands a system-wide evaluation and top-to-bottom emphasis on eliminating waste while increasing productivity and improving quality. Already, we are seeing improved performance that will translate into bottom-line improvements that will carry forward into the future.

Clearly, our 2006 financial performance reflects the challenging conditions in which we operate. For 2006, we reported a net loss of $138 million. Given the very significant changes we made during 2006 - and continue to make throughout this year - we will be better positioned to deliver improved financial performance. We are addressing our cost structure, implementing stringent capital spending discipline and making strategic shifts in our product mix and production levels to optimize our existing assets to better meet our customers’ needs.

With respect to our balance sheet, during 2006, we continued to make substantial progress by reducing debt - which we have accomplished primarily through our ongoing timberland sales program. Since we began the program in the fourth quarter of 2005, we have received proceeds of $375 million. In 2007, we expect to receive an additional $170 million. This will complete our U.S. timberland sales program, bringing the total proceeds received to $545 million, well exceeding our original goal of $300 million.

Given the realities of declining North American demand for newsprint, we have been making the difficult yet necessary decisions to curtail production at our facilities. As business conditions unfold, we will continue to match our production to our customers’ needs, continuously evaluate our operating strengths and reconfigure our product lines to meet the evolving market.

We are focusing on product mix opportunities by shifting Bowater’s production toward products with higher growth potential and higher margins. For example, in June, we completed the conversion of a machine at our Calhoun, Tennessee facility from newsprint to our new BowHybrid product. An alternative to traditional uncoated freesheet grades, BowHybrid is directed predominantly at the direct mail and commercial printing markets. I’m happy to report that both the converted machine and the new product are performing well.

North American demand for uncoated mechanical lightweight paper was strong in 2006 - up 10% year over year - and growth has continued into 2007. While much of this lower basis-weight grade has traditionally been used in telephone and business directories, these papers are also used for commercial applications, such as car and truck listings and catalogs. Accordingly, we expanded our offerings of this grade during 2006 and are optimistic about the continued success of this line in 2007.

Let me also mention something especially important to me. After joining the company last spring, I was impressed by Bowater’s emphasis on integrity, environmental responsibility and safety. I found that these are the core values that drive the company. With respect to safety specifically, we met a significant milestone in 2006: we achieved a 30% reduction in OSHA recordable rates due to the efforts of our employees. Our progress is steadily improving in 2007. This is of particular importance since maintaining a safe work environment is a core value and a key component of operational excellence.

Before concluding, I thank Arnold M. Nemirow for the leadership he provided Bowater as Chairman, President and Chief Executive Officer for the past 12 years. He led the company during an era of tremendous growth and market changes. We wish him well in his retirement.

Over the course of 2007, we have much to accomplish. The successful completion of our intended merger with Abitibi-Consolidated will create the platform for achieving financial stability and global competitiveness in the future. Meanwhile, our focus is on returning to profitability through a commitment to operational excellence across the company, a commitment which will energize all of us in the years to come. This will be achieved by our employees, applying their skills and knowledge to succeed in a challenging global marketplace. Sincerely,


David J. Paterson
Chairman, President and Chief Executive Officer