**Exhibit 13.3**

 

Management’sDiscussion & Analysis

 

Financial Overview—2008

 

Over several quarters andparticularly during the first half of the year 2008, the Company has had tomanage through challenging business conditions as its operating costs, such as thosefor recycled fiber and energy, increased to near-record highs in a very shortperiod of time. Freight and chemical product costs have also increasedsignificantly. These rapid changes put pressure on our operating results, as itwas difficult to adjust our selling prices at the same pace; in addition, theCanadian dollar appreciated quickly and remained around parity with the U.S.dollar until the beginning of the third quarter.

 

The challenging businessconditions have also had a direct impact on order volumes in certain sectors.The Company proactively reacted to this by taking market-related downtime tobalance its inventory against demand and/or by restructuring some of itsoperating units and implementing significant cost reduction measures.

 

In Europe, the Companyconcluded the transaction with Reno De Medici on March 1, 2008. Our shareof their consolidated results is proportionally consolidated since that date.

 

In the second half of2008, the Company was able to increase its average selling prices in Canadiandollars in all of its business groups while benefiting from improved seasonaldemand. Energy costs declined more than 32% in the fourth quarter of 2008,compared to the second and the third quarter. During the last quarter of2008, recycled fiber declined to price levels seen in 2001 and theCanadian dollar depreciated to its 2005 value. These factors led to betterresults, compared to the first two quarters of 2008. However, December wasaffected by lower seasonal demand and also extensive downtime in theContainerboard and Boxboard sectors.

 

In 2008, the Companyposted a net loss, including specific items, of $55 million or$0.56 per share, compared with net earnings of $95 million or$0.95 per share in 2007. Sales in 2008 increased by $88 million or2%, and reached the $4-billion level for the first time, compared to$3.9 billion in 2007. Operating income decreased by $129 million,including specific items that substantially affected results in 2008 and2007. Excluding these specific items, which will be discussed in detail in eachsegment, operating income was down $50 million, or 35%, to$92 million, compared to $142 million in 2007.

 

**Key performance indicators**

** **

In order to achieve ourlong-term objectives while also monitoring our action plan, we use several keyperformance indicators, including the following:

 
| ** **                               | ** ** | **2006**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2007**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2008**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | **Total**  | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total**  | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total**  | ** ** |
| OPERATIONAL                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total shipments  (in ‘000 of s.t.)  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard(1)                              |       | 1,204      |       | 301        |       | 313        |       | 296        |       | 292        |       | 1,202      | ** ** | **292**    | ** ** | **277**    | ** ** | **278**    | ** ** | **246**    | ** ** | **1,093**  | ** ** |
| Containerboard(2)                        |       | 742        |       | 351        |       | 366        |       | 357        |       | 338        |       | 1,412      | ** ** | **348**    | ** ** | **342**    | ** ** | **363**    | ** ** | **336**    | ** ** | **1,389**  | ** ** |
| Specialty  products(3)                   |       | 457        |       | 115        |       | 114        |       | 111        |       | 110        |       | 450        | ** ** | **116**    | ** ** | **115**    | ** ** | **118**    | ** ** | **109**    | ** ** | **458**    | ** ** |
|                                     |       | 2,403      |       | 767        |       | 793        |       | 764        |       | 740        |       | 3,064      | ** ** | **756**    | ** ** | **734**    | ** ** | **759**    | ** ** | **691**    | ** ** | **2,940**  | ** ** |
| Tissue Papers                            |       | 443        |       | 109        |       | 112        |       | 115        |       | 115        |       | 451        | ** ** | **112**    | ** ** | **116**    | ** ** | **124**    | ** ** | **119**    | ** ** | **471**    | ** ** |
| Total                                    |       | 2,846      |       | 876        |       | 905        |       | 879        |       | 855        |       | 3,515      | ** ** | **868**    | ** ** | **850**    | ** ** | **883**    | ** ** | **810**    | ** ** | **3,411**  | ** ** |
| Integration  rate—%                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard (North  America)                |       | 32         | %          | 27         | %          | 29         | %          | 31         | %          | 26         | %          | 29         | **%**      | **30**     | **%**      | **32**     | **%**      | **34**     | **%**      | **27**     | **%**      | **31**     | **%**      |
| Containerboard  (North America)          |       | 61         | %          | 58         | %          | 59         | %          | 63         | %          | 64         | %          | 61         | **%**      | **58**     | **%**      | **62**     | **%**      | **61**     | **%**      | **59**     | **%**      | **60**     | **%**      |
| Specialty  products (paper only)         |       | 10         | %          | 8          | %          | 7          | %          | 8          | %          | 8          | %          | 8          | **%**      | **9**      | **%**      | **9**      | **%**      | **9**      | **%**      | **7**      | **%**      | **9**      | **%**      |
| Tissue Papers                            |       | 59         | %          | 60         | %          | 59         | %          | 53         | %          | 52         | %          | 56         | **%**      | **55**     | **%**      | **55**     | **%**      | **52**     | **%**      | **55**     | **%**      | **54**     | **%**      |
|                                     |       | 44         | %          | 45         | %          | 45         | %          | 47         | %          | 46         | %          | 45         | **%**      | **45**     | **%**      | **47**     | **%**      | **46**     | **%**      | **45**     | **%**      | **46**     | **%**      |
| Capacity  utilization rate(4)—%     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard (5)                             |       | 95         | %          | 89         | %          | 94         | %          | 89         | %          | 85         | %          | 89         | **%**      | **87**     | **%**      | **82**     | **%**      | **82**     | **%**      | **68**     | **%**      | **80**     | **%**      |
| Containerboard                           |       | 99         | %          | 100        | %          | 102        | %          | 104        | %          | 99         | %          | 101        | **%**      | **97**     | **%**      | **94**     | **%**      | **94**     | **%**      | **82**     | **%**      | **92**     | **%**      |
| Specialty  products (paper only)         |       | 88         | %          | 89         | %          | 88         | %          | 85         | %          | 84         | %          | 86         | **%**      | **84**     | **%**      | **83**     | **%**      | **85**     | **%**      | **78**     | **%**      | **83**     | **%**      |
| Tissue Papers (6)                        |       | 101        | %          | 99         | %          | 100        | %          | 99         | %          | 99         | %          | 99         | **%**      | **102**    | **%**      | **99**     | **%**      | **104**    | **%**      | **102**    | **%**      | **102**    | **%**      |
| Total                                    |       | 96         | %          | 95         | %          | 97         | %          | 95         | %          | 92         | %          | 95         | **%**      | **93**     | **%**      | **89**     | **%**      | **90**     | **%**      | **79**     | **%**      | **88**     | **%**      |
| Energy  cons.(7)—GJ/ton             |       | 10.33      |       | 10.94      |       | 9.46       |       | 9.55       |       | 10.29      |       | 10.05      | ** ** | **10.39**  | ** ** | **9.54**   | ** ** | **9.25**   | ** ** | **11.06**  | ** ** | **10.09**  | ** ** |
| Work  accidents—OSHA frequency rate |       | 8.00       |       | 7.00       |       | 8.60       |       | 8.80       |       | 7.55       |       | 7.97       | ** ** | **7.11**   | ** ** | **6.52**   | ** ** | **7.77**   | ** ** | **4.52**   | ** ** | **6.48**   | ** ** |
| FINANCIAL                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on assets  (%)(8)                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard                                 |       | 5          | %          | 4          | %          | 4          | %          | 4          | %          | 4          | %          | 4          | **%**      | **4**      | **%**      | **3**      | **%**      | **3**      | **%**      | **3**      | **%**      | **3**      | **%**      |
| Containerboard                           |       | 15         | %          | 15         | %          | 14         | %          | 13         | %          | 12         | %          | 12         | **%**      | **12**     | **%**      | **11**     | **%**      | **10**     | **%**      | **9**      | **%**      | **9**      | **%**      |
| Specialty  products                      |       | 11         | %          | 12         | %          | 11         | %          | 10         | %          | 10         | %          | 10         | **%**      | **8**      | **%**      | **9**      | **%**      | **10**     | **%**      | **11**     | **%**      | **11**     | **%**      |
| Tissue Papers                            |       | 22         | %          | 20         | %          | 17         | %          | 14         | %          | 12         | %          | 12         | **%**      | **11**     | **%**      | **12**     | **%**      | **13**     | **%**      | **18**     | **%**      | **18**     | **%**      |
| Consolidated  return on assets (%)       |       | 10.8       | %          | 10.5       | %          | 9.8        | %          | 9.5        | %          | 8.9        | %          | 8.9        | **%**      | **8.3**    | **%**      | **7.7**    | **%**      | **7.6**    | **%**      | **8.0**    | **%**      | **8.0**    | **%**      |
| Working capital(9)                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| in millions of $,  at end of period      |       | 598        |       | 659        |       | 685        |       | 701        |       | 616        |       | 616        | ** ** | **682**    | ** ** | **652**    | ** ** | **675**    | ** ** | **694**    | ** ** | **694**    | ** ** |
| % of sales(10)                           |       | 16.3       | %          | 16.0       | %          | 15.8       | %          | 16.0       | %          | 16.5       | %          | 16.5       | **%**      | **16.7**   | **%**      | **16.6**   | **%**      | **16.3**   | **%**      | **16.6**   | **%**      | **16.6**   | **%**      |

 

1

----

 

----

(1)          Starting inQ1 2008, numbers take into account the merger of our European recycledboxboard assets with Reno De Medici. 

 

(2)          The 2006 numbersinclude 50% of Norampac, while 2007 and 2008 numbers include 100% ofNorampac. 

 

(3)          Kraft paper, uncoatedboard, specialty board, fine papers and papermill packaging shipments. 

 

(4)          Defined as:Shipments/Practical capacity. Paper manufacturing only. 

 

(5)          Starting inQ1 2008, capacity numbers were adjusted to take into account the merger ofour European recycled boxboard assets with Reno De Medici. 

 

(6)          Defined as:Manufacturing internal and external shipments/Practical capacity. Tissuepractical capacity represents 80% of its theoretical capacity, which wasdisclosed in the Annual Information form. 

 

(7)          Average energyconsumption for manufacturing mills only. 

 

(8)          Return on assets is anon-GAAP measure and is, defined as LTM OIBD excluding specific items/LTMAverage of total quarterly assets. 

 

(9)          Working capital includesaccounts receivable plus inventories less accounts payable. Starting in 2006,this number excludes an unpaid provision for closure and restructuring costs inthe amount of $19 million as at December 31, 2007 and$22 million as at December 31, 2008. It also excludes the currentportion of derivatives financial instruments liabilities in the amount of $31million (assets—$11 million—2007) and the current portion of future taxassets in the amount of $10 million (liabilities—$1 million—2007). 

 

(10)    % of sales = LTM workingcapital/LTM sales.

 

**Historical financial information**

 
| **(in millions of Canadian dollars, unless**                   | ** ** | **2006**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2007**   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2008**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|--------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **otherwise noted)**                                                               | ** ** | **Total**  | ** ** | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total**  |   | **Q1**     | ** ** | **Q2**     | ** ** | **Q3**     | ** ** | **Q4**     | ** ** | **Total**  | ** ** |
| **Sales**                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard(1)                                                                             |       | 1,359      |       | 344        |       | 352        |       | 332        |       | 315        |       | 1,343      |   | **329**    | ** ** | **331**    | ** ** | **332**    | ** ** | **331**    | ** ** | **1,323**  | ** ** |
| Containerboard                                                                          |       | 600        |       | 294        |       | 307        |       | 310        |       | 282        |       | 1,193      |   | **291**    | ** ** | **301**    | ** ** | **318**    | ** ** | **293**    | ** ** | **1,203**  | ** ** |
| Specialty  products                                                                     |       | 691        |       | 215        |       | 211        |       | 206        |       | 202        |       | 834        |   | **209**    | ** ** | **218**    | ** ** | **224**    | ** ** | **209**    | ** ** | **860**    | ** ** |
| Inter-segment  sales                                                                    |       | (68        | )          | (27        | )          | (29        | )          | (26        | )          | (26        | )          | (108       | )      | **(28**    | **)**      | **(25**    | **)**      | **(28**    | **)**      | **(19**    | **)**      | **(100**   | **)**      |
|                                                                                    |       | 2,582      |       | 826        |       | 841        |       | 822        |       | 773        |       | 3,262      |   | **801**    | ** ** | **825**    | ** ** | **846**    | ** ** | **814**    | ** ** | **3,286**  | ** ** |
| Tissue Papers                                                                           |       | 727        |       | 186        |       | 180        |       | 176        |       | 171        |       | 713        |   | **170**    | ** ** | **184**    | ** ** | **205**    | ** ** | **228**    | ** ** | **787**    | ** ** |
| Inter-segment  sales and Corporate activities                                           |       | (31        | )          | (12        | )          | (13        | )          | (14        | )          | (7         | )          | (46        | )      | **(12**    | **)**      | **(10**    | **)**      | **(12**    | **)**      | **(22**    | **)**      | **(56**    | **)**      |
|                                                                                    |       | 3,278      |       | 1,000      |       | 1,008      |       | 984        |       | 937        |       | 3,929      |   | **959**    | ** ** | **999**    | ** ** | **1,039**  | ** ** | **1,020**  | ** ** | **4,017**  | ** ** |
| **Operating  income (loss) before depreciation and amortization (“OIBD”)(2)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard(1)                                                                             |       | 57         |       | 33         |       | 12         |       | 15         |       | 9          |       | 69         |   | **(1**     | **)**      | **(1**     | **)**      | **6**      | ** ** | **(7**     | **)**      | **(3**     | **)**      |
| Containerboard                                                                          |       | 44         |       | 39         |       | 37         |       | 46         |       | 30         |       | 152        |   | **34**     | ** ** | **27**     | ** ** | **23**     | ** ** | **19**     | ** ** | **103**    | ** ** |
| Specialty  products                                                                     |       | 45         |       | 18         |       | 11         |       | 15         |       | 15         |       | 59         |   | **9**      | ** ** | **14**     | ** ** | **21**     | ** ** | **20**     | ** ** | **64**     | ** ** |
|                                                                                    |       | 146        |       | 90         |       | 60         |       | 76         |       | 54         |       | 280        |   | **42**     | ** ** | **40**     | ** ** | **50**     | ** ** | **32**     | ** ** | **164**    | ** ** |
| Tissue Papers                                                                           |       | 116        |       | 19         |       | 16         |       | 16         |       | 15         |       | 66         |   | **12**     | ** ** | **14**     | ** ** | **22**     | ** ** | **41**     | ** ** | **89**     | ** ** |
| Corporate  activities                                                                   |       | (5         | )          | 1          |       | 5          |       | 1          |       | (1         | )          | 6          |   | **(9**     | **)**      | **7**      | ** ** | **(1**     | **)**      | **(21**    | **)**      | **(24**    | **)**      |
|                                                                                    |       | 257        |       | 110        |       | 81         |       | 93         |       | 68         |       | 352        |   | **45**     | ** ** | **61**     | ** ** | **71**     | ** ** | **52**     | ** ** | **229**    | ** ** |
| **OIBD  excluding specific items(2)**                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Packaging                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Boxboard(1)                                                                             |       | 55         |       | 8          |       | 12         |       | 15         |       | 9          |       | 44         |   | **9**      | ** ** | **3**      | ** ** | **10**     | ** ** | **11**     | ** ** | **33**     | ** ** |
| Containerboard                                                                          |       | 91         |       | 40         |       | 44         |       | 48         |       | 44         |       | 176        |   | **37**     | ** ** | **30**     | ** ** | **32**     | ** ** | **31**     | ** ** | **130**    | ** ** |
| Specialty  products                                                                     |       | 58         |       | 18         |       | 11         |       | 15         |       | 16         |       | 60         |   | **9**      | ** ** | **15**     | ** ** | **21**     | ** ** | **22**     | ** ** | **67**     | ** ** |
|                                                                                    |       | 204        |       | 66         |       | 67         |       | 78         |       | 69         |       | 280        |   | **55**     | ** ** | **48**     | ** ** | **63**     | ** ** | **64**     | ** ** | **230**    | ** ** |
| Tissue Papers                                                                           |       | 116        |       | 19         |       | 15         |       | 16         |       | 15         |       | 65         |   | **12**     | ** ** | **15**     | ** ** | **22**     | ** ** | **41**     | ** ** | **90**     | ** ** |
| Corporate  activities                                                                   |       | (5         | )          | 1          |       | 5          |       | 1          |       | (2         | )          | 5          |   | **(8**     | **)**      | **—** | ** ** | **3**      | ** ** | **(9**     | **)**      | **(14**    | **)**      |
|                                                                                    |       | 315        |       | 86         |       | 87         |       | 95         |       | 82         |       | 350        |   | **59**     | ** ** | **63**     | ** ** | **88**     | ** ** | **96**     | ** ** | **306**    | ** ** |
| **Operating  income (loss) from continuing operations**                                 |       | 96         |       | 57         |       | 30         |       | 38         |       | 19         |       | 144        |   | **(6**     | **)**      | **8**      | ** ** | **17**     | ** ** | **(4**     | **)**      | **15**     | ** ** |
| Excluding  specific items(2)                                                            |       | 154        |       | 33         |       | 36         |       | 40         |       | 33         |       | 142        |   | **8**      | ** ** | **10**     | ** ** | **34**     | ** ** | **40**     | ** ** | **92**     | ** ** |
| **Net  earnings (loss)**                                                                |       | 3          |       | 22         |       | 45         |       | 16         |       | 12         |       | 95         |   | **(4**     | **)**      | **(25**    | **)**      | **(7**     | **)**      | **(19**    | **)**      | **(55**    | **)**      |
| Excluding  specific items(2)                                                            |       | 52         |       | 5          |       | 7          |       | 9          |       | 1          |       | 22         |   | **(9**     | **)**      | **(11**    | **)**      | **6**      | ** ** | **17**     | ** ** | **3**      | ** ** |
| **Net  earnings (loss) per share (in dollars)**                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                   |       | $          | 0.04       |       | $          | 0.22       |       | $          | 0.45       |       | $          | 0.16       |   | $          | 0.12       |       | $          | 0.95       |       | **$**      | **(0.04**  | **)**      | **$**      | **(0.25** | **)** | **$** | **(0.07** | **)** | **$** | **(0.20** | **)** | **$** | **(0.56** | **)** |
| Basic, excluding  specific items(2)                                                     |       | $          | 0.64       |       | $          | 0.05       |       | $          | 0.07       |       | $          | 0.09       |   | $          | 0.01       |       | $          | 0.22       |       | **$**      | **(0.09**  | **)**      | **$**      | **(0.11** | **)** | **$** | **0.06** | ** ** | **$** | **0.17** | ** ** | **$** | **0.03** | ** ** |
| **Cash  flow from operations (adjusted)(2)**                                            |       | 183        |       | 41         |       | 46         |       | 55         |       | 36         |       | 178        |   | **17**     | ** ** | **36**     | ** ** | **43**     | ** ** | **59**     | ** ** | **155**    | ** ** |
| Excluding  specific items                                                               |       | 196        |       | 49         |       | 48         |       | 56         |       | 49         |       | 202        |   | **26**     | ** ** | **42**     | ** ** | **47**     | ** ** | **68**     | ** ** | **183**    | ** ** |
| **Cash  flow from operations (adjusted) per share (in dollars)(2)**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                   |       | $          | 2.26       |       | $          | 0.41       |       | $          | 0.46       |       | $          | 0.56       |   | $          | 0.36       |       | $          | 1.79       |       | **$**      | **0.17**   | ** ** | **$**      | **0.37** | ** ** | **$** | **0.43** | ** ** | **$** | **0.60** | ** ** | **$** | **1.57** | ** ** |
| Basic, excluding  specific items                                                        |       | $          | 2.42       |       | $          | 0.49       |       | $          | 0.48       |       | $          | 0.57       |   | $          | 0.49       |       | $          | 2.03       |       | **$**      | **0.26**   | ** ** | **$**      | **0.43** | ** ** | **$** | **0.47** | ** ** | **$** | **0.69** | ** ** | **$** | **1.85** | ** ** |
| **Cascades  North American US$selling price index (2002 index = 1,000)(3)**             |       | 1,271      |       | 1,314      |       | 1,341      |       | 1,382      |       | 1,411      |       | 1,362      |   | **1,412**  | ** ** | **1,425**  | ** ** | **1,514**  | ** ** | **1,510**  | ** ** | **1,465**  | ** ** |
| **Cascades  North American US$raw materials index (2002 index = 300)(4)**               |       | 361        |       | 438        |       | 465        |       | 497        |       | 521        |       | 480        |   | **542**    | ** ** | **536**    | ** ** | **524**    | ** ** | **366**    | ** ** | **492**    | ** ** |
| **US$/CAN$**                                                                            | ** ** | $          | 0.88       |       | $          | 0.85       |       | $          | 0.91       |       | $          | 0.96       |   | $          | 1.02       |       | $          | 0.93       |       | **$**      | **1.00**   | ** ** | **$**      | **0.99** | ** ** | **$** | **0.96** | ** ** | **$** | **0.82** | ** ** | **$** | **0.94** | ** ** |
| **Natural  Gas Henry Hub — US$/mmBtu**                                             |       | $          | 7.23       |       | $          | 6.77       |       | $          | 7.55       |       | $          | 6.16       |   | $          | 6.97       |       | $          | 6.86       |       | **$**      | **8.03**   | ** ** | **$**      | **10.92** | ** ** | **$** | **10.24** | ** ** | **$** | **6.94** | ** ** | **$** | **9.03** | ** ** |
| **Return  on assets (%)(5)**                                                            |       | 10.8       | %          | 10.5       | %          | 9.8        | %          | 9.5        | %          | 8.9        | %          | 8.9        | %      | **8.3**    | **%**      | **7.7**    | **%**      | **7.6**    | **%**      | **8.0**    | **%**      | **8.0**    | **%**      |

 

2

----

 

*Source:Pulp & Paper Week, PPI, EUWID, Random Lengths and Cascades*

* *

----

(1)          The 2008 figurestake into account the merger of our European boxboard assets with Reno deMedici. 

 

(2)          See “SupplementalInformation on Non-GAAP Measures”. 

 

(3)          The Cascades NorthAmerican selling prices index represents an approximation of the Company’smanufacturing (excluding converted products) selling prices in North America.It is weighted according to shipments, and includes some of the main Cascadesproducts for which prices are available in Pulp & Paper Week magazineand the Cascades Tissue Index. This index should only be used as a trendindicator, as it may differ from our actual selling prices and our product mix.The only non-manufacturing prices reflected in the index are those for tissue.In fact, the tissue pricing indicator, which is blended into the Cascades NorthAmerican selling prices index, is the Cascades tissue paper selling pricesindex, which represents a mix of primary and converted products. 

 

(4)          The Cascades NorthAmerican raw materials index represents the average weighted cost paid for someof our manufacturing raw materials, namely recycled fibre, virgin pulp andwoodchips, in North America. It is weighted according to purchase volume (intons). This index should only be used as a trend indicator and may differ fromactual manufacturing purchasing costs and our purchase mix. 

 

(5)          Return on assets is anon-GAAP measure, defined as LTM OIBD excluding specific items/LTM average oftotal quarterly assets.

** **

**3**

----

** **

**Financial Results for the Year Ended December 31, 2008, Compared to the Year Ended December 31, 2007**

** **

**Sales**

** **

Sales increased slightly,by $88 million, to $4.017 billion versus $3.929 billion in 2007.Net average selling prices in U.S. dollars rose in all of our main segments.Shipments were 3% lower compared with 2007, partly as a result ofmarket-related downtime in the first half of the year in the North American Boxboardsector, the closure for an indefinite period of the Toronto recycled boxboardmill in the third quarter of 2008 and market-related downtime in the NorthAmerican Containerboard and Boxboard sectors in the fourth quarter of 2008. TheTissue Group’s business volume increased by 4.4% over 2007. Sales also includethe net impact of the transaction with Reno De Medici, which was concluded on March 1,2008.

 

**Operating Income Before Depreciation andAmortization (‘‘OIBD’’)**

** **

The Company generated$229 million in OIBD in 2008, compared to $352 million in 2007. TheOIBD margin decreased for the year, to 5.7%, compared to 8.9% in 2007.Excluding specific items, the OIBD stood at $306 million, compared to$350 million in 2007—a decrease of $44 million or 12.5%, resultingfrom higher costs for raw materials, energy and freight, and other diversevariable costs. The Company was able to partially compensate for these negativeeffects through increased selling prices, for an estimated contribution of$110 million. 2008 OIBD includes a $4-million charge, resulting fromthe collapse of a roof section at the Company’s fine papers converting centrelocated in Saint-Jérôme, in March 2008.

 

The main variances inOIBD, excluding specific items, are shown below. Selling price increases werenot enough to offset the negative impact of higher raw materials and energycosts, and other production costs:

 

 

----

(1)          The impacts of theseestimated costs are based on production costs per unit, which are affected byyield, product mix changes and purchase and transfer prices. In addition tomarket pulp and recycled fiber, they include purchases of external boards andparent rolls for the converting sector, and other raw materials such asplastics and woodchips.

 

(2)          The estimated impact ofthe exchange rate is based only on the Company’s export sales less purchasesthat are impacted by the exchange rate fluctuations, mainly the CAN$/US$variation. It also includes the impact of the exchange rate on the Company’sworking capital items and cash position. At the end of 2008, the Companychanged its method for estimating the impact of the exchange rate compared tothe previous period.

 

(3)          The impact of theseestimated variable costs based on production costs per unit, which are affectedby downtimes, efficiencies and product mix changes.

 

(4)          Includes all other costssuch as repair and maintenance, selling and administration, and profit-sharing.

 

(5)          Includes change in OIBDfor operating units that are not in the manufacturing or converting sector.

 

The operating incomebefore depreciation and amortization variance analysis by segment is shown ineach business segment review (refer to pages 34 to 42).

 

4

----

** **

**Specific Items Included in Operating Income Before Depreciation andAmortization**

** **

The Company incurred somespecific items in 2008 and 2007 that adversely or positively affectedits operating results. We believe that it is useful for readers to be aware ofthese items, as they provide a measure of performance with which to compare theCompany’s results between periods, notwithstanding these specific items.

 

The reconciliation of thespecific items by business group is as follows:

 
| For the years ended December 31  (in millions of Canadian dollars) | **2008** |
|-----------------------------------------------------------------------------------------------------------------|----------|

 
| ** **                                                                                    | ** ** | **Boxboard** | ** ** | **Containerboard** | ** ** | **Specialty  Products** | ** ** | **Tissue  Papers** | ** ** | **Corporate  Activities** |       | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|-------------------------|------------|--------------------|------------|---------------------------|------------|------------------|------------|
| **Operating  income before depreciation and amortization**                                    |       | (3           | )          | 103                |       | 64                      |       | 89                 |       | (24                       | )          | **229**          | ** ** |
| Specific items:                                                                               | ** ** | ** **   | ** ** | ** **         | ** ** | ** **              | ** ** | ** **         | ** ** | ** **                |       | ** **       | ** ** |
| Inventory  adjustment resulting from business acquisition                                     |       | 2            |       | —             |       | —                  |       | —             |       | —                    |       | **2**            | ** ** |
| Loss on  disposals and others                                                                 |       | 5            |       | —             |       | —                  |       | —             |       | —                    |       | **5**            | ** ** |
| Impairment loss                                                                               |       | 9            |       | 5                  |       | 2                       |       | —             |       | —                    |       | **16**           | ** ** |
| Closure and  restructuring costs                                                              |       | 19           |       | 6                  |       | 1                       |       | 1                  |       | —                    |       | **27**           | ** ** |
| Unrealized loss  on financial instruments                                                     |       | 1            |       | 16                 |       | —                  |       | —             |       | 10                        |       | **27**           | ** ** |
|                                                                                          |       | 36           |       | 27                 |       | 3                       |       | 1                  |       | 10                        | ** ** | **77**           |       |
| **Operating  income before depreciation and amortization—excluding specific items** |       | 33           |       | 130                |       | 67                      |       | 90                 |       | (14                       | )          | **306**          | ** ** |

 
| For the years ended December 31  (in millions of Canadian dollars) | **2007** |
|-------------------------------------------------------------------------|----------|

 
| ** **                                                                                     | ** ** | **Boxboard** | ** ** | **Containerboard** | ** ** | **Specialty  Products** | ** ** | **Tissue  Papers** | ** ** | **Corporate  Activities** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|-------------------------|------------|--------------------|------------|---------------------------|------------|------------------|------------|
| **Operating  income before depreciation and amortization**                                     |       | 69           |       | 152                |       | 59                      |       | 66                 |       | 6                         |       | 352              |       |
| Specific items:                                                                                |       |         |       |               |       |                    |       |               |       |                      |       |             |       |
| Inventory  adjustment resulting from business acquisition                                      |       | —       |       | 6                  |       | —                  |       | —             |       | —                    |       | 6                |       |
| Loss (gain) on  disposals and others                                                           |       | (25          | )          | 10                 |       | —                  |       | (1                 | )          | (1                        | )          | (17              | )          |
| Impairment loss                                                                                |       | —       |       | 3                  |       | —                  |       | —             |       | —                    |       | 3                |       |
| Closure and  restructuring costs                                                               |       | —       |       | 5                  |       | 1                       |       | —             |       | —                    |       | 6                |       |
|                                                                                           |       | (25          | )          | 24                 |       | 1                       |       | (1                 | )          | (1                        | )          | (2               | )          |
| **Operating  income before depreciation and amortization— excluding specific items** |       | 44           |       | 176                |       | 60                      |       | 65                 |       | 5                         |       | 350              |       |

 

**Gains and Losses on Disposal**

** **

In 2008 and 2007,the Company recorded the following gains and losses:

 
| ** **                                         | ** ** | **2008**   | ** ** | **2007** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------|------------|
| Loss on  contribution to a joint venture           | ** ** | **5**      |       | —   |       |
| Loss on disposal  of property, plant and equipment | ** ** | **—** |       | 6        |       |
| Legal settlement                                   | ** ** | **—** |       | 2        |       |
| Gain on business  disposal                         | ** ** | **—** |       | (25      | )          |
| ** **                                         |       | **5**      |       | (17      | )          |

 

·                  In the firstquarter of 2008, following the transaction with Reno De Medici S.p.A. (“RdM”),the Company recorded a loss of $5 million since the value of the sharesreceived as a consideration was lower than the contributed book value of theassets transferred as at March 1, 2008.

 

·                  In the firstquarter of 2007, the Company disposed of its investment in a joint venture (inthe Boxboard segment) for a consideration of $38 million($US32 million). The Company realized a gain of $25 million, beforeincome taxes of $11 million.

 

·                  In the secondquarter of 2007, the Company sold the building that housed its Toronto (Pickering)tissue converting facility, which had been closed in 2005, for an amount of$7 million. The Company realized a gain of $1 million.

 

·                  In the secondquarter of 2007, the Company recorded a provision of $2 million as asettlement related to the action filed by ServiceCore Inc.

 

·                  In the fourthquarter of 2007, the Company sold an investment in a privately-held companyaffiliated to a related director for a cash consideration and a gain of$3 million.

 

·                  In the fourthquarter of 2007, the Company completed the sale of its Red Rock linerboardmill, located in Ontario, which had been indefinitely shut down. As a result ofthis agreement, the Company agreed to pay the purchaser $10 million inorder to support the facility’s start-up.

 

5

----

 

**Impairment Charges, Closure and Restructuring Costs**

** **

The following impairmentcharges, closure and restructuring costs were recorded in 2008 and 2007:

 
| ** **                               | ** ** | **2008**                | ** ** | **2007**                                   | ** ** |
|------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **Impairment  Charges** | ** ** | **Closure and  restructuring  costs** | ** ** | **Impairment  Charges** | ** ** | **Closure and  restructuring  costs** | ** ** |
| Boxboard—Toronto  mill              | ** ** | **—**              | ** ** | **6**                                      |       | — |   | — |   |
| Boxboard—Dopaco  (Bakersfield)      | ** ** | **—**              | ** ** | **3**                                      |       | — |   | — |   |
| Boxboard—Europe  (Larochette)       | ** ** | **—**              | ** ** | **1**                                      |       | — |   | — |   |
| Boxboard—RdM  (Blendecques)         | ** ** | **1**                   | ** ** | **3**                                      |       | — |   | — |   |
| Boxboard—Manufacturing  Goodwill    | ** ** | **8**                   | ** ** | **—**                                 |       | — |   | — |   |
| Boxboard—Converting  and Corporate  | ** ** | **—**              | ** ** | **6**                                      |       | — |   | — |   |
| Containerboard—Red  Rock and others | ** ** | **5**                   | ** ** | **6**                                      |       | 3 |   | 5 |   |
| Specialty  Products                      | ** ** | **2**                   | ** ** | **1**                                      |       | — |   | 1 |   |
| Tissue                                   | ** ** | **—**              | ** ** | **1**                                      |       | — |   | — |   |
| ** **                               | ** ** | **16**                  | ** ** | **27**                                     |       | 3 |   | 6 |   |

 

In 2008, the Companyceased operations at its Dopaco converting plant located in Bakersfield,California and transfer its production to its Stockton, California plant. TheCompany recorded a charge of $3 million.

 

In the first quarter of2008, the Company announced the reorganization of its North American boxboardoperations with its containerboard operations. As a result of this change, theCompany recorded a restructuring provision of $6 million. In the thirdquarter, the Company closed, for an indefinite period, its Toronto recycledboxboard mill and recorded a provision of $6 million.

 

The Company also incurredrestructuring costs in the amount of $3 million after implementing severalcost control measures in its Tissue and Specialty Product Groups as well in itsLaRochette boxboard mill in France. The Company also recorded an impairmentcharge of $2 million on the property, plant and equipment of a wastepaperrecovery centre that had ceased operations and other assets of its SpecialtyProducts Group.

 

The Company recorded anadditional provision of $5 million, related to the pension plan settlementand other closure costs of its Red Rock containerboard mill, which was closedin 2006, as well as an impairment charge of $4 million on the remainingvalue of the property, plant and equipment of this mill. Containerboard Group,also recorded an impairment charge of $1 million on equipment from theconverting sector and a $1 million restructuring cost in 2008.

 

In the fourth quarter of2008, RdM announced the definite closure of one machine at its Blendecquesboxboard mill in France. This decision resulted in closure and restructuringcharge of $3 million and an impairment charge of $1 million. Theseamounts represent the Company’s share of RdM’s results.

 

As a result of theimpairment test performed on its goodwill (see Note 3 of the consolidatedfinancial statements), the Company recorded an impairment charge of$8 million related to the goodwill of the Boxboard manufacturing units.

 

The following table showsthe reconciliation of all closure and restructuring cost provisions. Thebalance as at December 31, 2008 should be paid in 2009. It includesthe provisions presented in discontinued operations as at December 31,2008 and 2007.

 
| ** **                                | ** ** | **2008**   | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|------------|------------|----------|------------|
| **Balance—Beginning  of year**       | ** ** | **19**     |       | 47       |       |
| Additional  provisions                    |       |       |       |     |       |
| Severance and  pension liability          | ** ** | **26**     |       | 7        |       |
| Writedown of  inventories                 | ** ** | **—** |       | 4        |       |
| Others                                    | ** ** | **1**      |       | 16       |       |
| Non-monetary  items                       |       |       |       |     |       |
| Writedown of  inventories                 | ** ** | **—** |       | (4       | )          |
| Pension  liability adjustments and others | ** ** | **—** |       | (7       | )          |
| Payments                                  | ** ** | **(24**    | **)**      | (44      | )          |
| **Balance—End  of year**             | ** ** | **22**     |       | 19       |       |

** **

**Financial Instruments**

** **

The Company recorded anunrealized loss of $27 million in 2008, on certain financial instrumentsthat were not designated as hedging instruments. More specifically, the2008 loss includes a $15 million loss on commodity financialinstruments (wastepaper hedging), $10 million on certain foreign exchangeoption contracts and $2 million on other financial instruments. In 2007,the Company did not record unrealized losses or gains on these financialinstruments.

 

In the second quarter of2008, the Company terminated, prior to maturity, certain natural gasderivatives contracts for net cash proceeds of $15 million. Since thesecontracts were designated as cash flow hedges of anticipated natural gaspurchases, their fair-value increment is recorded under “Accumulated OtherComprehensive Income (Loss)” and is amortized to earnings over the originaldesignated underlying period of natural gas purchases, from July 2008 toOctober 2011.

 

In the fourth quarter of2008, the Company terminated, prior to maturity, almost all of its foreignexchange forward contracts, related to its U.S.-denominated debt, for net cashproceeds of approximately $150 million. As these contracts weredesignated, since July 1, 2008, as cash flow hedges for the Company’s debtdenominated in U.S. dollars, their fair-value increment is recorded under “AccumulatedOther Comprehensive Income (Loss)” and will be recorded mainly in earningsuntil 2013.

 

6

----

 

**Inventory Adjustments Resulting from Business Acquisitions**

** **

As a consequence of theallocation of the combination value on the RdM transaction, operating resultswere reduced by $2 million for 2008 since the inventory acquired atthe time of the combination was recognized at fair value and no profit wasrecorded on its subsequent sale. The results of the first quarter of2007 were reduced by $6 million, for the same reasons, following theacquisition of Norampac at the end of 2006.

 

Business Highlights

 

Over the past two years,the Company finalized several transactions (closure or sale of certainoperating units) in order to optimize its asset base and streamline its coststructure.

 

The followingtransactions that occurred in 2007 and 2008 should be taken intoconsideration when reviewing the overall or segmented analysis of the Company’sresults:

 

**Closure, Restructuring and Disposal**

** **

**Boxboard Group**

** **

1)              In the first quarterof 2007, the Company disposed of an investment in a joint venture pertaining toits converting operations.

 

2)              In the first quarterof 2008, the Company ceased operations at its Dopaco converting plant locatedin Bakersfield, California and transferred production to its Stockton,California plant.

 

3)              In the first quarterof 2008, the Company announced the reorganization of its North Americanboxboard operations with its containerboard operations.

 

4)              In the third quarterof 2008, the Company closed its Toronto, Ontario recycled boxboard mill for anindefinite period of time.

 

5)              In the third quarterof 2008, the Company sold its Scierie Lemay sawmill, which was closed at thetime.

 

6)              In the fourthquarter of 2008, following restructuring initiatives at RdM (Europe), one papermachine located in Blendecques, France was shut down.

 

**Containerboard Group**

** **

7)              On August 30,2006, the Company announced that it had ceased operations at its Red Rock,Ontario containerboard mill for an indefinite period of time. The mill was soldto a third party in December 2007.

 

8)              In 2008, the Companycarried out a general review of its labour cost structure that led to600 layoffs in its converting facilities in Canada and the United States.

 

**Specialty Products Group**

** **

9)              In 2007, the Companydecided to dispose of its Greenfield SAS pulp mill, located in France. Thetransaction was completed on January 7, 2008. This activity is presentedas a discontinued operation.

 

**Business Acquisitions**

** **

**Merger Boxboard Group—Europe**

** **

10)        Transaction with Reno DeMedici S.p.A.

 

On June 20, 2007,Reno De Medici S.p.A., a public company based in Milan, Italy, announced, alongwith the Company, the signing of a Letter of Intent for the negotiation ofterms and conditions pertaining to a potential combination of RdM and CascadesS.A.’s European recycled cartonboard businesses. The transaction was declaredeffective March 1, 2008.

 

As a result of thistransaction, the Company contributed its recycled boxboard manufacturingassets, located in Blendecques, France, and Arnsberg, Germany, as well asits sheeting centre in Wednesbury, U.K., which had a net book value of$92 million (€62 million), in exchange for 115.6 millionshares or 30.6% of outstanding shares of RdM, representing a contribution of$81 million (€54 million) and a cash consideration adjustment of$3 million (€2 million). The Company also acquired an additional 2.6%of RdM shares on the open market in 2008. As a result of the shareholdersagreement, the Company’s investment in RdM is proportionally consolidated sincethat date.

 

7

----

 

Discontinued Operations

 

In 2007, the Companydecided to dispose of its Greenfield SAS pulp mill, located in France, and ofits Scierie Lemay sawmill, located in Québec.

 

Condensed statements ofearnings (loss) and cash flows related to these discontinued operations arepresented in the table below.

 

The condensed balancesheet is presented in Note 4 of the consolidated financial statements.

 
| ** **                                                  | ** ** | **2008**   | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Condensed  Statement of Earnings**                        |       |       |       |     |       |
| Sales                                                       | ** ** | **8**      |       | 104      |       |
| Depreciation and  amortization                              | ** ** | **—** |       | 1        |       |
| Operating income  (loss) (1)                                | ** ** | **22**     |       | (20      | )          |
| Interest expense                                            | ** ** | **1**      |       | 4        |       |
| Provision for  (recovery of) income taxes                   | ** ** | **3**      |       | (5       | )          |
| Net earnings  (loss) from discontinued operations           | ** ** | **18**     |       | (19      | )          |
| Net earnings  (loss) per share from discontinued operations | ** ** | **$**      | **0.18**   |     | $          | (0.19 | ) |
| **Condensed  Statement of Cash Flows**                      |       |       |       |     |       |
| Operating  activities                                       | ** ** | **2**      |       | (36      | )          |
| Investing  activities                                       | ** ** | **47**     |       | (2       | )          |
| Financing  activities                                       | ** ** | **1**      |       | (2       | )          |
|                                                             |            |            |            |          |            |  |  |

 

----

(1)   Operatingloss includes the following items:

 
| ** **                                              | ** ** | **2008**   | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|
| Impairment  charges and closure and restructuring costs | ** ** | **(1**     | **)**      | (3       | )          |
| Legal settlement                                        | ** ** | **—** | ** ** | (1       | )          |
| Loss on disposal  of Thunder Bay assets                 | ** ** | **—** | ** ** | (5       | )          |
| Gain on disposal  of Greenfield pulp mill               | ** ** | **24**     | ** ** | —   |       |
| **Total**                                               | ** ** | **23**     | ** ** | (9       | )          |

 

On January 7, 2008,the Company sold its Greenfield SAS pulp mill, located in France, for an amountof $41 million (€28 million). This transaction resulted in a gain of$24 million before related income taxes of $4 million.

 

In September 2008,the Company sold its Scierie Lemay sawmill assets for a cash consideration of$6 million and a contingent consideration of $2 million, whichresulted in no gain or loss.

 

Business Segment Review

 

**Packaging—Boxboard**

 
| ** **                        | ** ** | **Sales  (in millions  of dollars)** |       | **OIBD  (in millions  of dollars)** |   | **Shipments(1)  (in thousands  of short tons)** | ** ** | **Average  selling price  (in Canadian  dollars/unit)** | ** ** | **Average  selling price  (in U.S. dollars  or Euro/unit)** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|--------|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                       | ** ** | **2007**                                      |   | **2008**                                                       | ** ** | **2007**                                                          |       | **2008**                                                                        | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Boxboard**                      |       |                                           |       |                                          |   |                                                           |       |                                                              |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Manufacturing—North  America | ** ** | **267**                                        |       | 317                                           |   | **(34**                                                        | **)**      | (12                                                               | )          | **383**                                                                         |       | 459 | ** ** | **705** |   | 691 | ** ** | **660** |   | 643 |   |
| Manufacturing—Europe(2)      | ** ** | **476**                                        |       | 463                                           |   | **(6**                                                         | **)**      | 9                                                                 |       | **544**                                                                         |       | 580 | ** ** | **877** |   | 806 | ** ** | **€** | ** 562** |   | € |  549 |   |
| Converting                        | ** ** | **677**                                        |       | 691                                           |   | **50**                                                         | ** ** | 76                                                                |       | **285**                                                                         |       | 295 | ** ** | **2,363** |   | 2,275 | ** ** | **2,217** |   | 2,118 |   |
| Others and  eliminations          | ** ** | **(97**                                        | **)**      | (128                                          | )      | **(13**                                                        | **)**      | (4                                                                | )          | **(119**                                                                        | **)**      | (132 | ) |   |   |   |   |   |   |   |   |
| ** **                        |       | **1,323**                                      |       | 1,343                                         |   | **(3**                                                         | **)**      | 69                                                                |       | **1,093**                                                                       |       | 1,202 |   |   |   |   |   |   |   |   |   |
| Specific items                    | ** ** | ** **                                     |       |                                          |   | **36**                                                         | ** ** | (25                                                               | )          |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Excluding  specific items         | ** ** | ** **                                     |       |                                          |   | **33**                                                         | ** ** | 44                                                                |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
|                                   |            |                                                |            |                                               |        |                                                                |            |                                                                   |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Total shipments do nottake into account the elimination of business sector intercompany shipments. 

 

(2)          Include the Company’sshare of Reno de Medici, since March 1, 2008.

 

8

----

 

 

 

 

9

----

 

The main variances in OIBD for the Boxboard Group, excluding specificitems, are shown below:

 

 

Sales for the BoxboardGroup totaled $1.323 billion in 2008, compared to $1.343 billion in2007. Sales decreased by $20 million, or 1.5%, compared to 2007. Marketconditions and the price environment remain challenging for both recycled andvirgin mills. In North America, the economic slowdown experienced since thesecond half of 2007 and the operational difficulties of our manufacturingunits led to our decision in 2008 to further restructure this sector. InEurope, the Company completed the merger with Reno De Medici. OIBD, excludingspecific items, for this Group decreased by $11 million to$33 million compared to $44 million in 2007, due to higher rawmaterials and energy costs in both North America and Europe, and the impact ofintegration of the proportionate results of RdM since March 1. Thesenegative impacts were offset by better selling prices and reduced sales andadministration costs driven by the reorganization of Cascades’ boxboardoperations with containerboard operations.

 

**Europe**

** **

The transaction with RdMbecame effective March 1, 2008. As a result of this transaction, theCompany contributed its recycled boxboard manufacturing assets, located inBlendecques, France, and Arnsberg, Germany, as well as its sheeting centre inWednesbury, U.K., for a consideration of 115.6 million shares representing30.6% of the outstanding shares in RdM. Cascades’ investment in RdM isproportionally consolidated since that date, as the Company and a group ofcurrent shareholders have joint control of RdM. In 2008, the Company purchasedan additional 2.6% of RdM shares on the open market.

 

Including the net impactof the transaction with RdM in Europe, sales increased by $13 million or2.8% as the average selling price went up by 8.8% compared to last year, butshipments went down by 6%. These improved selling prices in Euros are theresults of the mix of recycled and virgin volume versus 2007, following theintegration of RdM in 2008 and the more advantageous sales mix at ourLarochette virgin mill. Pricing and volume at our Sweden virgin mill wereaffected in 2008 by lower demand and increased sales to the export marketat lower prices. In general, production costs were impacted by the increase inraw materials and energy prices, and necessary market-related downtime. In thefourth quarter of 2008, significant market-related downtime was required at RdMin order to adjust to the decline in customer orders, as they use theirinventories in these uncertain times. However, volume orders at the beginningof 2009 were back to their normal levels.

 

Following the transactionwith RdM, the Company recorded a loss of $5 million as the value of theconsideration received was lower than the contributed book value of the assetstransferred. As a consequence of the allocation of the combination value on theRdM transaction, operating results for 2008 were reduced by$2 million since the inventory acquired at the time of the combination wasrecognized at fair value and no profit was recorded on its subsequent sale. Inaddition to the transaction with RdM, the Company recorded a restructuringprovision of $3 million, an impairment charge of $1 million followingthe closure of one paper machine in Blendecques (RdM) and an unrealized loss onderivative financial instruments of $1 million. These amounts representour share of RdM’s results. The Company also incurred a restructuring provisionof $1 million at its Larochette boxboard mill.

 

**North America**

** **

Sales decreased by$50 million or 15.8% following difficult market conditions and the impactof the restructuring announced in the first quarter of 2008. Manufacturingshipments decreased by 16.5% in North America, mainly due to lower demand andthe temporary closing of the Toronto boxboard mill in the third quarter of2008 (a decrease of 47,000 tons versus 2007). However, averagemanufacturing selling prices rose by $US17 per ton compared to 2007. Onthe converting side, shipments decreased by 3.3% but this was offset by an increasein average selling prices of $US99 per ton.

 

In 2008, the Companyannounced the restructuring of its North American boxboard operations with itscontainerboard operations. This change did not include our QSR folding cartonoperations (Dopaco).

 

On July 2, 2008, theGroup announced the closure of its Toronto boxboard mill for an indefiniteperiod of time, effective late August. The Toronto mill has an annual coatedrecycled boxboard (CRB) production capacity of approximately 182,000 shorttons. This decision was taken to mitigate the negative impacts of severalfactors such as high labour costs, growing fibre supply costs and rising energycosts. As a result of these changes, the Company recorded a restructuringprovision of $12 million. The new management team continues its strategicreview in order to optimize the profitability of these assets, and decisionsmay be made in 2009 that could lead to further restructuring measures,including capacity or labour reduction.

 

Excluding the temporaryshutdown of the Toronto mill, we took approximately 75,000 tons of downtime in2008 in the North American manufacturing units to lower inventories. Thishad a negative impact of approximately $7 million on our results. Also,the Group carried out a number of trials aimed at optimizing its manufacturingasset base, resulting in increased production costs.

 

10

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In order to reduce costs,Dopaco decided, in 2008, to increase capacity at its Stockton facility whilepermanently closing its Bakersfield unit in March of the same year. Thisinitiative resulted in a provision of $3 million for closure andrestructuring costs.

 

As at December 31,2008, as a result of an impairment test for its goodwill related to themanufacturing business unit, the Company recorded an impairment charge of$8 million.

 

In 2007, the Grouprecorded a $25 million gain on the disposal of its interest in GSD, ajoint-venture company in its QSR converting business, for a cash considerationof $38 million ($US32 million).

 

**Packaging—Containerboard**

 
| ** **                | ** ** | **Sales  (in millions  of dollars)** |       | **OIBD  (in millions  of dollars)** | ** ** | **Shipments(1)  (in thousands  of short tons)** | ** ** | **Average  selling price  (in Canadian  dollars/unit)** | ** ** | **Average  selling price  (in U.S.  dollars/unit)** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                | ** ** | **2008**                                       | ** ** | **2007**                                      |       | **2008**                                                       | ** ** | **2007**                                                          | ** ** | **2008**                                                      | ** ** | **2007** |   | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Containerboard**        |       |                                           |       |                                          |       |                                                           |       |                                                              |       |                                                          | ** ** |   |   |   | ** ** |   |   |   |   |   |   |
| Manufacturing             | ** ** | **615**                                        |       | 599                                           |       | **57**                                                         |       | 59                                                                | ** ** | **1,172**                                                     | ** ** | 1,217 |   | **527** | ** ** | 493 |   | **494** | ** ** | 459 |   |
| Converting                | ** ** | **962**                                        |       | 984                                           |       | **53**                                                         |       | 76                                                                | ** ** | **833**                                                       | **(2)**    | 844 | (2) | **1,154** | **(2)** | 1,166 | (2) | **1,090** | **(2)** | 1,085 | (2) |
| Others and  eliminations  | ** ** | **(374**                                       | **)**      | (390                                          | )          | **(7**                                                         | **)**      | 17                                                                | ** ** | **(616**                                                      | **)**      | (649 | ) |   | ** ** |   |   |   | ** ** |   |   |
| ** **                |       | **1,203**                                      |       | 1,193                                         |       | **103**                                                        | ** ** | 152                                                               | ** ** | **1,389**                                                     | ** ** | 1,412 |   |   | ** ** |   |   |   |   |   |   |
| Specific items            | ** ** | ** **                                     |       |                                          |       | **27**                                                         |       | 24                                                                |       |                                                          | ** ** |   |   |   |   |   |   |   |   |   |   |
| Excluding  specific items | ** ** | ** **                                     |       |                                          |       | **130**                                                        |       | 176                                                               |       |                                                          | ** ** |   |   |   |   |   |   |   |   |   |   |

 

----

(1)          Total shipments do nottake into account the elimination of business sector intercompany shipments. 

 

(2)          Equal to12,998 million square feet (msf), $CAN74/msf, $US70/msf in 2008, and to13,378 msf, $CAN74/msf, $US68/msf in 2007.

 

 

 

11

----

 

The main variances inOIBD for the Containerboard Group, excluding specific items, are shown below:

 

 

The Containerboard Group’ssales increased by $10 million to $1.203 billion in 2008, comparedwith $1.193 billion in 2007. Manufacturing shipments dropped by 3.7% as aresult of the mills’ market-related downtime. In December, 85 days ofdowntime were taken in the manufacturing sector in order to keep production inbalance with demand. Those downtimes had a negative impact of approximately$7 million on our results.Both manufacturing and converting US$ sellingprices increased in 2008 compared to 2007. Manufacturing average sellingprices increased in 2008 by an average of $US35.

 

The North Americancorrugated product markets, particularly in the Northeastern U.S. region,continued to be challenging. On an average-week basis, U.S. and Canadian boxshipments were down 4.3% and 2.6% respectively year-to-date through December.In 2008, our shipments decreased by 1.8% in the U.S. and decreased by 2.7% inCanada (including the strike at the Calgary plant) compared to 2007.

 

Since the beginning ofthe fourth quarter of 2008, we laid off approximately 600 people in ourconverting facilities for an indefinite period of time, in order to react tothe weaker market conditions. Those layoffs represent a 17% reduction of theconverting segment’s workforce.

 

OIBD excluding specificitems decreased by $46 million to $130 million, compared with$176 million in 2007. Despite our hedging portfolio, the higher cost ofrecycled fibre had a negative impact of $6 million, while energy costs,freight and chemicals reduced OIBD by $13 million, $9 million and$2 million respectively. Other variable costs, such as labour andenvironmental costs, also had a negative impact on our OIBD. The depreciationof the Canadian dollar had a positive impact of $6 million. Also, asix-week strike at the Calgary facility negatively impacted on our results byapproximately $5 million in 2008.

 

The Containerboard Groupincurred closure costs of $5 million following the settlement of thepension plan and other costs, and an impairment charge of $4 million onthe remaining value of the property, plant and equipment of the Red Rockfacility, which was closed at the end of 2006. This Group also recorded animpairment charge of $1 million on equipment of the converting sector anda $1 million restructuring cost in 2008, compared to $18 million in 2007.This was in addition to an unrealized loss of $16 million on financialinstruments in 2008. Following the purchase price allocation made in 2006, the2007 first-quarter operating results were reduced by $6 million,since the inventories acquired at the end of 2006 were recognized at fairvalue and no profit was recorded on their subsequent sale.

 

**Packaging—Specialty Products**

 
| ** **                | ** ** | **Sales  (in millions  of dollars)** |       | **OIBD   (in millions  of dollars)** | ** ** | **Shipments(1)  (in thousands  of short tons)** |       | **Average  selling price  (in Canadian  dollars/unit)** | ** ** | **Average  selling price  (in U.S.  dollars/unit)** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                | ** ** | **2008**                                       | ** ** | **2007**                                            |       | **2008**                                                       | ** ** | **2007**                                                          | ** ** | **2008**                                                      | ** ** | **2007** |   | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Specialty  products**   | ** ** | ** **                                     | ** ** |                                                |       | ** **                                                     |       |                                                              | ** ** | ** **                                                    | ** ** |   |   | ** ** |   |   | ** ** | ** ** |   |   |   |
| Manufacturing             | ** ** | **315**                                        | ** ** | 318                                                 |       | **10**                                                         |       | 6                                                                 | ** ** | **344**                                                       | ** ** | 360 |   | **920** |   | 887 | ** ** | **863** |   | 826 |   |
| Converting                | ** ** | **267**                                        | ** ** | 232                                                 |       | **30**                                                         |       | 26                                                                | ** ** | **129**                                                       | ** ** | 104 |   | ** ** |   |   | ** ** | ** ** |   |   |   |
| Recovery and  deinked     | ** ** | **376**                                        | ** ** | 374                                                 |       | **23**                                                         |       | 25                                                                | ** ** | **n/a**                                                       | ** ** | n/a |   | ** ** |   |   | ** ** | ** ** |   |   |   |
| Others and  eliminations  | ** ** | **(98**                                        | **)**      | (90                                                 | )          | **1**                                                          |       | 2                                                                 | ** ** | **(15**                                                       | **)**      | (14 | ) | ** ** |   |   | ** ** | ** ** |   |   |   |
|                      | ** ** | **860**                                        | ** ** | 834                                                 |       | **64**                                                         |       | 59                                                                | ** ** | **458**                                                       | ** ** | 450 |   | ** ** |   |   | ** ** | ** ** |   |   |   |
| Specific items            | ** ** | ** **                                     | ** ** |                                                |       | **3**                                                          |       | 1                                                                 | ** ** | ** **                                                    | ** ** |   |   | ** ** |   |   | ** ** | ** ** |   |   |   |
| Excluding  specific items | ** ** | ** **                                     | ** ** |                                                |       | **67**                                                         |       | 60                                                                | ** ** | ** **                                                    | ** ** |   |   | ** ** |   |   | ** ** | ** ** |   |   |   |

 

----

(1) Totalshipments do not take into account the elimination of business sectorintercompany shipments.

 

12

----

 

 

 

 

13

----

 

The main variance in OIBD for the Specialty products Group, excludingspecific items are shown below:

 

 

Sales for the SpecialtyProducts Group increased by 3% to $860 million, compared with$834 million in 2007.  Ourindustrial packaging activities increased their sales compared to 2007, mostlydue to new papermill packaging business gains in the United States combinedwith an acquisition in our honeycomb activities in the third quarter of 2007.Our Consumer Packaging sector showed a sales increase, as our plasticactivities benefited from a price increase combined with additional volume.Finally, higher prices combined with sustained demand for our de-inking pulpproducts explain the higher sales for this business.

 

OIBD excluding specificitems increased by $7 million to $67 million, compared with$60 million in 2007. Despite the negative impact of energy $5 millionand raw materials prices $9 million, our ability to increase pricescombined with the re-alignment toward higher value and recycled-content grade,namely for our specialty papers activities, resulted in an increasedprofitability margin compared to 2007.

 

The turnaround at ourSaint-Jérôme Fine Paper Division, achieved by cost reduction measures andimproved efficiencies, resulted in a $6 million profitability increasecompared to 2007. Our Industrial and Consumer Packaging and Recovery sectorscontinued to deliver stable results. Although beneficial for the CascadesGroup, the recent drastically falling prices for wastepaper had a negativeimpact on our recovery and de-inked pulp sector in the last quarter of 2008.During that period, sales decreased by 20% or $21 million, compared to thethird quarter of 2008. OIBD excluding specific items decreased by 39% in thesame period.

 

The Group also recordedan impairment charge of $2 million on the property, plant and equipment ofone wastepaper sorting facility that ceased operations in 2008 and onother assets. It also incurred a $1 million charge following the samerestructuring initiatives.

 

**Tissue Papers**

 
| ** **                    | ** ** | **Sales  (in millions  of dollars)** | ** ** | **OIBD  (in millions  of dollars)** | ** ** | **Shipments(1)  (in thousands  of short tons)** | ** ** | **Average  selling price  (in Canadian  dollars/unit)** | ** ** | **Average  selling price  (in U.S.  dollars/unit)** | ** ** |
|-------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                       | ** ** | **2007**                                      | ** ** | **2008**                                                       | ** ** | **2007**                                                          | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Tissue  papers**            | ** ** | ** **                                     |       |                                          | ** ** | ** **                                                     |       |                                                              | ** ** | ** **                                                    |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Manufacturing and  converting | ** ** | **787**                                        |       | 713                                           | ** ** | **89**                                                         |       | 66                                                                | ** ** | **471**                                                       |       | 451 | ** ** | **1,649** |   | 1,547 | ** ** | **1,544** |   | 1,440 |   |
| Specific items                | ** ** | ** **                                     |       |                                          | ** ** | **1**                                                          |       | (1                                                                | )          | ** **                                                    |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Excluding  specific items     | ** ** | ** **                                     |       |                                          | ** ** | **90**                                                         |       | 65                                                                | ** ** | ** **                                                    |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |

 

----

(1)          Total shipments do not takeinto account reflect the elimination of business sector intercompany shipments.

 

14

----

 

 

 

The main variances in OIBD for the Tissue Group, excluding specificitems, are shown below:

 

 

Tissue Group salesincreased by 10% to $787 million in 2008, compared to $713 million in2007, while shipments increased by 4.4%. The improvement in sales is mainly dueto average net realized prices in US$, which were 7.2% higher in 2008 versus2007 as a result of price increases implemented in parent rolls and in theU.S. retail, commercial and industrial markets. However, this increase waspartially offset by the 1% rise in the proportion of jumbo rolls against totalshipments compared to 2007, for which selling prices are lower than forconverted products.

 

The Tissue Group’s OIBDexcluding specific items stood at $90 million in 2008, compared to$65 million in 2007. The improvement in OIBD is mainly due to the rise inthe average realized U.S.-dollar selling prices, increased volume and theweakening of the Canadian dollar versus the American dollar. However, the Group’sresults were partially offset by an increase in raw materials and energyproduction costs amounting to $15 and $7 million respectively.Operational inefficiencies at the new Memphis de-inking pulp plant caused extracosts of $3 million. Our fixed cost increase is mostly due to additionalpromotion activities for the Cascades brand and additional labour costs,including profit-sharing.

 

15

----

 

Specific item for theGroup is a $1 million restructuring cost due to a labour rationalizationin 2008. This is compared with a gain of $1 million, following the sale ofa building in 2007.

 

**Corporate Activities**

** **

Corporate activitiesinclude OIBD from the Company’s Engineering Division, which has been involvedin a construction project in Western Canada for a third party since late 2006.This project is now complete and the final settlement of outstanding unpaidinvoices for approximately $30 million is under discussion and should besettled in 2009. The profit from this project was lower in 2008, compared to2007. It is impossible at this point to determine whether or not this type ofactivity will continue in the future.

 

The 2008 results forcorporate activities include a charge of $4 million resulting from thecollapse of a roof section at the Company’s fine papers converting centrelocated in Saint-Jérôme, in March 2008.

 

The corporate activitiesalso incurred a foreign exchange loss of $11 million, which came fromforward exchange contracts, interest payable in U.S. dollars and the net cashposition of its centralized cash pooling accounts.

 

Other Items Analysis

 

**Depreciation andAmortization**

** **

Depreciation andamortization increased to $214 million in 2008, compared to$208 million in 2007. The depreciation and amortization expense wasaffected by the net impact of the proportional consolidation of the transactionwith Reno De Medici.

 

**Operating Income**

** **

As a result of the aboveand the impact of the specific items, operating income decreased by$129 million to $15 million, compared to an operating income of$144 million in 2007. Operating margins for 2008 decreased from 3.6%in 2007 to 0.4% in 2008.

 

Excluding specific items,operating income for 2008 stood at $92 million compared to$142 million in 2007.

 

**Interest Expense**

** **

The interest expenseremained stable in 2008 at $102 million. Debt level increased as aresult of working capital requirements and capital investments in 2007 and2008. This was offset by the reduction of the market floating rate in 2008. Theproportional consolidation of Reno De Medici also slightly increased the2008 interest expense.

 

In 2009, the interestrate on the Company’s revolving and term facilities will increase by 2%following the February 13, 2009 amendment, as discussed in the “Liquidityand Capital Resources” section.

 

**Foreign Exchange Loss (Gain)on Long-term Debt**

** **

In 2008, the Companyrecorded a foreign exchange loss of $ 24 million on its US$-denominateddebts, as the fair value of its derivative instruments, described below,experienced an unfavorable fluctuation. This compares to a foreign exchangegain of $59 million in 2007. These gains or losses have no impact on theCompany’s liquidity.

 

In 2007, the Companyentered into derivative instruments to fix $US 900 million of itsUS$-denominated debt at an average exchange rate of $CAN 0.981 ($US1.019). Initially, these instruments were not designated as a hedge againstfluctuations in foreign exchange rates on the US$-denominated debts.Consequently, gains and losses on changes in their fair value were recorded inearnings and, for the most part, offset foreign exchange gains and losses onthe US$-denominated debts.

 

On July 1, 2008, theCompany designated a new hedging relationship for these instruments, whichqualifies for cash-flow hedge accounting in accordance with Section 3865.Accordingly, 95% of the Company’s US$-denominated debts was hedged by theseforeign exchange forward contracts.

 

In the fourth quarter of2008, the Company terminated, prior to maturity, almost all of these contractsas discussed in “Financing Activities”. At the same time, the Companyre-entered into new derivative instruments, to fix a maximum of$547.5 million of its US$-denominated debt at an average exchange rate of$CAN 1.154 ($US 0.867).

 

The Company designated anew hedging relationship for these instruments, which qualifies for cash-flowhedge accounting in accordance with Section 3865. The timing of thesetransactions and of the designation and the portions of these instruments thatdo not qualify as cash flow hedge accounting resulted in a loss of$5.4 million (included in the $24 million mentioned above) during thefourth quarter of 2008. The Company also recorded a $1.6 million gain(included in the $24 million mentioned above) following the purchase of$3 million of its US$-denominated debt at a price below its nominal value.

 

**Provision for Income Taxes**

** **

The 2008 income taxrecovery was $32 million, for an effective rate of 29%, including theimpact of all specific items. Excluding these specific items, the effective taxrate is approximately 35%.

 

The effective tax rateand current income taxes are affected by the results of certain subsidiariesand a joint venture located in countries where the income tax rate is higherthan in Canada, notably Germany, Italy and the United States. The normaleffective tax rate is expected to be in a range of 31% to 35%.

 

**Share of Results of Significantly-influencedCompanies and Dilution Gain**

** **

The share of earnings ofsignificantly-influenced companies is mainly represented by our 34% interest inBoralex Inc., a Canadian public company that produces green and renewableenergy, with operations in the northeastern United States, Canada and France.

 

The 2007 earningsshare includes a dilution gain of $15 million, resulting from thereduction of its interest in Boralex Inc. from 43% to 34% as a result of apublic equity offering of 7.3 million common shares, made by Boralex, at aprice of $15.00.

 

16

----

** **

**Results of DiscontinuedOperations**

** **

The results ofdiscontinued operations include those of the Greenfield and Scierie Lemayfacilities. On January 7, 2008, the Company sold its Greenfield SAS pulpmill, located in France, for an amount of $41 million (€28 million).This transaction resulted in a gain of $24 million before related incometaxes of $4 million.

 

**Net earnings**

** **

As a result of theforegoing factors, the Company posted a net loss of $55 million, or$0.56 per share in 2008, compared to net earnings of $95 million or$0.95 per share in 2007. After excluding certain specific items, however,the Company realized net earnings of $3 million or $0.03 per sharecompared to net earnings of $22 million or $0.22 per share in2007 (see “Supplemental Information on Non-GAAP Measures” forreconciliation of these amounts).

 

Liquidity and Capital Resources

 

**Cash Flows from OperatingActivities**

** **

Operating activities generated$124 million in liquidity in 2008, compared to $89 million in 2007.Changes in non-cash working capital components required $31 million infunds, compared to a cash requirement of $89 million in 2007. Workingcapital requirements were less in 2008, following productive measures tooptimize the working capital level. In 2008, working capital was affected bythe increase of our selling prices and our production costs. However, thesewere partially offset by the decrease in our inventory level in all of ourconverting business and in the boxboard manufacturing mills resulting, in part,by the temporary closure of the Toronto mill. Extensive downtime taken at theend of 2008 also affected our working capital following the decrease of ouraccounts payable.

 

Cash flow from operatingactivities includes the net proceeds of $15 million from the earlysettlement of certain natural gas derivative contracts. The related valueincrement is recorded under “Accumulated Other Comprehensive Income (Loss)” andis amortized against earnings over the original designated underlying period ofnatural gas purchases, from July 2008 to October 2011.

 

Cash flow from operatingactivities, excluding the change in non-cash working-capital components, stoodat $155 million for 2008, compared to $178 million in 2007. Specificamounts, namely $26 million related to closure and restructuring charges,and $2 million for an inventory fair value adjustment resulting from theReno de Medici merger, reduced cash flow from operating activities in2008 versus $24 million in 2007. This cash flow measure issignificant, since it positions the Company to pursue its capital expendituresprogram and reduce its indebtedness.

 

**Investing Activities**

** **

Investment activities in2008 required total cash resources of $178 million, mainly forcapital expenditure projects.

 

The largest capitalprojects in 2008 were:

 

**Boxboard ($60 million)**

** **

·                  $28 millionto add converting equipment for the QSR business

 

·                  $1 millionto install a pulper in the East Angus mill

 

·                  $2 millionto install a new turbogenerator in the LaRochette, France mill

 

·                  $2 millionin the Versailles mill, mainly for converting equipment and water treatmentmodifications

 

**Containerboard ($39 million)**

** **

·                  $4 millionfor a new press in one converting facility in Ontario

 

·                  $16 millionfor various projects in the papermill manufacturing units

 

·                  $6 millionfor various projects in the converting units

 

**Specialty Products ($41 million)**

** **

·                  $3 millionfor new equipment in the Birmingham papermill packaging plant

 

·                  $19 millionfor a new sorting facility in Calgary, for our recycling paper activities

 

·                  $6 millionin the East Angus mill, to improve the kraft pulp process

 

**Tissue ($38 million)**

** **

·                  $5 millionto complete the new de-inking unit in Memphis, Tennessee

 

·                  $21 millionfor new converting equipment in Candiac, Lachute, Kingsey Falls, NorthCarolina, Waterford and Arizona, and for expansion of the Wisconsin convertingfacility

 

·                  $3 millionfor de-inked system and paper machines in Kingsey Falls, Pennsylvania and NorthCarolina

 

**Corporate Activities ($10 million)**

** **

·                  Investmentsaimed at reducing energy consumption and new IT development in Finance

 

During the secondquarter, the Company disposed of one building located in Montréal for a cashconsideration of $5 million. No gain or loss was realized on thistransaction.

 

The merger of ourEuropean recycled boxboard assets with RdM did not generate or require anycash, since the consideration was shares in RdM except for a cash considerationadjustment of $3.7 million. As at the transaction date, our share of thecash and cash equivalents owned by RdM, net of cash transferred from our transferredassets, amounted to $5.2 million. In addition, the Company acquired9.6 million shares in RdM on the open market, which represents 2.6% of theoutstanding shares, for a cash consideration of $4.2 million(€2.7 million).

 

**Financing Activities**

** **

In 2008, the Company hada net reduction of $149 million on its revolving credit facilitiesfollowing the settlement of forward exchange contracts. This was partiallyoffset by the capital investments and the working capital requirementsdiscussed above.

 

17

----

 

The Company also redeemed595,500 of its common shares on the open market, pursuant to anormal-course issuer bid, for an amount of $4 million. One of the Company’s(73%-owned) subsidiary paid a $20 million dividend in 2008, resulting in apayment of $5 million to the non-controlling interest.

 

At the end of 2008, theCompany purchased $US 3 million of the nominal value of its unsecuredsenior notes, for an amount of $US 1.7 million. The gain resulting from thedifference between the nominal value and the amount paid has been recorded asearnings in reduction of the foreign exchange loss on long-term debt.

 

Including thesetransactions and the $16 million in dividends paid out during 2008,financing activities required $9 million in liquidity.

 

**Settlement of ForwardExchange Contracts**

** **

In the fourth quarter of2008, the Company terminated forward exchange derivative contracts prior tomaturity for net cash proceeds of approximately $150 million. Since thesecontracts had been designated as cash flow hedges, effective July 1, 2008,for the Company’s US$-denominated debt, their fair value increment was recordedunder “Accumulated Other Comprehensive Income (Loss)” and in other assets. Thenet cash proceeds of these transactions have been applied to reduce the Company’srevolving credit facility. At the time of the sale of its derivative contracts,the Company entered into new derivative instruments to fix the nominal value ofits US$-denominated debt.

 

At the end of 2008, theCompany has forward exchange contracts to fix a maximum of $547.5 million,or 59% of its US$-denominated debt, at an average exchange rate of $CAN1.154 ($US 0.867). The marked to market value of $10 million at theend of 2008 is recorded in “Other Assets” on the balance sheet.

 

**Liquidity from DiscontinuedOperations**

** **

In 2007, the Companyreclassified its Scierie Lemay (sawmill) and Greenfield SAS (pulp mill)activities as discontinued operations. The Greenfield pulp mill was sold inearly January 2008 for a cash consideration of $41 million(€28 million). These businesses generated $5 million from theiroperating activities and $2 million was paid out, in 2008, for a2006 legal settlement relating to our fine papers activities. In addition,in September 2008, the Company sold its Scierie Lemay sawmill assets for acash consideration of $6 million and a contingent consideration of$2 million.

 

**Debt Refinancing**

** **

On May 7, 2008, theCompany amended its credit facility, extending its $100 million 12-monthunsecured revolving credit from June 2008 to June 2009 andmaintaining the existing covenant, at that time, until June 30, 2009.

 

On February 13,2009, the Company entered into an agreement to amend its existing bank creditagreement. Under the terms of the amendment, the existing financial covenantsnamely the maximum funded debt to capitalization ratio of 65% and the minimuminterest coverage ratio of 2.25x will remain unchanged until maturity in October 2012.In consideration of this covenant extension, the variable interest rateapplicable to borrowings outstanding was increased by 200 basis points.The amendment also cancels the unsecured revolving credit facility in theamount of $100 million that was originally scheduled to terminate in June 2009.

 

The amounts of the Company’ssecured revolving credit and term facilities ($750 million and$100 million respectively) and their maturity dates (December 2011 andOctober 2012 respectively) stay unchanged.

 

**Consolidated FinancialPosition as at December 31, 2008 and December 31, 2007**

** **

Following are the Company’sfinancial position and ratios:

 
| **(in millions of Canadian dollars)** | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------|------------|-----------|------------|------------|------------|
| Working capital(1)                                        | ** ** | **694**   | ** ** | 616        |       |
| % of sales(2)                                             | ** ** | **16.6**  | **%**      | 16.5       | %          |
| Bank loan and advances                                    | ** ** | **104**   | ** ** | 47         |       |
| Current portion of long-term debt                         | ** ** | **36**    | ** ** | 4          |       |
| Long-term debt                                            | ** ** | **1,672** | ** ** | 1,570      |       |
| Total debt                                                | ** ** | **1,812** | ** ** | 1,621      |       |
| Shareholders’ equity                                 | ** ** | **1,256** | ** ** | 1,199      |       |
| Total equity and debt                                     | ** ** | **3,068** | ** ** | 2,820      |       |
| Ratio of debt/total equity and debt                       | ** ** | **59.1**  | **%**      | 57.5       | %          |
| Shareholders’ equity per share                       | ** ** | **$**     | **12.74**  | ** ** | $          | 12.09 |   |
|                                                           |            |           |            |            |            |  |  |

 

----

(1)   Working capitalincludes accounts receivable plus inventories less accounts payable. Itexcludes the unpaid provision for closure and restructuring costs in the amountof $22 million as at December 31, 2008 and $19 million asat December 31, 2007. It also excludes the current portion of derivativefinancial instruments liabilities in the amount of $31 million as atDecember 31, 2008 (assets–$11 million in 2007) and the currentportion of future tax assets in the amount of $10 million as atDecember 31, 2008 (liabilities–$1 million in 2007).

 

(2)   % of sales =LTM Working Capital/LTM Sales.

 

Liquidity available viathe Company’s credit facilities, along with the expected cash flow generated byits operating activities, will provide sufficient funds to meet its financialobligations and fulfill its capital expenditure program. Capital expendituresfor 2009 are approved at $100 million, but are subject to changedepending on the Company’s operating results and on general economicconditions. At the end of 2008, the Company had $290 million (net ofletters of credit in the amount of $33 million) available through its $850million revolving credit facility. The Company’s joint- ventures haveapproximately $17 million (net of letters of credit in the amount of $4million) available through their various credit facilities. The Company has nosignificant debt maturities before the end of 2011. In 2009, there is nosignificant cash requirement in terms of pension liabilities, compared with2008.

 

18

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Comments on the Fourth Quarter of 2008

 

Net loss for the fourthquarter ended December 31, 2008 amounted to $19 million($0.20 per share), compared to net earnings of $12 million($0.12 per share) for the fourth quarter ended December 31, 2007.When excluding specific items, net earnings for the fourth quarter of2008 amounted to $17 million ($0.17 per share), compared withnet earnings of $1 million ($0.01 per share) for the same quarter in2007.

 

As a result of betterselling prices and the depreciation of the Canadian dollar, sales increased by8.9% during the fourth quarter of 2008, amounting to $1.020 billioncompared with $937 million last year. Operating loss amounted to$4 million for the period, compared to an operating income of$19 million for the same quarter last year.

 

Operating incomeexcluding specific items amounted to $40 million and excludes thefollowing items: a $13 million impairment charge on certain assets of theContainerboard, Boxboard and Specialty Products Groups, and $10 million inclosure and restructuring costs. It also excludes a $21 million unrealizedloss of financial instruments.

 

Operating income beforedepreciation and amortization amounted to $52 million, compared with$68 million in the fourth quarter of 2007. Excluding the specific items,the operating income before depreciation and amortization stood at$96 million, which represents the highest quarterly OIBD since 2002,compared with $82 million in 2007, a 17% increase. Despite lower salesvolumes, operating results improved in the quarter compared to last year as aresult of higher selling prices, lower raw materials, and the depreciation ofthe Canadian dollar.

 

The fourth quarter netearnings, excluding specific items, of $17 million included a$5 million recovery of income tax resulting mainly from provisionadjustments for prior years.

 

The reconciliation of thespecific items by business group is as follows:

 
| For the 3–month periods ended December 31  (in millions of Canadian dollars) | ** ** | **2008** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------|

 
| ** **                                                                                    | ** ** | **Boxboard** | ** ** | **Containerboard** | ** ** | **Specialty  Products** | ** ** | **Tissue  Papers** | ** ** | **Corporate  Activities** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|-------------------------|------------|--------------------|------------|---------------------------|------------|------------------|------------|
| **Operating  income before depreciation and amortization**                                    |       | (7           | )          | 19                 |       | 20                      |       | 41                 |       | (21                       | )          | **52**           | ** ** |
| Specific items:                                                                               | ** ** | ** **   | ** ** | ** **         | ** ** | ** **              | ** ** | ** **         | ** ** | ** **                | ** ** | ** **       | ** ** |
| Impairment loss                                                                               |       | 9            |       | 3                  |       | 1                       |       | —             |       | —                    | ** ** | **13**           | ** ** |
| Closure and  restructuring costs                                                              |       | 8            |       | 1                  |       | 1                       |       | —             |       | —                    | ** ** | **10**           | ** ** |
| Unrealized loss  on financial instruments                                                     |       | 1            |       | 8                  |       | —                  |       | —             |       | 12                        | ** ** | **21**           | ** ** |
|                                                                                          |       | 18           |       | 12                 |       | 2                       |       | —             |       | 12                        | ** ** | **44**           | ** ** |
| **Operating  income before depreciation and amortization—excluding specific items** |       | 11           |       | 31                 |       | 22                      |       | 41                 |       | (9                        | )          | **96**           | ** ** |

 
| For  the 3–month periods ended December 31  (in millions of Canadian dollars) |   | 2007 |
|-----------------------------------------------------------------------------------------|--------|------|

 
| ** **                                                                                    | ** ** | **Boxboard** | ** ** | **Containerboard** | ** ** | **Specialty  Products** | ** ** | **Tissue  Papers** | ** ** | **Corporate  Activities** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|-------------------------|------------|--------------------|------------|---------------------------|------------|------------------|------------|
| **Operating  income before depreciation and amortization**                                    |       | 9            |       | 30                 |       | 15                      |       | 15                 |       | (1                        | )          | 68               |       |
| Specific items:                                                                               |       |         |       |               |       |                    |       |               |       |                      |       |             |       |
| Loss (gain) on  disposals                                                                     |       | —       |       | 10                 |       | —                  |       | —             |       | (3                        | )          | 7                |       |
| Impairment loss                                                                               |       | —       |       | 2                  |       | —                  |       | —             |       | —                    |       | 2                |       |
| Closure and  restructuring costs                                                              |       | —       |       | 2                  |       | 1                       |       | —             |       | —                    |       | 3                |       |
| Unrealized loss  on financial instruments                                                     |       | —       |       | —             |       | —                  |       | —             |       | 2                         |       | 2                |       |
|                                                                                          |       | —       |       | 14                 |       | 1                       |       | —             |       | (1                        | )          | 14               |       |
| **Operating  income before depreciation and amortization—excluding specific items** |       | 9            |       | 44                 |       | 16                      |       | 15                 |       | (2                        | )          | 82               |       |

 

19

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The main variances inoperating income before depreciation and amortization, excluding specificitems, are shown below. Selling price increases, combined with the recent dropin raw materials prices, more than offset the negative impact of higher energyand other costs following significant downtime during the month of December inthe Containerboard and Boxboard sector:

 

 

Management Comments on the Current Economic Situation

 

**General**

** **

The current economicsituation and, especially, the economic situation in the United States, couldimpact negatively on the Company, since it operates mostly in the NorthAmerican market. However, during the last quarter of the year, the Company’soperating results were improved by the decline in recycled fiber and energycosts and the depreciation of the Canadian dollar. Nonetheless, there is a riskthese economic conditions could reverse themselves in a short period of time.The difficult first half of the year and recent significant improvement in ourresults has demonstrated how much the extreme volatility of the financialmarket can affect our results. In addition to these difficult marketconditions, any decrease in demand could cause a decline in our selling pricewhich would have a negative impact on our results.

 

Under these conditions,management will continue to take necessary downtime, implement cost reductionprograms in all of its sectors and maintain rigorous analysis of investmentsprojects. In the face of these difficult economic conditions, the Companyremains committed to its strategy of focusing on its Packaging and Tissuesectors, optimizing the use of recycled fiber and increasing its convertingintegration rate.

 

**Financing**

** **

As a measure of prudence,the Company took steps to amend its existing credit facilities in order to improveits financial flexibility by removing the planned changes of its financialcovenants that would have taken place after June 30, 2009. With close to$300 million of available credit and no significant debt maturities before December 2011,the Company is well positioned to face these uncertain times.

 

**North American Boxboard Group**

** **

The economic slowdown inthe second half of 2007 and operational difficulties in our North Americanboxboard manufacturing units led to our decision in 2008 to further restructurethis sector. In March 2008, the Company announced the reorganization ofthese operations with its containerboard operations, along with a change ofmanagement. On July 2, 2008, the Group announced the closure of itsToronto boxboard mill for an indefinite period of time, effective in lateAugust. This decision was taken to mitigate several negative factors such ashigh labour costs, growing fibre supply costs and rising energy costs. The newmanagement team continues its strategic review in order to optimize theprofitability of these assets, and decisions might be made in 2009 that couldlead to further restructuring measures, including capacity orlabour reduction.

 

**Pension Liabilities**

** **

The Company’s futureemployee benefits assets and liabilities amounted to $97 million and $124million respectively as at December 31, 2008. These liabilities include anamount of $104 million for post-retirement benefits other than pension plans,which do not require any funding by the Company until they are claimed by theemployees. This amount is not expected to increase, as the Company is reviewingits benefits program to phase out some of them for the majority of future andcurrent employees who do not meet certain criteria.

 

With regards to pensionplans, the Company’s risk is limited, as only approximately 30% of itsemployees are subject to a defined benefit contribution pension plan while theremaining employees are part of the Company’s defined contribution plans suchas group RRSPs or 401K. Only three relatively small plans will have anactuarial evaluation performed in 2009. These evaluations are not expected torequire significant funding by the Company. However, approximately 75% of theCompany’s pension plans will be required to have such a valuation in 2010, andadditional funding by the Company may be significant in future years, dependingon the assumptions used at this time and the achieved return on itsinvestments. The adverse economic situation requires the Company to usedifferent assumptions to determine the fair value of its Plan assets and theamount of accrued benefit obligations.

 

Considering theassumptions used and the unrecognized liability, the deficit status foraccounting purpose of its pension plans amounted to $17 million as at December 31,2008, compared to $3 million in 2007. Excluding specific events, the expensefor these pension plans is expected to increase to approximately $15 million in2009, compared to $8 million in 2008. As for the cash flow requirement, thesepension plans are expected to require a contribution of approximately $28million in 2009, compared with $26 million in 2008.

 

20

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Refer to “Risk Management”(page 51) for more details of what factors could have an impact on ouroperations. Refer also to the sensitivity analysis (page 15).

 

Near-term Outlook

 

From a businessstandpoint and given the sensitivity of our results to these factors. We expectto significantly benefit from relatively stable recycled fibre and energy costsas well as from the lower Canadian dollar during the course of the followingyear.

 

However, despite thisfavorable cost environment, we remain cautiously optimistic given furtherpotential weakness in demand for certain of our products and price erosion. Infact, corrugated box and industrial packaging shipments have been negativelyaffected by the economic slowdown and we anticipate that volumes could remainunder pressure due to the global recession. In term of selling prices, theyhave slightly retreated in some of our sectors in the past few months and morecompetitive business conditions could exacerbate the decline.

 

Fortunately, Cascades hasa balanced business mix and a significant position in consumer markets such astissue papers and food packaging which are generally more recession resistant.

 

On the financial front,notwithstanding our increased liquidity and the recently announced amendment ofour credit agreement, we intend to limit capital investments to approximately$100 million while reducing working capital by $40 million. We also continueour efforts to divest non-strategic or non-performing assets. All in all, weanticipate to generate improved free cash flows and to reduce debt.

 

Capital Stock Information

 

As at December 31,2008, issued and outstanding capital stock consisted of 98,548,851 commonshares (99,144,351 as at December 31, 2007), and 2,903,506 stockoptions were issued and outstanding (2,459,056 as at December 31,2007). In 2008, no options were exercised and 94,934 were forfeited. In2008, the Company issued 539,384 stock options at an exercise price of$7.81.

 

As at March 16,2009, issued and outstanding capital stock consisted of 97,997,651 commonshares and 2,903,506 stock options.

 

Note that Cascades isclassified by S&P/TSX and Morgan Stanley Capital International (“MSCI”) aspart of the Paper Packaging sub-industry. More specifically, Cascades isclassified as part of the Containers & Packaging industry in theMaterials sector.

 

Contractual Obligations and Other Commitments

 

The Company’s principalcontractual obligations and commercial commitments relate to outstanding debt,operating leases, capital leases and purchase obligations for its normalbusiness operations. The following table summarizes these obligations as at December 31,2008:

 

**Contractual Obligations**

 
| **Payment due by period (in millions of dollars)** | ** ** | **Total** | ** ** | **Year 2009** | ** ** | **Years 2010  and 2011** | ** ** | **Years 2012  and 2013** | ** ** | **Thereafter** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------|------------|--------------------|------------|------------------------------------|------------|------------------------------------|------------|----------------|------------|
| Long-term debt,  including capital and interests                                      |       | 2,126     |       | 141                |       | 642                                |       | 1,339                              |       | 4              |       |
| Capital lease                                                                         |       | 1         |       | 1                  |       | —                             |       | —                             |       | —         |       |
| Operating lease                                                                       |       | 175       |       | 42                 |       | 62                                 |       | 34                                 |       | 37             |       |
| Purchase  obligations                                                                 |       | 347       |       | 130                |       | 110                                |       | 41                                 |       | 66             |       |
| Legal settlement                                                                      |       | 9         |       | 3                  |       | 3                                  |       | 3                                  |       | —         |       |
| Pension plans  and other post-employement benefits                                    |       | 461       |       | 55                 |       | 80                                 |       | 85                                 |       | 241            |       |
| **Total  contractual obligations**                                                    |       | 3,119     |       | 372                |       | 897                                |       | 1,502                              |       | 348            |       |

 

Transactions with Related Parties

 

The Company has alsoentered into various agreements with its joint-venture partners,significantly-influenced companies and entities that are affiliated to one ormore of its directors, for the supply of raw materials, including recycledpaper, virgin pulp and energy; the supply of unconverted and convertedproducts; and other agreements entered into in the normal course of business.Aggregate sales by the Company to its joint-venture partners and otheraffiliates totaled $108 million and $132 million for 2007 and2008 respectively. Aggregate sales to the Company from its joint-venturepartners and other affiliates came to $47 million and $59 million for2007 and 2008 respectively. Aggregate sales to the Company fromentities controlled by one or more of its directors totaled $5 million for2007. These amounts are on a 100% comparative basis.

 

Off-balance-sheet Arrangements

 

In the normal course ofbusiness, Cascades finances some of its activities off-balance sheet throughleases. The Company enters into operating leases for buildings and equipment.Minimum future rental payments under these operating leases, determined as at December 31,2008, are included in the contractual obligations table above.

 

Critical Accounting Estimates

 

Some of the Company’saccounting policies require significant estimates and assumptions about futureevents that affect the amounts reported in the financial statements and the accompanyingnotes. Future events and their effects cannot be determined with absolutecertainty. Therefore, the determination of estimates requires the exercise ofmanagement’s judgment. Actual results could differ from those estimates, andany such differences may be material to the Company’s financial statements. Asummary of our significant accounting policies is disclosed in note 2 of ourconsolidated financial statements. We believe the following items require us tomake estimates.

 

21

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**Impairmentof Long-lived Assets and Goodwill**

** **

(a) Property, plantand equipment and intangible assets (referred to as “long-lived assets”) arereviewed for impairment upon the occurrence of events or changes incircumstances indicating that at the lowest level of determinable cash flows,the carrying value of the long-lived assets may not be recoverable. This isaccomplished by determining if projected undiscounted future cash flows fromoperations exceed the carrying amount of the assets as of the assessment date.Estimates of future cash flows and fait values require judgment and may change.

 

For the purpose of thistest, estimates of undiscounted future cash flows from operations are developedand several key assumptions are used including amongst others, productionlevels, selling prices and volume, raw materials costs and foreign exchangerate. The forecasts used were derived from our internal budget and forecast andsupported or derived from external information on the industry such asRessource Information System inc. (“RISI”) and Bloomberg.

 

The Company believes suchassumptions to be reasonable. These assumptions involve a high degree ofjudgment and complexity and reflect our best estimates with the informationavailable at the assessment date. In addition, our products are commodityproducts; therefore, pricing is inherently volatile and often follows acyclical pattern.

 

In 2008, the Companyannounced a reorganization of its North American Boxboard Group and thetemporary closure of its Toronto boxboard mill. In addition, certain of ouroperating units have been and continue to face difficult market conditions.

 

As a result of the above,the Company conducted impairment tests mainly on long-lived assets of the NorthAmerican Boxboard manufacturing mills and one pulp mill having a carryingamount of $163 million as at December 31, 2008. The tests have beenperformed under the assumption that these assets will continue to be utilizedin a manner consistent with the historical operations of such assets.

 

Since the reorganizationof the North American Boxboard Group, the new management team continues itsstrategic review in order to optimize the profitability of these assets anddecisions might be taken in 2009 which could lead to further restructuring measuresincluding capacity of labour reduction.

 

Considering the above,there is a measurement uncertainty since adverse changes in one or in acombination of our key assumptions or change in use of such operations couldrequire a significant change in the carrying amount of the assets tested forimpairment.

 

(b) Goodwill is notamortized and is subject to an annual goodwill impairment test. This test iscarried out more frequently if events or changes in circumstances indicate thatgoodwill might be impaired. A goodwill impairment test determines whether thefair value of a reporting unit exceeds the net carrying amount of thatreporting unit (“Step I”), including goodwill, as of the assessment date, inorder to assess if goodwill is impaired. If the fair value is greater than thenet carrying amount, no impairment charge is necessary. In the event that thenet carrying value exceeds the fair value, a “Step II” goodwill impairment testmust be performed in order to determine the amount of the impairment charge.The implied fair value of goodwill in this test is estimated in the same way asgoodwill was determined at the date of the acquisition in a businesscombination. That is, the excess of the fair value of the reporting unit overthe fair value of its identifiable net assets of the reporting unit representsthe implied value of goodwill. To accomplish this Step II test, the fair valueof the reporting unit’s goodwill must be estimated and compared to its carryingvalue. The excess of the carrying value over the fair value is taken as animpairment charge in the period.

 

In determining the fairvalue of our reporting units, we primarily used the discounted cash flow methodand several key assumptions were used for these tests including amongst others,production levels, selling prices and volume, raw materials costs, foreignexchange rate, weighted average cost of capital (“WACC”) and capital spending.The forecasts used were derived from our internal budget and forecast andsupported or derived from external information on the industry such asRessource Information System inc. (“RISI”) and Bloomberg.

 

The Company believes suchassumptions to be reasonable. These assumptions involve a high degree ofjudgment and complexity and reflect our best estimates with the informationavailable at the assessment date. In addition, our products are commodityproducts; therefore, pricing is inherently volatile and often follows acyclical pattern.

 

These assumptions areoften interrelated. Our reporting units operate mostly in disciplined marketsand depending on the rapidity of the change in these factors, we can assumethat our reporting units will maintain or recuperate their profitability marginover a certain period of time. Because of these facts, we do not believe it wouldbe meaningful to provide a sensitivity analysis on any of the assumptions takenindividually. The weighted average cost of capital, which is used to discountthe projected cash flows, is important and if the general economic conditionswould continue to worsen, we would have to consider increasing our WACC and itcould have an adverse effect on the valuation of our reporting units.

 

For the reporting unit(Containerboard) having the most significant amount of goodwill amounting to$270 million as at December 31, 2008, estimated fair value in step 1exceeded carrying value by a range of 9% to 15%. An increase of 0.25% in ourWACC, while holding all other key assumptions constant, would modify the rangeabove to 6% and 12%. A decrease of 4.5% in the profitability of thereporting unit, while holding the WACC assumption constant, would change therange above to 5% and 10%.

 

Considering thesensitivity of the key assumptions used, there is a measurement uncertaintysince adverse changes in one or in a combination of our key assumptions couldrequire a significant change in the carrying amount of goodwill.

 

**Valuationof Identifiable Intangible Assets**

** **

Business acquisitions areaccounted for under the purchase method of accounting. The total cost of anacquisition is allocated to the underlying net assets, based on theirrespective estimated fair values. As part of this allocation process, theCompany must identify and attribute values and estimated lives to theintangible assets acquired. While an expert may be employed to assist theCompany with these matters, these types of determinations involve considerablejudgment and often require the use of estimates and assumptions, includingthose with respect to future cash inflows and outflows, discount rates and assetlives. These determinations affect the amortization expense amount recognizedin future periods.

 

**IncomeTaxes**

** **

The Company is requiredto estimate the income taxes in each of jurisdictions in which it operates.This includes estimating a value for existing net operating losses based on theCompany’s assessment of its ability to utilize them against future taxableincome before they expire. If the Company’s assessment of its ability to usethe net operating losses proves inaccurate in the future, more or less of thenet operating losses might be recognized as assets, which would increase ordecrease the income tax expense, and consequently affect the Company’s resultsin the relevant year.

 

22

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**Pensionand Post-retirement Benefit Costs**

** **

Pension andpost-retirement benefit costs are developed from actuarial valuations. Inherentin these valuations are key assumptions provided by the Company to actuaries,including discount rates, expected returns on plan assets, rates ofcompensation increases and medical cost inflation. In selecting the rates andreturns, the Company is required to consider current market conditions,including changes in interest rates. Material changes in pension andpost-retirement benefit costs may occur in the future, as a result offluctuations in headcount as well as changes in the assumptions. See note16 of the concolidated Financial statements for the assumptions used andthe sensivity analysis in regard to some of these assumptions.

 

**EnvironmentalClean-up Costs**

** **

The Company expensesenvironmental disbursements related to existing conditions caused by past orcurrent operations, from which no future benefit is discernible. The Company’sestimated environmental remediation costs are based upon an evaluation ofcurrently available facts pertaining to each individual site, including theresults of environmental studies and testing, and taking into considerationexisting technology, applicable laws and regulations, and prior experience incontaminated site remediation. Expenditures that extend the life of the relatedproperty, or mitigate or prevent future environmental contamination, arecapitalized. The Company determines its liability on a site-by-site basis andrecords a liability when one is probable and can be reasonably estimated. Thecontingencies take into account the anticipated participation of otherpotentially responsible parties, when it is probable that such parties arelegally responsible and financially capable of paying their respective sharesof the relevant costs. Actual costs to be incurred in future periods at theidentified sites may vary from the estimates, given the inherent uncertaintiesin evaluating environmental exposures. Future information and developments mayrequire the Company to reassess the expected impact of these environmentalmatters.

 

**Collectibilityof Accounts Receivable**

** **

In order to record itsaccounts receivable at their net realizable value, the Company must assesstheir “collectibility”. A considerable amount of judgment is required in makingthis assessment, including a review of the receivables’ aging and each customer’scurrent creditworthiness. The Company has recorded allowances for receivablesthat it feels are uncollectible. However, if the financial condition of theCompany’s customers were to deteriorate, their ability to make requiredpayments may become further impaired and increases in these allowances would berequired.

 

Introduction of New Accounting Standards in2008

 

**Inventories**

** **

On January 1, 2008,the Company adopted the CICA-published Section 3031, “Inventories”,without restating the comparative figures. This new standard establishesmeasurement and disclosure requirements concerning inventories. The newrequirements were effective January 1, 2008. The application of this newstandard by the Company decreased inventories by approximately $2 millionand increased property, plant and equipment by $7 million, and futureincome taxes and retained earnings by $2 million and $3 million respectively.

 

**GoingConcern**

** **

CICA Handbook Section 1400,“General Standards of Financial Statement Presentation”, was amended to includerequirements to assess and disclose an entity’s ability to continue as agoing-concern. When financial statements are note prepared on a going-concernbasis, that fact shall be disclosed together with the basis on which thefinancial statements are prepared and the reason why the company is noconsidered a going-concern. The new requirements are effective for the Company forinterim and annual financial statements beginning January 1, 2008. Theadoption of this new standard had no impact on the consolidated financialstatements.

 

New Accounting Standards not yet Adopted

 

**Goodwilland Intangible Assets**

** **

In February 2008, CICApublished Section 3064, “Goodwill and Intangible Assets”. This newstandard establishes standards for the recognition, measurement, presentationand disclosure of goodwill and intangible assets. The requirements will beeffective for the interim period and annual financial statements relating tofiscal years starting on or after October 1, 2008. The Company ispresently evaluating the impact of this new standard.

 

**CreditRisk and the Fair Value of Financial Assets and Financial Liabilities**

** **

In January 2009,CICA issued EIC-173, “Credit Risk and the Fair Value of Financial Assets andFinancial Liabilities”, which becomes effective for the Company’s2009 fiscal year with retrospective application without restatement ofprior periods. The guidance requires that an entity’s own credit risk and thecredit risk of the counterparty should be taken into account in determining thefair value of financial assets and financial liabilities, including derivativeinstruments. As at December 31, 2008 the Company evaluated that theadoption of these recommandations would have had no impact.

 

**InternationalFinancial Reporting Standards**

** **

In February 2008,the Accounting Standards Board (“AcSB”) confirmed that the use of InternationalFinancial Reporting Standards (“IFRS”) will replace Canadian GAAP in2011 for publicly accountable profit-oriented enterprises. The transitionfrom current Canadian GAAP to IFRS will be applicable for the Company for thefiscal year beginning on January 1, 2011. The Company will convert tothese new standards according to the timetable set for these new rules. TheCompany has established its transition plan and has formally established aproject team. The project team consists of members from Finance and is beingoverseen by the Company’s Chief Financial Officer. Reporting is done to seniormanagement and to the Audit Committee of the Company’s Board of Directors, on aregular basis. The Company uses an external advisor to assist in the conversionproject.

 

The Company completed thefirst phase of its transition program, which included scoping to identify thesignificant accounting policy differences and their related areas of impact interms of systems, procedures and financial statements.

 

The Company is currentlyin the second phase, which involves a completed design and work plan to measurethe differences between IFRS and Canadian GAAP, and the impact on its financialstatements, disclosures and operations.

 

23

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The Company will addressthe design, planning, solution development and implementation of the conversionin 2009.

 

Controls and Procedures

 

**Evaluationof the Effectiveness of Disclosure Controls and Procedures, and InternalControl Over Financial Reporting**

** **

Disclosure controls andprocedures are designed to provide reasonable assurance that all relevantinformation is gathered and reported to senior management on a timely basis,including the President and Chief Executive Officer and the Vice-President andChief Financial Officer so that appropriate decisions can be made regardingpublic disclosure.

 

The President and ChiefExecutive Officer and the Vice-President and Chief Financial Officer haveevaluated the effectiveness of the Company’s disclosure controls and proceduresrelated to the preparation of Management’s discussion and analysis and theconsolidated financial statements. They have concluded that the design andoperation of disclosure controls were effective at December 31, 2008.

 

Internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsin accordance with Canadian GAAP. The President and Chief Executive Officer andthe Vice-President and Chief Financial Officer have assessed the effectivenessof the Company’s internal control over financial reporting as at December 31, 2008based on the framework established in Internal Control- Integrated Framework,issued by the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”). Based on this assessment, they have concluded that the Company’sinternal control over financial reporting is effective as at December 31, 2008and expect to certify the Company’s annual filings with the U.S. Securities andExchange Commission on Form 40-F, as required by the United StatesSarbanes Oxley Act.

 

The reader is advisedthat note 22—Summary of differences between Canadian and United Statesgenerally accepted accounting principles (GAAP) forms part of the ConsolidatedFinancial Statements attached as an exhibit to Form 40-F filed with theU.S. Securities and Exchange Commission.

 

Changes in Internal Control overFinancial Reporting

 

During the third quarterof 2008 , the Company made a change in the consolidation software used tosupport financial reporting. As appropriate, the Company modified the design,documentation and evaluation of internal control processes and proceduresrelating to the new system, to supplement and complement existing internalcontrols over financial reporting.

 

Risk Management

 

As part of its ongoingbusiness operations, the Company is exposed to certain market risks, includingrisks ensuing from changes in selling prices for its principal products, costsof raw materials, interest rates and foreign currency exchange rates, all ofwhich impact on the Company’s financial position, operating results and cashflows. The Company manages its exposure to these and other market risks throughregular operating and financing activities and, on a limited basis, through theuse of derivative financial instruments. We use these derivative financialinstruments as risk management tools, not for speculative investment purposes.The following is a discussion of key areas of business risks and uncertaintiesthat we have identified, and our mitigating strategies. The risk areas beloware listed in no particular order, as risks are evaluated based on bothseverity and probability. Readers are cautioned that the following is not anexhaustive list of all the risks we are exposed to, nor will our mitigationstrategies eliminate all risks listed.

 

**(a)****          The markets for some ofthe Company’s products tend to be cyclical in nature and prices for some of itsproducts, as well as raw materials and energy costs, may fluctuate significantly,which can adversely affect its business, operating results, profitability andfinancial position.**

 

The markets for some ofthe Company’s products, particularly containerboard and boxboard, are highlycyclical. As a result, prices for these types of products and for its twoprincipal raw materials, recycled paper and virgin fibre, have fluctuatedsignificantly in the past and will likely continue to fluctuate significantlyin the future, principally due to market imbalances between supply and demand.Demand is heavily influenced by the strength of the global economy and thecountries or regions in which Cascades does business, particularly Canada andthe United States, the Company’s two primary markets. Demand is also influencedby fluctuations in inventory levels held by customers and consumer preferences.Supply depends primarily on industry capacity and capacity utilization rates.In periods of economic weakness, reduced spending by consumers and businessesresults in decreased demand, potentially causing downward price pressure.Industry participants may also, at times, add new capacity or increase capacityutilization rates, potentially causing supply to exceed demand and exertingdownward price pressure. Depending on market conditions and related demand,Cascades may have to take market-related downtime. In addition, the Company maynot be able to maintain current prices or implement additional price increasesin the future. If Cascades is not able to do so, its revenues, profitabilityand cash flows could be adversely affected. In addition, other participants mayintroduce new capacity or increase capacity utilization rates, which could alsoadversely affect the Company’s business, operating results and financialposition. Prices for recycled and virgin fibre also fluctuate considerably. Thecosts of these materials present a potential risk to the Company’s profitmargins, to the extent that it is unable to pass along price increases to itscustomers on a timely basis. Although changes in the price of recycled fibregenerally correlate with changes in the price of products made from recycledpaper, this may not always be the case. To the extent that Cascades is not ableto implement increases in the selling prices for its products to compensate forincreases in the price of recycled or virgin fibre, the Company’s profitabilityand cash flows would be adversely affected. In addition, Cascades uses energy,mainly natural gas and fuel oil, to generate steam, which it then uses in theproduction process and to operate machinery. Energy prices, particularly fornatural gas and fuel oil, have continued to fluctuate. Cascades continues toevaluate its energy costs and consider ways to factor energy costs into itspricing. However, if energy prices were to increase, the Company’s productioncosts, competitive position and operating results would be adversely affected.In addition, uncertainty in the Middle East or in other oil-producing regionscould lead to an increase in the cost of energy. A substantial increase inenergy costs would adversely affect the Company’s operating results and couldhave broader market implications that could further adversely affect theCompany’s business or financial results.

 

To mitigate price risk,our strategies include the uses of various derivative financial instrumenttransactions, whereby it sets the price for notional quantities of oldcorrugated containers, electricity and natural gas.

 

24

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Additional information onour North American raw material, electricity and natural gas hedging programsas at December 31, 2008 is set out below:

 

**North American Finished Products and Raw Materials Hedging**

 
| ** **                               | ** ** | **Linerboard/old  corrugated  containers spread** | ** ** | **Old   corrugated  containers** | ** ** | **Sorted  office  paper** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------|------------|---------------------------|------------|
| Quantity  hedge                          |       | 57,000 st                                              |       | 141,000 st                            |       | 10,800 st                 |       |
| % of  annual consumption hedged          |       | 5.6                                                    | %(1)       | 14                                    | %          | 3                         | %          |
| Average  price                           |       | $                                                      | US510/ST   |                                  | $          | US134/ST                  |       | $ | US145/ST |   |
| Fair  value as of December 31, 2008 |       | (1.5                                                   | )          | (10.8                                 | )(2)       | (0.2                      | )          |
|                                          |            |                                                        |            |                                       |            |                           |            |  |  |  |

 

----

| (1) | Base  on old corrugated containers consumption. |
|-----|-------------------------------------------------|
| (2) | Base  on diverse index.                         |

 

**North American Electricity Hedging**

 
| ** **                                          | ** ** | **United States** | ** ** | **Canada** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|------------|------------|
| Electricity  consumption                            |       | 30                     | %          | 70         | %          |
| Electricity  consumption in a regulated market |       | 58                     | %          | 80         | %          |
| % of  consumption hedged in a deregulated market    |       | 34                     | %          | 22         | %          |
| Average  price                                      |       | US$0.083/KWh           |       | $          | 0.054/KWh  |   |
| Fair  value as of December 31, 2008            |       | (3.4                   | )          | —     |       |
|                                                     |            |                        |            |            |            |  |

 

**North American Natural Gas Hedging**

 
| ** **                               | ** ** | **United States** | ** ** | **Canada** | ** ** |
|------------------------------------------|------------|------------------------|------------|------------|------------|
| Natural  gas consumption                 |       | 44                     | %          | 56         | %          |
| % of  consumption hedged                 |       | 45                     | %          | 59         | %          |
| Average  price                           |       | US$8.63/mmBtu          |       | $          | 7.17/GJ    |   |
| Fair  value as of December 31, 2008 |       | (8.3                   | )          | 0.7        |       |
|                                          |            |                        |            |            |            |  |

 

**(b)****          Cascades facessignificant competition and some of its competitors may have greater costadvantages or be able to achieve greater economies of scale or be able to betterwithstand periods of declining prices and adverse operating conditions, whichcould negatively affect the Company’s market share and profitability.**

 

The markets for theCompany’s products are highly competitive. In some of the markets in whichCascades competes, particularly in tissue and specialty products, it competeswith a small number of other producers. In some businesses, such as thecontainerboard industries, competition tends to be global. In others, such asthe tissue industry, competition tends to be regional. In the Company’spackaging products segment, it also faces competition from alternativepackaging materials, such as vinyl, plastic and styrofoam, which can lead toexcess capacity, decreased demand and pricing pressures. Competition in theCompany’s markets is primarily based upon price as well as customer service andthe quality, breadth and performance characteristics of its products. TheCompany’s ability to compete successfully depends upon a variety of factors,including:

 

·                  its ability tomaintain high plant efficiencies and operating rates, and lowermanufacturing costs

·                  theavailability, quality and cost of raw materials, particularly recycled andvirgin fibre, and labour, and

·                  the cost ofenergy.

 

Some of the Company’scompetitors may, at times, have lower fibre, energy and labour costs, and lessrestrictive environmental and governmental regulations to comply with thanCascades does. For example, fully integrated manufacturers, which are thosemanufacturers whose requirements for pulp or other fibre are met fully fromtheir internal sources, may have some competitive advantages over manufacturersthat are not fully integrated, such as Cascades, in periods of relatively highraw materials pricing, in that the former are able to ensure a steady source ofthese raw materials at costs that may be lower than prices in the prevailingmarket. In contrast, competitors that are less integrated than Cascades mayhave cost advantages in periods of relatively low pulp or fibre prices becausethey may be able to purchase pulp or fibre at prices lower than the costs theCompany incurs in the production process. Other competitors may be larger insize or scope than Cascades is, which may allow them to achieve greatereconomies of scale on a global basis or allow them to better withstand periodsof declining prices and adverse operating conditions. In addition, there hasbeen an increasing trend among the Company’s customers towards consolidation.With fewer customers in the market for the Company’s products, the strength ofits negotiating position with these customers could be weakened, which couldhave an adverse effect on its pricing, margins and profitability.

 

To mitigate competitionrisk, Cascades’ targets are to offer quality products that meet customers’needs at competitive prices and to give good customer service.

 

**(c)****          Because of the Company’sinternational operations, it faces political, social and exchange rate risksthat can negatively affect its business, operating results, profitability andfinancial condition.**

 

Cascades has customersand operations located outside Canada. In 2008, sales outside Canadarepresented approximately 61% of the Company’s consolidated sales, excludingdiscontinued operations. Of this portion, 74% were sales to the United States.In 2008, 26% of sales from Canadian operations were made to the United States.

 

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The Company’sinternational operations present it with a number of risks and challenges, including:

 

·                  the effectivemarketing of its products in other countries

·                  tariffs andother trade barriers, and

·                  differentregulatory schemes and political environments applicable to the Company’soperations, in areas such as environmental and health and safety compliance.

 

In addition, the Company’sfinancial statements are reported in Canadian dollars, while a portion of itssales is made in other currencies, primarily the U.S. dollar and the euro. Theappreciation of the Canadian dollar against the U.S. dollar over the last fewyears has adversely affected the Company’s reported operating results andfinancial condition. This had a direct impact on export prices and alsocontributed to reducing Canadian dollar prices in Canada, because several ofthe Company’s product lines are priced in U.S. dollars. However, a substantialportion of the Company’s debt is also denominated in currencies other than theCanadian dollar. The Company has $922 million of senior notes outstandingand also some borrowings under its credit facility that are denominated in U.S.dollar and in Euro.

 

The Company alsopurchases the majority of its recycled and virgin fibre needs in U.S. dollars,which mitigates the impact on the selling prices. Moreover, in some cases, thecurrency of the Company’s sales does not match the currency in which it incurscosts, which can negatively affect the Company’s profitability. Fluctuations inexchange rates can also affect the relative competitive position of aparticular facility, where the facility faces competition from non-localproducers, as well as the Company’s ability to successfully market its productsin export markets. As a result, the continuing appreciation of the Canadiandollar can affect the profitability of the Company’s facilities, which couldlead Cascades to shut down facilities either temporarily or permanently, all ofwhich could adversely affect its business or financial results.

 

To mitigate the risk ofcurrency rises from future commercial transactions, recognized assets andliabilities, and net investments in foreign operations, which are partiallycovered by purchases and debt, management has implemented a policy for managingforeign exchange risk against the relevant functional currency.

 

The Company uses variousforeign-exchange forward contracts and related currency option instruments toanticipate sales net of purchases, interest expenses and US denominated debtrepayment. Gains or losses from the derivative financial instruments designatedas hedges are recorded under “Accumulated Other Comprehensive Income” and arereclassified under earnings in accordance with the hedge items.

 

Additional information onour North American foreign exchange hedging program is set out below:

 

**North American Foreign Exchange Hedging**

 
| **Sell contracts and options**                   | ** ** | **2009** | ** ** | **2010** | ** ** | **2013** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total amount in  $US                                            |       | 114      |       | 33       |       | 547.5    |       |
| Estimated % of  sales, net of expenses from Canadian operations |       | 51       | %          | 15       | %          | n/a      |       |
| Estimated % of  US denominated debt                             |       | n/a      |       | n/a      |       | 59       | %          |
| Average rate  ($CAN)                                            |       | 1.1257   |       | 1.2525   |       | 1.154    |       |
| Fair value as at  December 31, 2008                        |       | (15.1    | )          | 0.1      |       | 10.1     |       |

 

**(d)****          The Company’s operationsare subject to comprehensive environmental regulation and involve expendituresthat may be material in relation to its operating cash flow.**

 

The Company is subject toenvironmental laws and regulations imposed by the various governments andregulatory authorities in all countries in which it operates. Theseenvironmental laws and regulations impose stringent standards on the Company,regarding, among other things:

 

·                  air emissions

·                  water discharges

·                  use and handlingof hazardous materials

·                  use, handlingand disposal of waste, and

·                  remediation ofenvironmental contamination.

 

The Company is alsosubject to the U.S. Federal Comprehensive Environmental Response, Compensationand Liability Act, (“CERCLA”), as well as to other applicable legislation inthe United States, Canada and Europe that holds companies accountable for theinvestigation and remediation of hazardous substances. The Company’s Europeansubsidiaries are also subject to the Kyoto protocol, in order to reduceworldwide CO2 emissions.Each unit has been allocated emission rights (“CO2 quota”). On a calendar-year basis,the Company must buy the necessary credits to cover its deficit, on the openmarket, if its emissions are higher than quota.

 

The Company’s failure tocomply with applicable environmental laws, regulations or permit requirementsmay result in civil or criminal fines, penalties or enforcement actions. Thesemay include regulatory or judicial orders enjoining or curtailing operations orrequiring corrective measures, the installation of pollution control equipmentor remedial actions, any of which could entail significant expenditures. It isdifficult to predict the future development of such laws and regulations, ortheir impact on future earnings and operations, but these laws and regulationsmay require capital expenditures to ensure compliance. In addition, amendmentsto, or more stringent implementation of, current laws and regulations governingthe Company’s operations could have a material adverse effect on its business,operating results or financial position. Furthermore, although Cascadesgenerally tries to plan for capital expenditures relating to environmental andhealth and safety compliance on an annual basis, actual capital expendituresmay exceed those estimates. In such an event, Cascades may be forced to curtailother capital expenditures or other activities. In addition, the enforcement ofexisting environmental laws and regulations has become increasingly strict. TheCompany may discover currently-unknown environmental problems or conditions inrelation to its past or present operations, or may face unforeseenenvironmental liabilities in the future. These conditions and liabilities may:

 

·                  require siteremediation or other costs to maintain compliance or correct violations ofenvironmental laws and regulations, or

·                  result ingovernmental or private claims for damage to person, property or theenvironment.

 

Either of these couldhave a material adverse effect on the Company’s financial condition oroperating results.

 

Cascades may be subjectto strict liability and, under specific circumstances, joint and several(solidary) liability for the investigation and remediation of soil, surface andgroundwater contamination, including contamination caused by other parties, atproperties that its owns 

 

26

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or operates, and atproperties where the Company or its predecessors have arranged for the disposalof regulated materials. As a result, the Company is involved from time to timein administrative and judicial proceedings and inquiries relating toenvironmental matters. The Company may become involved in additionalproceedings in the future, the total amount of future costs and otherenvironmental liabilities of which could be material.

 

To date, the Company isin compliance, in all material respects, with all applicable environmentallegislation or regulations. However, we expect to incur ongoing capital andoperating expenses in order to achieve and maintain compliance with applicableenvironmental requirements.

 

**(e)****          Cascades may be subjectto losses that might not be covered in whole or in part by its insurancecoverage.**

 

Cascades carries comprehensiveliability, fire and extended coverage insurance on most of its facilities, withpolicy specifications and insured limits customarily carried in its industryfor similar properties. The cost of the Company’s insurance policies hasincreased over the past few years. In addition, some types of losses, suchas losses resulting from wars, acts of terrorism or natural disasters, aregenerally not insured because they are either uninsurable or not economicallypractical. Moreover, insurers have recently become more reluctant to insureagainst these types of events. Should an uninsured loss or a loss in excess ofinsured limits occur, Cascades could lose capital invested in that property, aswell as the anticipated future revenues derived from the manufacturingactivities conducted at that property, while remaining obligated for anymortgage indebtedness or other financial obligations related to the property.Any such loss could adversely affect its business, operating results orfinancial condition.

 

To mitigate the risksubject to insurance coverage, the Company reviews its strategy annually withthe Board of Directors and is seeking different alternatives to achieve moreefficient forms of insurance coverage, at the lowest costs possible.

 

**(f)****            Labour disputes couldhave a material adverse effect on the Company’s cost structure and ability torun its mills and plants.**

 

As of December 2008,the Company had approximately 12,500 employees, of whom approximately11,800 were employees of its Canadian and United States operations.Approximately 46.5% of the Company’s employees are unionized under49 separate collective bargaining agreements. In addition, in Europe, someof the Company’s operations are subject to national industry collectivebargaining agreements that are renewed on an annual basis. The Company’sinability to negotiate acceptable contracts with these unions upon expirationof an existing contract could result in strikes or work stoppages by theaffected workers and increased operating costs as a result of higher wages orbenefits paid to union members. If the unionized workers were to engage in astrike or another form of work stoppage, Cascades could experience asignificant disruption in operations or higher labour costs, which could have amaterial adverse effect on its business, financial condition, operating resultsand cash flow. Of the Company’s 49 collective bargaining agreements, eightwill expire within the year 2009 and eight more in 2010. The Companygenerally begins the negotiation process several months before agreements aredue to expire and is currently in the process of negotiating with the unionswhere the agreements have expired or will soon expire. However, Cascades maynot be successful in negotiating new agreements on satisfactory terms, if atall.

 

**(g)****         Cascades may makeinvestments in entities that it does not control and may not receive dividendsor returns from those investments in a timely fashion or at all.**

 

Cascades has establishedjoint ventures and made minority interest investments to increase its verticalintegration, enhance customer service and increase efficiencies in itsmarketing and distribution in the United States and other markets. The Company’sprincipal joint ventures and minority investments include:

 

·                  three 50%-ownedjoint ventures with Sonoco Products Company, two of which are in Canada and onein the United States, that produce specialty paper packaging products such asheaders, rolls and wrappers

·                  a 73%-ownedinterest in Metro Waste, a Canadian operator of wastepaper recovery andrecycling operations

·                  a 34% interestin Boralex Inc., a public Canadian corporation and an independent producer ofelectric, thermal and wind power with operations in the Province of Québec, thenortheastern United States and France, and

·                  a 33.17%-ownedjoint venture interest in RDM, a European manufacturer of recycled boxboard.

 

Currently Cascades doesnot have effective control of these entities. The Company’s inability tocontrol entities in which it invests may affect its ability to receivedistributions from those entities or to fully implement its business plan. Theincurrence of debt or entrance into other agreements by an entity not under theCompany’s control may result in restrictions or prohibitions on that entity’sability to pay distributions to the Company. Even where these entities are notrestricted by contract or by law from paying dividends or making distributionsto Cascades, the Company may not be able to influence the making or timing ofthese dividends or distributions. In addition, if any of the other investors ina non-controlled entity fails to observe its commitments, which entity may notbe able to operate according to its business plan or Cascades may be requiredto increase its level of commitment. If any of these events were to transpire,the Company’s business, operating results, financial condition and ability tomake payments on the notes could be adversely affected.

 

In addition, the Companyhas entered into various shareholder agreements relating to its joint venturesand equity investments. Some of these agreements contain “shotgun” provisions,which provide that if one shareholder offers to buy all the shares owned by theother parties to the agreement, the other parties must either accept the offeror purchase all the shares owned by the offering shareholder at the same priceand conditions. Some of the agreements also provide that in the event that ashareholder is subject to bankruptcy proceedings or otherwise defaults on anyindebtedness, the non-defaulting parties to that agreement are entitled toinvoke the shotgun provision or sell their shares to a third party. The Company’sability to purchase the other shareholders’ interests in these joint venturesif they were to exercise these shotgun provisions could be limited by thecovenants in the Company’s credit facility and the indenture. In addition,Cascades may not have sufficient funds to accept the offer or the ability toraise adequate financing should the need arise, which could result in theCompany having to sell its interests in these entities or otherwise alter itsbusiness plan.

 

**(h) Acquisitions have beenand are expected to continue to be a substantial part of the Company’s growthstrategy, which could expose the Company to difficulties in integrating theacquired operation, diversion of management time and resources, and unforeseenliabilities, among other business risks.**

 

Acquisitions have been asignificant part of the Company’s growth strategy. Cascades expects to continueto selectively seek strategic acquisitions in the future. The Company’s abilityto consummate and to integrate effectively any future acquisitions on termsthat are favorable to it may be limited by the number of attractive acquisitiontargets, internal demands on its resources and, to the extent necessary, itsability to obtain financing on satisfactory terms, if at all. Acquisitions mayexpose the Company to additional risks, including:

 

·                  difficulty inintegrating and managing newly-acquired operations, and in improving theiroperating efficiency

·                  difficulty inmaintaining uniform standards, controls, procedures and policies across all ofthe Company’s businesses

·                  entry intomarkets in which Cascades has little or no direct prior experience

·                  the Company’sability to retain key employees of the acquired company

 

27

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·                  disruptions tothe Company’s ongoing business and

·                  diversion ofmanagement time and resources.

 

In addition, futureacquisitions could result in Cascades incurring additional debt to finance saidacquisition, or possibly assuming additional debt as part of it, as well ascosts, contingent liabilities and amortization expenses. The Company may alsoincur costs and divert management attention for potential acquisitions whichare never consummated. For acquisitions Cascades does consummate, expectedsynergies may not materialize. The Company’s failure to effectively address anyof these issues could adversely affect its operating results, financialcondition and ability to service debt, including its outstanding senior notes.

 

Although Cascadesgenerally performs a due diligence investigation of the businesses or assetsthat it acquires, and anticipates continuing to do so for future acquisitions,the acquired business or assets may have liabilities that it fails or is unableto uncover during its due diligence investigation and for which the Company, asa successor owner, may be responsible. When feasible, the Company seeks tominimize the impact of these types of potential liabilities by obtainingindemnities and warranties from the seller, which may in some instances besupported by deferring payment of a portion of the purchase price. However,these indemnities and warranties, if obtained, may not fully cover theliabilities because of their limited scope, amount or duration, the financialresources of the indemnitor or warrantor, or other reasons.

 

**(i)****            The Company undertakesimpairment tests, which could result in a write-down of the value of assetsand, as a result, could have a material adverse effect on the Company.**

 

Canadian generallyaccepted accounting principles require that Cascades regularly undertakeimpairment tests of long-lived assets and goodwill, to determine whether awrite-down of such assets is required. A write-down of asset value as a resultof impairment tests would result in a non-cash charge that reduces the Company’sreported earnings. Further, a reduction of the Company’s asset value could havea material adverse effect on the Company’s compliance with total debt tocapitalization tests under its current credit facilities and, as a result,limit its ability to access further debt capital.

 

**(j)****            Certain Cascadesinsiders collectively own a substantial percentage of the Company’s commonshares.**

 

Messrs. Bernard,Laurent and Alain Lemaire (“the Lemaires”) collectively own 30.4% of the commonshares and there may be situations in which their interests and the interestsof other holders of common shares will not be aligned. Because the Company’sremaining common shares are widely held, the Lemaires may be effectively ableto:

 

·                  elect all of theCompany’s directors and, as a result, control matters requiring board approval

·                  control matterssubmitted to a shareholder vote, including mergers, acquisitions andconsolidations with third parties, and the sale of all or substantially all ofthe Company’s assets and

·                  otherwisecontrol or influence the Company’s business direction and policies.

 

In addition, the Lemairesmay have interests in pursuing acquisitions, divestitures or other transactionsthat, in their judgment, could enhance the value of their equity investment,even though the transactions might involve increased risk to the holders of thecommon shares.

 

**(k)****        If Cascades is notsuccessful in retaining or replacing its key personnel, particularly if theLemaires do not stay active in the Company’s business, its business, financialcondition or operating results could be adversely affected.**

 

The Lemaires are key tothe Company’s management and direction. Although Cascades believes that theLemaires will remain active in the business and that Cascades will continue tobe able to attract and retain other talented personnel, and replace keypersonnel should the need arise, competition in recruiting replacementpersonnel could be significant. Cascades does not carry key man insurance onthe Lemaires or any other members of its senior management.

 

**(l)****            Risks relating to theCompany’s indebtedness and liquidity**

 

                        ***The significant amount of the Company’s debt couldadversely affect its financial health and prevent it from fulfilling theCompany’s obligations under its outstanding indebtedness.*** TheCompany has a significant amount of debt. As of December 31, 2008, it had$1.8 billion in outstanding debt, including capital-lease obligations andits proportionate share of the debt of its joint ventures. The Company also hadapproximately $307 million available under its revolving credit facilityand those of its joint ventures. On the same basis, its consolidated ratio oftotal debt to capitalization as of December 31, 2008 was 59.1%. TheCompany’s actual interest expense for 2008 was $102 million. Cascadesalso have significant obligations under operating leases, as described in itsaudited consolidated financial statements that are incorporated by referenceherein.

 

The Company hasoutstanding senior notes rated by Moody’s Investor Service (“Moody’s”) andStandard & Poor’s (“S&P”).

 

The following tablereflects the Company’s secured debt rating/corporate rating/unsecured debtrating as at the date on which this MD&A was approved by the Board ofDirectors, and the evolution of these ratings compared to past years:

 
| **Credit Rating  (outlook)** | ** ** | **Moody’s**            | ** ** | **Standard & Poor’s** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|------------------------------------------|------------|
| 2004                              |       | Ba1/Ba2/Ba3 (stable)        |       | BBB-/BB+/BB+ (negative)                  |       |
| 2005/2006                         |       | Ba1/Ba2/Ba3 (stable)        |       | BB+/BB/BB- (negative)                    |       |
| 2007                              |       | Baa3/Ba2/Ba3 (stable)       |       | BBB-/BB/BB- (stable)                     |       |
| 2008                              | ** ** | **Baa3/Ba2/Ba3 (negative)** | ** ** | **BB+/BB-/B+ (negative)**                | ** ** |

 

The Company has$850 million credit facilities, consisting of a $750 million securedrevolving credit facility maturing in December 2011 and a$100 million secured term facility maturing in October 2012.

 

These facilities arearranged with a core group of highly rated international banks. The Company maydecide to enter into certain derivative instruments, to reduce interest ratesand foreign exchange exposure.

 

The Company’s leveragecould have important consequences to holders of its common shares. For example,it could:

 

·                  make it moredifficult for the Company to satisfy its obligations with respect to itsindebtedness

·                  increase theCompany’s vulnerability to competitive pressures and to general adverseeconomic or market conditions and require it to dedicate a substantial portionof its cash flow from operations to servicing debt, reducing the availabilityof its cash flow to fund working capital, capital expenditures, acquisitionsand other general corporate purposes

·                  limit itsflexibility in planning for, or reacting to, changes in its business andindustry, and

 

28

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·                  limit itsability to obtain additional sources of financing.

 

Cascades may incuradditional debt in the future, which would intensify the risks it now faces asa result of its leverage as described above.

 

***TheCompany’s operations are substantially restricted by the terms of its debt,which could limit its ability to plan for or react to market conditions, or tomeet its capital needs.***

 

The Company’s creditfacilities and the indenture governing its senior notes include a number ofsignificant restrictive covenants. These covenants restrict, among otherthings, the Company’s ability to:

 

·                  borrow money

·                  pay dividends onstock or redeem stock or subordinated debt

·                  make investments

·                  sell capitalstock in subsidiaries

·                  guarantee otherindebtedness

·                  enter intoagreements that restrict dividends or other distributions from restricted subsidiaries

·                  enter intotransactions with affiliates

·                  create or assumeliens

·                  enter into saleand leaseback transactions

·                  engage inmergers or consolidations, and

·                  enter into asale of all or substantially all of our assets.

 

These covenants couldlimit the Company’s ability to plan for or react to market conditions, or tomeet its capital needs. The Company’s current credit facilities contain other,more restrictive covenants, including financial covenants that require it toachieve certain financial and operating results, and maintain compliance withspecified financial ratios. The Company’s ability to comply with thesecovenants and requirements may be affected by events beyond its control, and itmay have to curtail some of its operations and growth plans to maintaincompliance.

 

The restrictive covenantscontained in the Company’s senior note indenture along with the Company’scredit facilities, do not apply to its joint ventures. However, for financialreporting purposes, Cascades consolidates these entities’ results and financialposition based on its proportionate ownership interest.

 

***TheCompany’s failure to comply with the covenants contained in its creditfacilities and its senior note indenture, as a result of events beyond itscontrol or due to other factors, could result in an event of default that couldcause accelerated repayment of the debt.***

 

If Cascades is not ableto comply with the covenants and other requirements contained in theindentures, its credit facility or its other debt instruments, an event ofdefault under the relevant debt instrument could occur. If an event of defaultdoes occur, it could trigger a default under its other debt instruments,Cascades could be prohibited from accessing additional borrowings and theholders of the defaulted debt could declare amounts outstanding with respect tothat debt, which would then be immediately due and payable. The Company’sassets and cash flow may not be sufficient to fully repay borrowings under itsoutstanding debt instruments. In addition, the Company may not be able torefinance or restructure payments on the applicable debt. Even if the Companywere able to secure additional financing, it may not be available on favourableterms. A significant or prolonged downtime in general business and difficulteconomic conditions may affect the Company’s ability to comply with itscovenants and could require to take actions to reduce its debt or to act in amanner contrary to its current business objectives.

 

**(m)****      Cascades is a holdingcompany and depends on its subsidiaries to generate sufficient cash flow tomeet its debt service obligations.**

 

Cascades is structured asa holding company and its only significant assets are the capital stock orother equity interests in its subsidiaries, joint ventures and minorityinvestments. As a holding company, Cascades conducts substantially all of itsbusiness through these entities. Consequently, the Company’s cash flow andability to service its debt obligations are dependent upon the earnings of itssubsidiaries, joint ventures and minority investments, and the distribution ofthose earnings to Cascades, or upon loans, advances or other payments made bythese entities to Cascades. The ability of these entities to pay dividends ormake other payments or advances to Cascades will depend upon their operatingresults and will be subject to applicable laws and contractual restrictionscontained in the instruments governing their debt. In the case of the Company’sjoint ventures and minority investments, Cascades may not exercise sufficientcontrol to cause distributions to itself. Although its credit facility and theindentures respectively limit the ability of its restricted subsidiaries toenter into consensual restrictions on their ability to pay dividends and makeother payments to the Company, these limitations do not apply to its jointventures or minority investments. The limitations are also subject to importantexceptions and qualifications. The ability of the Company’s subsidiaries togenerate cash flow from operations that is sufficient to allow the Company tomake scheduled payments on its debt obligations will depend on their futurefinancial performance, which will be affected by a range of economic,competitive and business factors, many of which are outside of the Company’scontrol. If the Company’s subsidiaries do not generate sufficient cash flowfrom operations to satisfy the Company’s debt obligations, Cascades may have toundertake alternative financing plans, such as refinancing or restructuring itsdebt, selling assets, reducing or delaying capital investments or seeking toraise additional capital. Refinancing may not be possible, and any assets maynot be able to be sold, or, if they are sold, Cascades may not realizesufficient amounts from those sales. Additional financing may not be availableon acceptable terms, if at all, or the Company may be prohibited from incurringit, if available, under the terms of its various debt instruments in effect atthe time. The Company’s inability to generate sufficient cash flow to satisfyits debt obligations, or to refinance its obligations on commerciallyreasonable terms, would have an adverse effect on its business, financialcondition and operating results. The earnings of the Company’s operating subsidiariesand the amount that they are able to distribute to the Company as dividends orotherwise may not be adequate for the Company to service its debt obligations.

 

**(n)****         Risks related to thecommon shares**

 

***Themarket price of the common shares may fluctuate and purchasers may not be ableto resell the common shares at or above the offering price.***

 

The market price of thecommon shares may fluctuate due to a variety of factors relative to the Company’sbusiness, including announcements of new developments, fluctuations in theCompany’s operating results, sales of the Common Shares in the marketplace,failure to meet analysts’ expectations, general conditions in theContainerboard, Boxboard and Tissue sectors, or the worldwide economy. Inrecent years, the common shares, the stock of other companies operating in thesame sectors and the stock market in general have experienced significant pricefluctuations, which have been unrelated to the operating performance of theaffected companies. There can 

 

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be no assurance that themarket price of the common shares will not continue to experience significantfluctuations in the future, including fluctuations that are unrelated to theCompany’s performance.

 

**(o)****          Cash-flow and fair-valueinterest rate risks**

 

As the Company has nosignificant interest-bearing assets, its earnings and operating cash flows aresubstantially independent of changes in market interest rates.

 

The Company’s interestrate risk arises from long-term borrowings. Borrowings issued at variable ratesexpose the Company to a cash-flow interest rate risk. Borrowings issued at afixed rate expose the Company to a fair-value interest rate risk.

 

**(p)****          Credit risk**

 

Credit risk arises fromcash and cash equivalents, derivative financial instruments and deposits withbanks and financial institutions. The Company reduces this risk by dealing withcreditworthy financial institutions.

 

The Company is exposed tocredit risk on accounts receivable from its customers. In order to reduce thisrisk, the Company’s credit policies include the analysis of a customer’sfinancial position and a regular review of its credit limits. The Company alsobelieves that no particular concentration of credit risks exists, due to the geographicdiversity of its customers and the procedures in place for managing commercialrisks. Derivative financial instruments include an element of credit risk,should the counterparty be unable to meet its obligations.

 

Supplemental Information on Non-GAAP Measures

 

None of the followingitems is a measure of performance under Canadian GAAP: operating income beforedepreciation and amortization (OIBD), operating income, cash flow fromoperations and cash flow from operations per share. The Company includes OIBD,operating income, cash flow from operations and cash flow from operations pershare because these elements are measures used by management to assess theoperating and financial performance of the Company’s operating segments.Moreover, the Company believes that these items provide additional measuresoften used by investors to assess a company’s operating performance and itsability to meet debt service requirements. However, these measures do notrepresent, and should not be used as, a substitute for net earnings or cashflows from operating activities as determined in accordance with Canadian GAAP,nor are they necessarily an indication of whether or not cash flow will besufficient to fund our cash requirements. In addition, our definition of OIBD,operating income, cash flow from operations (adjusted) and cash flow fromoperations (adjusted) per share may differ from those of other companies. “Cashflow from operations (adjusted)” is defined as cash flow from operatingactivities, as determined in accordance with Canadian GAAP and excluding thechange in working capital components. Cash flow from operations (adjusted) pershare is determined by dividing cash flow from operations by the weightedaverage number of common shares for the period in question.

 

Operating income beforedepreciation and amortization excluding specific items, operating incomeexcluding specific items, net earnings excluding specific items, net earningsper common share excluding specific items, cash flow from operations (adjusted)excluding specific items and cash flow from operations (adjusted) per shareexcluding specific items are non-GAAP measures. The Company believes that it isuseful for investors to be aware of specific items that adversely or positivelyaffected its GAAP measures, and that the above-mentioned non-GAAP measuresprovide investors with a measure of performance that can be used to compare itsresults between periods without regard to these specific items. The Company’smeasures excluding specific items have no standardized meaning prescribed byGAAP, nor are they necessarily comparable to similar measures presented byother companies, and therefore should not be considered in isolation.

 

Specific items includecharges for impairment of assets, charges for facility or machine closures,debt restructuring charges, gain or loss on sale of business units, unrealizedgain or loss on financial instruments that do not qualify for hedge accounting,foreign exchange gain or loss on long-term debt and other significant items ofan unusual or a non-recurring nature.

 

Net earnings (loss), aperformance measure defined by Canadian GAAP, is reconciled below withoperating income, operating income excluding specific items and operatingincome before depreciation and amortization excluding specific items:

 
| ** **                                                                               | ** ** | **For the years ended December 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **(in millions of Canadian dollars)**                                | ** ** | **2008**                                                     | ** ** | **2007** | ** ** |
| **Net  earnings (loss)**                                                                 | ** ** | **(55**                                                      | **)**      | 95 |   |
| Net (earnings)  loss from discontinued operations                                        | ** ** | **(18**                                                      | **)**      | 19 |   |
| Non-controlling  interest                                                                | ** ** | **2**                                                        | ** ** | 3 |   |
| Share of results  of significantly influenced companies and dilution gain                | ** ** | **(8**                                                       | **)**      | (27 | ) |
| Provision for  recovery of income taxes                                                  | ** ** | **(32**                                                      | **)**      | 11 |   |
| Foreign exchange  loss (gain) on long-term debt                                          | ** ** | **24**                                                       | ** ** | (59 | ) |
| Interest expense                                                                         | ** ** | **102**                                                      | ** ** | 102 |   |
| **Operating  income**                                                                    | ** ** | **15**                                                       | ** ** | 144 |   |
| Specific items:                                                                          |       |                                                         | ** ** |   |   |
| Inventory  adjustment resulting from business acquisition                                | ** ** | **2**                                                        | ** ** | 6 |   |
| Loss (gain) on  disposals                                                                | ** ** | **5**                                                        | ** ** | (17 | ) |
| Impairment loss                                                                          | ** ** | **16**                                                       | ** ** | 3 |   |
| Closure and  restructuring costs                                                         | ** ** | **27**                                                       | ** ** | 6 |   |
| Unrealized loss  on financial instruments                                                | ** ** | **27**                                                       | ** ** | — |   |
| ** **                                                                               |       | **77**                                                       | ** ** | (2 | ) |
| **Operating  income—excluding specific items**                                      | ** ** | **92**                                                       | ** ** | 142 |   |
| Depreciation and  amortization                                                           | ** ** | **214**                                                      | ** ** | 208 |   |
| **Operating  income before depreciation and amortization—excluding specific items** | ** ** | **306**                                                      | ** ** | 350 |   |

 

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The following tablereconciles net earnings (loss) and net earnings (loss) per share with netearnings (loss) excluding specific items and net earnings (loss) per shareexcluding specific items:

 
| ** **                                                                                             | ** ** | **Net earnings (loss)**                            | ** ** | **Net earnings (loss) per share (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **For the years ended December 31** | ** ** | **For the years ended December 31**   | ** ** |
| **(in millions of Canadian dollars, except amount per share)** | ** ** | **2008**                                                     | ** ** | **2007**                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **As per  GAAP**                                                                                       | ** ** | **(55**                                                      | **)**      | 95                                                             |       | **$** | **(0.56** | **)** | $ | 0.95 |   |
| Specific items:                                                                                        |       |                                                         | ** ** |                                                           |       |   | ** ** |   |   |
| Inventory  adjustment resulting from business acquisition                                              | ** ** | **2**                                                        | ** ** | 6                                                              |       | **$** | **0.01** | ** ** | $ | 0.04 |   |
| Loss (gain) on  disposals                                                                              | ** ** | **5**                                                        | ** ** | (17                                                            | )          | **$** | **0.05** | ** ** | $ | (0.09 | ) |
| Impairment loss                                                                                        | ** ** | **16**                                                       | ** ** | 3                                                              |       | **$** | **0.13** | ** ** | $ | 0.02 |   |
| Closure and  restructuring cost                                                                        | ** ** | **27**                                                       | ** ** | 6                                                              |       | **$** | **0.19** | ** ** | $ | 0.04 |   |
| Unrealized loss  on financial instruments                                                              | ** ** | **27**                                                       | ** ** | —                                                         |       | **$** | **0.19** | ** ** | — |   |
| Foreign exchange  loss (gain) on long-term debt                                                        | ** ** | **24**                                                       | ** ** | (59                                                            | )          | **$** | **0.21** | ** ** | $ | (0.49 | ) |
| Share of results  of significantly influenced companies and dilution gain                              | ** ** | **—**                                                   | ** ** | (15                                                            | )          | **—** | ** ** | $ | (0.15 | ) |
| Loss (gain)  included in discontinued operations                                                       | ** ** | **(23**                                                      | **)**      | 9                                                              |       | **$** | **(0.19** | **)** | $ | 0.06 |   |
| Ajustment of  statutory tax rate                                                                       | ** ** | **—**                                                   | ** ** | (16                                                            | )          | **—** | ** ** | $ | (0.16 | ) |
| Tax effect on  specific items                                                                          | ** ** | **(20**                                                      | **)**      | 10                                                             |       |   | ** ** |   |   |
| ** **                                                                                             |       | **58**                                                       | ** ** | (73                                                            | )          | **$** | **0.59** | ** ** | $ | (0.73 | ) |
| **Excluding  specific items**                                                                          | ** ** | **3**                                                        | ** ** | 22                                                             |       | **$** | **0.03** | ** ** | $ | 0.22 |   |

 

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| (1) | Specific amounts per share are calculated on an  after-tax basis. |
|-----|-------------------------------------------------------------------|

 

The following tablereconciles cash flow from operations (adjusted) and cash flow from operations(adjusted) per share with cash flow from operations (adjusted) excludingspecific items and cash flow from operations (adjusted) per share excludingspecific items:

 
| ** **                                                                                | ** ** | **Cash flow from operations  (adjusted)**     | ** ** | **Cash flow from operations  (ajusted) per share** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **For the years ended December 31** | ** ** | **For the years ended December 31**                | ** ** |
| **(in millions of dollars, except amounts per share)** | ** ** | **2008**                                                     | ** ** | **2007**                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Cash  flow provided by operating activities**                                           | ** ** | **124**                                                      |       | 89                                                                          |       |   |   |   |   |
| Changes in  non-cash working capital components                                           | ** ** | **31**                                                       |       | 89                                                                          |       |   |   |   |   |
| **Cash  flow (adjusted) from operations**                                                 | ** ** | **155**                                                      |       | 178                                                                         | ** ** | **$** | **1.57** |   | $ | 1.79 |   |
| Specific items:                                                                           |       |                                                         |       |                                                                        |       |   |   |   |   |
| Inventory  adjustment resulting from business acquisition                                 | ** ** | **2**                                                        |       | 6                                                                           | ** ** | **$** | **0.02** |   | $ | 0.06 |   |
| Loss (gain) on  disposals and other                                                       | ** ** | **—**                                                   |       | 12                                                                          | ** ** | **—** |   | $ | 0.12 |   |
| Closure and  restructuring costs, net of current income tax                               | ** ** | **26**                                                       |       | 6                                                                           | ** ** | **$** | **0.26** |   | $ | 0.06 |   |
| **Excluding  specific items**                                                             | ** ** | **183**                                                      |       | 202                                                                         | ** ** | **$** | **1.85** |   | $ | 2.03 |   |

 

The following tablereconciles cash flow provided by (used for) operating activities with operatingincome and operating income before depreciation and amortization:

 
| ** **                                                                                                             | ** ** | **For the years ended December 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **(in millions of dollars)**                                                                            | ** ** | **2008**                                                     | ** ** | **2007** | ** ** |
| Cash flow  provided by operating activities                                                                            | ** ** | **124**                                                      | ** ** | 89 |   |
| Changes in  non-cash working capital components                                                                        | ** ** | **31**                                                       | ** ** | 89 |   |
| Depreciation and  amortization                                                                                         | ** ** | **(214**                                                     | **)**      | (208 | ) |
| Current income  taxes                                                                                                  | ** ** | **20**                                                       | ** ** | 33 |   |
| Interest expense  (includes interest on long-term debt, other interest less interest income and  capitalized interest) | ** ** | **102**                                                      | ** ** | 102 |   |
| Gain (loss) on  disposals and other                                                                                    | ** ** | **(5**                                                       | **)**      | 29 |   |
| Impairment loss                                                                                                        | ** ** | **(16**                                                      | **)**      | (3 | ) |
| Unrealized loss  on financial instruments                                                                              | ** ** | **(27**                                                      | **)**      | — |   |
| Early retirement  of natural gas contracts                                                                             | ** ** | **(11**                                                      | **)**      | — |   |
| Other non-cash  adjustments                                                                                            | ** ** | **11**                                                       | ** ** | 13 |   |
| Operating income  from continuing operations                                                                           | ** ** | **15**                                                       | ** ** | 144 |   |
| Depreciation and  amortization                                                                                         | ** ** | **214**                                                      | ** ** | 208 |   |
| Operating income  before depreciation and amortization                                                                 | ** ** | **229**                                                      | ** ** | 352 |   |

 

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