**Exhibit 13.2**

 

Management’sReport to the Shareholders of Cascades Inc.

 

March 16, 2009

 

The accompanyingconsolidated financial statements are the responsibility of the management ofCascades Inc., and have been reviewed by the Audit Committee and approved bythe Board of Directors.

 

The consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in Canada and include certain estimates thatreflect management’s best judgment.

 

Management is alsoresponsible for all other information included in this Annual Report and forensuring that this information is consistent with the Company’s consolidatedfinancial statements and business activities.

 

The Management of theCompany is responsible for the design, establishment and maintenance ofappropriate internal controls and procedures for financial reporting, to ensurethat financial statements for external purposes are fairly presented inconformity with generally accepted accounting principles. Such internal controlssystems are designed to provide reasonable assurance on the reliability of thefinancial information and the safeguarding of assets.

 

External and internalauditors have free and independent access to the Audit Committee, which iscomprised of outside independent directors. The Audit Committee, which meetsregularly throughout the year with members of management and the external andinternal auditors, reviews the consolidated financial statements and recommendstheir approval to the Board of Directors.

 

The consolidatedfinancial statements have been audited by PricewaterhouseCoopers LLP, whosereport is provided below.

 

 
| /s/ Alain Lemaire                      |   | /s/ Christian Dubé                     |
|----------------------------------------|--------|---------------------------------------------|
| Alain Lemaire                          |   | Christian Dubé                         |
| President and Chief  Executive Officer |   | Vice-President and Chief  Financial Officer |
| Kingsey Falls, Canada                  |   |                                        |

 

 

Auditors’Report to the Shareholders of Cascades Inc.

 

March 16, 2009

 

We have audited theconsolidated balance sheets of **Cascades Inc.**(the “Company”) as at December 31, 2008 and 2007 and the consolidatedstatements of earnings (loss), shareholders’ equity and cash flows for each ofthe years in the three-year period ended December 31, 2008.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our auditsin accordance with Canadian generally accepted auditing standards. Thosestandards require that we plan and perform an audit to obtain reasonableassurance whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.

 

In our opinion, theseconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as at December 31, 2008 and 2007and the results of its operations and its cash flows for each of the years inthe three-year period ended December 31, 2008 in accordancewith Canadian generally accepted accounting principles.

 

 
| /s/  PricewatershouseCoopers LLP1 |   |   |
|-----------------------------------|--------|--------|
| Montréal, Canada             |   |   |

 

1. Chartered accountant auditor permit No. 19653

 

**CASCADES– ANNUAL REPORT 2008**

 

1

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Consolidated Balance Sheets

 
| **As at December 31, 2008 and 2007  (in millions of Canadian dollars)** | ** ** | **Note**   |   | **2008**  | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------|--------|-----------|------------|----------|------------|
| **Assets**                                                                                                                |       |       |   |      |       |     |       |
| **Current  assets**                                                                                                       |       |       |   |      |       |     |       |
| Cash and cash  equivalents                                                                                                | ** ** | ** ** |   | **11**    |       | 25       |       |
| Accounts receivable                                                                                                       | ** ** | ** ** |   | **657**   |       | 624      |       |
| Inventories                                                                                                               |       | 6          |   | **580**   |       | 555      |       |
| ** **                                                                                                                |       | ** ** |   | **1,248** |       | 1,204    |       |
| **Property,  plant and equipment**                                                                                        |       | 7          |   | **2,037** |       | 1,886    |       |
| **Intangible  assets**                                                                                                    |       | 8(a        | )      | **142**   |       | 130      |       |
| **Other  assets**                                                                                                         |       | 8(a        | )      | **283**   |       | 237      |       |
| **Goodwill**                                                                                                              |       | 8(b        | )      | **321**   |       | 312      |       |
| ** **                                                                                                                |       | ** ** |   | **4,031** |       | 3,769    |       |
| **Liabilities  and Shareholders’ Equity**                                                                            |       |       |   |      |       |     |       |
| **Current  liabilities**                                                                                                  |       |       |   |      |       |     |       |
| Bank loans and  advances                                                                                                  | ** ** | ** ** |   | **104**   |       | 47       |       |
| Accounts payable  and accrued liabilities                                                                                 | ** ** | ** ** |   | **586**   |       | 572      |       |
| Current portion  of long-term debt                                                                                        |       | 9          |   | **36**    |       | 4        |       |
| ** **                                                                                                                |       | ** ** |   | **726**   |       | 623      |       |
| **Long-term  debt**                                                                                                       |       | 9          |   | **1,672** |       | 1,570    |       |
| **Other  liabilities**                                                                                                    |       | 10         |   | **377**   |       | 377      |       |
| ** **                                                                                                                |       | ** ** |   | **2,775** |       | 2,570    |       |
| **Commitment  and Contingencies**                                                                                         |       | 17         |   |      |       |     |       |
| **Shareholders’  equity**                                                                                            |       |       |   |      |       |     |       |
| Capital stock                                                                                                             |       | 11         |   | **515**   |       | 517      |       |
| Retained  earnings                                                                                                        | ** ** | ** ** |   | **656**   |       | 725      |       |
| Accumulated  other comprehensive income (loss)                                                                            |       | 18         |   | **85**    |       | (43      | )          |
| ** **                                                                                                                |       | ** ** |   | **1,256** |       | 1,199    |       |
| ** **                                                                                                                |       | ** ** |   | **4,031** |       | 3,769    |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

Approved by the Board ofDirectors

 

 

| /s/ Laurent Lemaire |   | /s/ Robert Chevrier |
|---------------------|--------|---------------------|
|                |   |                |
| Laurent Lemaire     |   | Robert Chevrier     |
| Director            |   | Director            |

 

2

----

 

Consolidated Statements ofShareholders’ Equity

 
| For each of the years in the three-year period ended  December 31, 2008  (in millions of Canadian dollars)     | ** ** | ** ** | ** ** | ** **             | ** ** | ** **                | ** ** | 2008                                                         | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|---------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | ** ** | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                                                   | ** ** | ** ** | ** ** |
| ** **                                                                                                          | ** ** | **Note**   | ** ** | **Capital stock** | ** ** | **Retained  Earnings(4)** | ** ** | **Accumulated  other  comprehensive  income (loss)(4)** | ** ** | **Shareholders’  equity** | ** ** |
| **Balance-Beginning  of year**                                                                                      |       |       | ** ** | **517**                | ** ** | **725**                   | ** ** | **(43**                                                      | **)**      | **1,199** | ** ** |
| Cumulative  impact of accounting changes                                                                            |       | 2(a        | )          | **—**             | ** ** | **3**                     | ** ** | **—**                                                   | ** ** | **3** | ** ** |
| Restated balance-Beginning  of year                                                                                 |       |       |       | **517**                | ** ** | **728**                   | ** ** | **(43**                                                      | **)**      | **1,202** | ** ** |
| Comprehensive  income:                                                                                              |       |       |       | ** **             | ** ** | ** **                | ** ** | ** **                                                   | ** ** | ** ** | ** ** |
| Net loss for the  year                                                                                              |       |       |       | **—**             | ** ** | **(55**                   | **)**      | **—**                                                   | ** ** | **(55** | **)** |
| Change in  foreign currency translation of self-sustaining foreign subsidiaries, net of  related hedging activities |       | 19(b       | )          | **—**             | ** ** | **—**                | ** ** | **190**                                                      | ** ** | **190** | ** ** |
| Change in fair  value of foreign exchange forward contracts designated as cash flow hedges(1)                       |       |       |       | **—**             | ** ** | **—**                | ** ** | **(61**                                                      | **)**      | **(61** | **)** |
| Change in fair  value of interest rate swap agreements designated as cash flow hedges(2)                            |       |       |       | **—**             | ** ** | **—**                | ** ** | **(2**                                                       | **)**      | **(2** | **)** |
| Change in fair  value of commodity derivative financial instruments designated as cash flow  hedges(3)              |       |       |       | **—**             | ** ** | **—**                | ** ** | **1**                                                        | ** ** | **1** | ** ** |
| Comprehensive  income for the year                                                                                  |       |       |       | ** **             | ** ** | ** **                | ** ** | ** **                                                   | ** ** | **73** | ** ** |
| Dividends                                                                                                           |       |       |       | **—**             | ** ** | **(16**                   | **)**      | **—**                                                   | ** ** | **(16** | **)** |
| Adjustment  related to stock options                                                                                |       |       |       | **1**                  | ** ** | **—**                | ** ** | **—**                                                   | ** ** | **1** | ** ** |
| Redemption of  common shares                                                                                        |       | 11(d       | )          | **(3**                 | **)**      | **(1**                    | **)**      | **—**                                                   | ** ** | **(4** | **)** |
| **Balance-End  of year**                                                                                            |       |       |       | **515**                | ** ** | **656**                   | ** ** | **85**                                                       | ** ** | **1,256** | ** ** |

 
| ** **                                                                                                          | ** ** | ** ** | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                                                   | ** ** | 2007                           | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|---------------------------|------------|--------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                          | ** ** | ** ** | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                                                   | ** ** | ** **                     | ** ** |
| ** **                                                                                                          | ** ** | **Note**   | ** ** | **Capital stock** | ** ** | **Retained  Earnings(4)** | ** ** | **Accumulated  other  comprehensive  income (loss)(4)** | ** ** | **Shareholders’  equity** | ** ** |
| **Balance-Beginning  of year**                                                                                      |       |       |       | 517                    |       | 649                       |       | (9                                                           | )          | 1,157                          |       |
| Cumulative  impact of accounting changes                                                                            |       | 2(e), (j   | )          | —                 |       | —                    |       | 1                                                            |       | 1                              |       |
| Restated balance-Beginning  of year                                                                                 |       |       |       | 517                    |       | 649                       |       | (8                                                           | )          | 1,158                          |       |
| Comprehensive  income:                                                                                              |       |       |       |                   |       |                      |       |                                                         |       |                           |       |
| Net earnings for  the year                                                                                          |       |       |       | —                 |       | 95                        |       | —                                                       |       | 95                             |       |
| Change in  foreign currency translation of self-sustaining foreign subsidiaries, net of  related hedging activities |       | 19(b       | )          | —                 |       | —                    |       | (41                                                          | )          | (41                            | )          |
| Change in fair  value of foreign exchange forward contracts designated as cash flow hedges(1)                       |       |       |       | —                 |       | —                    |       | 4                                                            |       | 4                              |       |
| Change in fair  value of commodity derivative financial instruments designated as cash flow  hedges(2)              |       |       |       | —                 |       | —                    |       | 2                                                            |       | 2                              |       |
| Comprehensive  income for the year                                                                                  |       |       |       |                   |       |                      |       |                                                         |       | 60                             |       |
| Dividends                                                                                                           |       |       |       | —                 |       | (16                       | )          | —                                                       |       | (16                            | )          |
| Adjustment  related to stock options                                                                                |       |       |       | 2                      |       | —                    |       | —                                                       |       | 2                              |       |
| Redemption of  common shares                                                                                        |       | 11(d       | )          | (2                     | )          | (3                        | )          | —                                                       |       | (5                             | )          |
| **Balance-End  of year**                                                                                            |       |       |       | 517                    |       | 725                       |       | (43                                                          | )          | 1,199                          |       |

 

3

----

 

Consolidated Statements ofShareholders’ Equity (continued)

 
| For each of the years in the three-year period ended  December 31, 2008  (in millions of Canadian dollars)     | ** ** | ** ** | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                                                   | ** ** | 2006                                 |   |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|---------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------|--------|
| ** **                                                                                                          | ** ** | ** ** | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                                                   | ** ** | ** **                           |   |
| ** **                                                                                                          | ** ** | **Note**   | ** ** | **Capital stock** | ** ** | **Retained  earnings(4)** | ** ** | **Accumulated  other  comprehensive  income (loss)(4)** | ** ** | **Shareholders’   equity** |   |
| **Balance-Beginning  of year**                                                                                      |       |       |       | 264                    |       | 669                       |       | (36                                                          | )          | 897                                  |   |
| Comprehensive  income:                                                                                              |       |       |       |                   |       |                      |       |                                                         |       |                                 |   |
| Net earnings for  the year                                                                                          |       |       |       | —                 |       | 3                         |       | —                                                       |       | 3                                    |   |
| Change in  foreign currency translation of self-sustaining foreign subsidiaries, net of  related hedging activities |       |       |       | —                 |       | —                    |       | 27                                                           |       | 27                                   |   |
| Comprehensive  income for the year                                                                                  |       |       |       |                   |       |                      |       |                                                         |       | 30                                   |   |
| Dividends                                                                                                           |       |       |       | —                 |       | (13                       | )          | —                                                       |       | (13                                  | )      |
| Net proceeds  from issuance of common shares                                                                   |       | 11(d       | )          | 250                    |       | (7                        | )          | —                                                       |       | 243                                  |   |
| Adjustment  related to stock options                                                                                |       |       |       | 4                      |       | —                    |       | —                                                       |       | 4                                    |   |
| Redemption of  common shares                                                                                        |       |       |       | (1                     | )          | (3                        | )          | —                                                       |       | (4                                   | )      |
| **Balance-End  of year**                                                                                            |       |       |       | 517                    |       | 649                       |       | (9                                                           | )          | 1,157                                |   |

 

----

(1)   Presented net of incometaxes of $25 million (2007—$(2) million) and reclassification adjustmentsto the consolidated statement of earnings of $(2) million. The portion tobe realized within the next twelve month is $(17) million.

 

(2)   Presented net of incometaxes of $1.5 million (2007—$– million) and reclassification adjustments to theconsolidated statement of earnings of $– million. The portion to be realized withinthe next twelve month is $– million.

 

(3)   Presented net of incometaxes of $(3) million (2007—$(1) million) and reclassificationadjustment to the consolidated statement of earnings of $(12) million. Theportion to be realized within the next twelve month is $(14) million.

 

(4)   The sum of retained earningsand accumulated other comprehensive income (loss) amounted to $741 million asof December 31, 2008 (2007—$682 million, 2006—$640 million).

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

4

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Consolidated Statements ofEarnings (Loss)

 
| **For each of the years in the three-year period ended December 31, 2008  (in millions of Canadian dollars, except per share amounts)** | ** ** | **Note** |   | **2008**       | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|--------|----------------|------------|------------|------------|------------|------------|
| **Sales**                                                                                                                                                                                                                                   |       |     |   | **4,017**      | ** ** | 3,929      |       | 3,278      |       |
| **Cost of  sales and expenses**                                                                                                                                                                                                             |       |     |   | ** **     | ** ** |       |       |       |       |
| Cost of sales  (excluding depreciation and amortization)                                                                                                                                                                                    |       |     |   | **3,323**      | ** ** | 3,201      |       | 2,657      |       |
| Depreciation and  amortization                                                                                                                                                                                                              |       |     |   | **214**        | ** ** | 208        |       | 161        |       |
| Selling and administrative  expenses                                                                                                                                                                                                        |       |     |   | **389**        | ** ** | 390        |       | 304        |       |
| Losses (gains)  on disposal and other                                                                                                                                                                                                       |       | 12       |   | **5**          | ** ** | (17        | )          | (4         | )          |
| Impairment and  other restructuring costs                                                                                                                                                                                                   |       | 13(a     | )      | **43**         | ** ** | 9          |       | 67         |       |
| Loss (gain) on  financial instruments                                                                                                                                                                                                       |       | 18(a     | )      | **28**         | ** ** | (6         | )          | (3         | )          |
|                                                                                                                                                                                                                                        |       |     |   | **4,002**      | ** ** | 3,785      |       | 3,182      |       |
| **Operating  income from continuing operations**                                                                                                                                                                                            |       |     |   | **15**         | ** ** | 144        |       | 96         |       |
| Interest expense                                                                                                                                                                                                                            |       |     |   | **102**        | ** ** | 102        |       | 79         |       |
| Foreign exchange  loss (gain) on long-term debt                                                                                                                                                                                             |       |     |   | **24**         | ** ** | (59        | )          | —     |       |
|                                                                                                                                                                                                                                        |       |     |   | **(111**       | **)**      | 101        |       | 17         |       |
| **Provision  for (recovery of) income taxes**                                                                                                                                                                                               |       | 14       |   | **(32**        | **)**      | 11         |       | 6          |       |
| **Share  of results of significantly influenced companies and dilution gain**                                                                                                                                                          |       | 8(a      | )      | **(8**         | **)**      | (27        | )          | (8         | )          |
| **Non-controlling  interest**                                                                                                                                                                                                               |       |     |   | **2**          | ** ** | 3          |       | —     |       |
| **Net  earnings (loss) from continuing operations**                                                                                                                                                                                         |       |     |   | **(73**        | **)**      | 114        |       | 19         |       |
| **Net  earnings (loss) from discontinued operations**                                                                                                                                                                                       |       | 4        |   | **18**         | ** ** | (19        | )          | (16        | )          |
| **Net  earnings (loss) for the year**                                                                                                                                                                                                       |       |     |   | **(55**        | **)**      | 95         |       | 3          |       |
| **Basic  net earnings (loss) from continuing operations per common share**                                                                                                                                                        |       |     |   | **(0.74**      | **)**      | 1.14       |       | 0.23       |       |
| **Basic  and diluted net earnings (loss) per common share**                                                                                                                                                                                 |       | 11(e     | )      | **(0.56**      | **)**      | 0.95       |       | 0.04       |       |
| **Weighted  average number of common shares outstanding during the year**                                                                                                                                                                   |       |     |   | **98,804,536** | ** ** | 99,329,472 |       | 80,941,603 |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

----

 

Consolidated Statements ofCash Flows

 
| **For each of the years in the three-year period ended December 31, 2008  (in millions of Canadian dollars)** | ** ** | **Note**        |   | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|--------|------------|------------|----------|------------|----------|------------|
| **Operating  activities from continuing operations**                                                                                                                                          |       |            |   | ** ** | ** ** |     |       |     |       |
| Net earnings  (loss) for the year                                                                                                                                                             |       |            |   | **(55**    | **)**      | 95       |       | 3        |       |
| Net earnings  (loss) from discontinued operations                                                                                                                                             |       |            |   | **(18**    | **)**      | 19       |       | 16       |       |
| Net earnings  (loss) from continuing operations                                                                                                                                               |       |            |   | **(73**    | **)**      | 114      |       | 19       |       |
| Adjustments for                                                                                                                                                                               |       |            |   | ** ** | ** ** |     |       |     |       |
| Depreciation and  amortization                                                                                                                                                                |       |            |   | **214**    | ** ** | 208      |       | 161      |       |
| Losses (gains)  on disposal and other                                                                                                                                                         |       |            |   | **5**      | ** ** | (29      | )          | (4       | )          |
| Impairment and  other restructuring costs                                                                                                                                                     |       |            |   | **16**     | ** ** | 3        |       | 50       |       |
| Unrealized loss  (gain) on financial instruments                                                                                                                                              |       |            |   | **27**     | ** ** | —   |       | (5       | )          |
| Foreign exchange  loss (gain) on long-term debt                                                                                                                                               |       |            |   | **24**     | ** ** | (59      | )          | —   |       |
| Future income  taxes                                                                                                                                                                          |       |            |   | **(52**    | **)**      | (22      | )          | (28      | )          |
| Share of results  of significantly influenced companies and dilution gain                                                                                                                |       |            |   | **(8**     | **)**      | (27      | )          | (8       | )          |
| Non-controlling  interest                                                                                                                                                                     |       |            |   | **2**      | ** ** | 3        |       | —   |       |
| Others                                                                                                                                                                                        |       |            |   | **(11**    | **)**      | (13      | )          | (2       | )          |
| Early settlement  of natural gaz contracts                                                                                                                                                    |       |            |   | **11**     | ** ** | —   |       | —   |       |
|                                                                                                                                                                                          |       |            |   | **155**    | ** ** | 178      |       | 183      |       |
| Changes in  non-cash working capital components                                                                                                                                               |       | 15(a            | )      | **(31**    | **)**      | (89      | )          | 35       |       |
|                                                                                                                                                                                          |       |            |   | **124**    | ** ** | 89       |       | 218      |       |
| **Investing  activities from continuing operations**                                                                                                                                          |       |            |   | ** ** | ** ** |     |       |     |       |
| Purchases of  property, plant and equipment                                                                                                                                                   |       |            |   | **(191**   | **)**      | (167     | )          | (110     | )          |
| Proceeds from  disposal of property, plant and equipment                                                                                                                                      |       |            |   | **5**      | ** ** | 7        |       | —   |       |
| Decrease  (increase) in other assets                                                                                                                                                          |       |            |   | **3**      | ** ** | (3       | )          | (10      | )          |
| Cash of a joint  venture and business acquisitions                                                                                                                                            |       | 5(a), (b), 21(a | )      | **5**      | ** ** | (10      | )          | (572     | )          |
| Business  disposals, net of cash disposed                                                                                                                                                     |       | 5(c), (d), (e   | )      | **—** | ** ** | 37       |       | 8        |       |
|                                                                                                                                                                                          |       |            |   | **(178**   | **)**      | (136     | )          | (684     | )          |
| **Financing  activities from continuing operations**                                                                                                                                          |       |            |   | ** ** | ** ** |     |       |     |       |
| Bank loans and  advances                                                                                                                                                                      |       |            |   | **20**     | ** ** | 7        |       | (4       | )          |
| Change in  revolving credit facilities                                                                                                                                                        |       |            |   | **(149**   | **)**      | 100      |       | 186      |       |
| Increase in  other long-term debt                                                                                                                                                             |       |            |   | **2**      | ** ** | —   |       | 2        |       |
| Payments of  other long-term debt                                                                                                                                                             |       |            |   | **(7**     | **)**      | (8       | )          | (9       | )          |
| Early settlement  of foreign exchange contracts                                                                                                                                               |       |            |   | **150**    | ** ** | —   |       | —   |       |
| Net proceeds  from issuances of common shares                                                                                                                                                 |       |            |   | **—** | ** ** | 1        |       | 242      |       |
| Dividend paid to  a non-controlling interest                                                                                                                                                  |       |            |   | **(5**     | **)**      | —   |       | —   |       |
| Redemption of  common shares                                                                                                                                                                  |       | 11(d            | )      | **(4**     | **)**      | (5       | )          | (4       | )          |
| Dividends                                                                                                                                                                                     |       |            |   | **(16**    | **)**      | (16      | )          | (13      | )          |
|                                                                                                                                                                                          |       |            |   | **(9**     | **)**      | 79       |       | 400      |       |
| **Change  in cash and cash equivalents during the year from continuing operations**                                                                                                           |       |            |   | **(63**    | **)**      | 32       |       | (66      | )          |
| **Change  in cash and cash equivalents from discontinued operations, including proceeds  on disposal**                                                                                        |       | 4               |   | **50**     | ** ** | (40      | )          | 56       |       |
| **Net change  in cash and cash equivalents during the year**                                                                                                                             |       |            |   | **(13**    | **)**      | (8       | )          | (10      | )          |
| **Translation  adjustments on cash and cash equivalents**                                                                                                                                     |       |            |   | **(1**     | **)**      | (1       | )          | 1        |       |
| **Cash  and cash equivalents—Beginning of year**                                                                                                                                         |       |            |   | **25**     | ** ** | 34       |       | 43       |       |
| **Cash  and cash equivalents—End of year**                                                                                                                                               |       |            |   | **11**     | ** ** | 25       |       | 34       |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

6

----

 

Segmented Information

 

The Company’s operationsare managed by four segments: boxboard, containerboard, specialty products(which consists of the packaging products group) and tissue papers.

 

The Company analyzes theperformance of its operating segments based on their operating income beforedepreciation and amortization, which is not a measure of performance underCanadian generally accepted accounting principles (“Canadian GAAP”); however,the chief operating decision-maker uses this performance measure for assessingthe operating performance of each reportable segment. Earnings for each segmentare prepared on the same basis as those of the Company. Intersegment operationsare recorded on the same basis as sales to third parties, which are at fair marketvalue.

 

Sales of the Company byreportable segment are as follows:

 

 

 
| ** **                                                                                                                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | SALES    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **                                                                                                                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |     | ** ** |
| **For each of the years in the three-year period ended December 31, 2008  (in millions of Canadian dollars)** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006** | ** ** |
| **Packaging  products**                                                                                                                                                                       |       |       | ** ** |       |       |     |       |
| Boxboard                                                                                                                                                                                      |       |       | ** ** |       |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **743**    | ** ** | 780        |       | 727      |       |
| Converting                                                                                                                                                                                    | ** ** | **677**    | ** ** | 691        |       | 790      |       |
| Intersegment  sales                                                                                                                                                                           | ** ** | **(97**    | **)**      | (128       | )          | (158     | )          |
| ** **                                                                                                                                                                                    |       | **1,323**  | ** ** | 1,343      |       | 1,359    |       |
| Containerboard(1)                                                                                                                                                                             |       |       | ** ** |       |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **615**    | ** ** | 599        |       | 333      |       |
| Converting                                                                                                                                                                                    | ** ** | **962**    | ** ** | 984        |       | 506      |       |
| Intersegment sales                                                                                                                                                                            | ** ** | **(374**   | **)**      | (390       | )          | (239     | )          |
| ** **                                                                                                                                                                                    |       | **1,203**  | ** ** | 1,193      |       | 600      |       |
| Specialty  products                                                                                                                                                                           |       |       | ** ** |       |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **315**    | ** ** | 318        |       | 333      |       |
| Converting                                                                                                                                                                                    | ** ** | **267**    | ** ** | 232        |       | 226      |       |
| Recovery and  deinked pulp                                                                                                                                                                    | ** ** | **376**    | ** ** | 374        |       | 184      |       |
| Intersegment  sales                                                                                                                                                                           | ** ** | **(98**    | **)**      | (90        | )          | (52      | )          |
| ** **                                                                                                                                                                                    |       | **860**    | ** ** | 834        |       | 691      |       |
| Intersegment  sales                                                                                                                                                                           | ** ** | **(100**   | **)**      | (108       | )          | (68      | )          |
| ** **                                                                                                                                                                                    |       | **3,286**  | ** ** | 3,262      |       | 2,582    |       |
| **Tissue  papers**                                                                                                                                                                            |       |       | ** ** |       |       |     |       |
| Manufacturing  and converting                                                                                                                                                                 | ** ** | **787**    | ** ** | 713        |       | 727      |       |
| **Intersegment  sales**                                                                                                                                                                       | ** ** | **(56**    | **)**      | (46        | )          | (31      | )          |
| **Total**                                                                                                                                                                                     | ** ** | **4,017**  | ** ** | 3,929      |       | 3,278    |       |

 

----

(1) In 2006, the Company’s containerboard segmentconsists of 50% of Norampac’s sales.

 

7

----

 

Segmented Information(continued)

 

The operating income(loss) before depreciation and amortization from continuing operations of theCompany by reportable segment are as follows:

 
|                                                                                                                                                                                          | OPERATING INCOME (LOSS)  BEFORE DEPRECIATION   AND AMORTIZATION FROM CONTINUING OPERATIONS |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                                          |                                                                                       |       |
| **For each of the years in the three-year period ended December 31, 2008  (in millions of Canadian dollars)** | ** **                                                                                 | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Packaging  products**                                                                                                                                                                       |                                                                                       |       | ** ** |   |   |   |   |
| Boxboard                                                                                                                                                                                      |                                                                                       |       | ** ** |   |   |   |   |
| Manufacturing                                                                                                                                                                                 | ** **                                                                                 | **(40**    | **)** | (3 | ) | 1 |   |
| Converting                                                                                                                                                                                    | ** **                                                                                 | **50**     | ** ** | 76 |   | 62 |   |
| Others                                                                                                                                                                                        | ** **                                                                                 | **(13**    | **)** | (4 | ) | (6 | ) |
| ** **                                                                                                                                                                                    |                                                                                       | **(3**     | **)** | 69 |   | 57 |   |
| Containerboard(1)                                                                                                                                                                             |                                                                                       |       | ** ** |   |   |   |   |
| Manufacturing                                                                                                                                                                                 | ** **                                                                                 | **57**     | ** ** | 59 |   | (8 | ) |
| Converting                                                                                                                                                                                    | ** **                                                                                 | **53**     | ** ** | 76 |   | 45 |   |
| Others                                                                                                                                                                                        | ** **                                                                                 | **(7**     | **)** | 17 |   | 7 |   |
| ** **                                                                                                                                                                                    |                                                                                       | **103**    | ** ** | 152 |   | 44 |   |
| Specialty  products                                                                                                                                                                           |                                                                                       |       | ** ** |   |   |   |   |
| Manufacturing                                                                                                                                                                                 | ** **                                                                                 | **10**     | ** ** | 6 |   | 1 |   |
| Converting                                                                                                                                                                                    | ** **                                                                                 | **30**     | ** ** | 26 |   | 30 |   |
| Recovery and  deinked pulp                                                                                                                                                                    | ** **                                                                                 | **24**     | ** ** | 25 |   | 9 |   |
| Others                                                                                                                                                                                        | ** **                                                                                 | **—** | ** ** | 2 |   | 5 |   |
| ** **                                                                                                                                                                                    |                                                                                       | **64**     | ** ** | 59 |   | 45 |   |
| ** **                                                                                                                                                                                    |                                                                                       | **164**    | ** ** | 280 |   | 146 |   |
| **Tissue  papers**                                                                                                                                                                            |                                                                                       |       | ** ** |   |   |   |   |
| Manufacturing  and converting                                                                                                                                                                 | ** **                                                                                 | **89**     | ** ** | 66 |   | 116 |   |
| **Corporate**                                                                                                                                                                                 | ** **                                                                                 | **(24**    | **)** | 6 |   | (5 | ) |
| **Operating  income before depreciation and amortization from continuing operations**                                                                                                         | ** **                                                                                 | **229**    | ** ** | 352 |   | 257 |   |
| **Depreciation  and amortization**                                                                                                                                                            |                                                                                       |       | ** ** |   |   |   |   |
| Boxboard                                                                                                                                                                                      | ** **                                                                                 | **(72**    | **)** | (68 | ) | (66 | ) |
| Containerboard(1)                                                                                                                                                                             | ** **                                                                                 | **(63**    | **)** | (68 | ) | (38 | ) |
| Specialty  products                                                                                                                                                                           | ** **                                                                                 | **(33**    | **)** | (31 | ) | (28 | ) |
| Tissue papers                                                                                                                                                                                 | ** **                                                                                 | **(36**    | **)** | (35 | ) | (37 | ) |
| Corporate and  eliminations                                                                                                                                                                   | ** **                                                                                 | **(10**    | **)** | (6 | ) | 8 |   |
| ** **                                                                                                                                                                                    |                                                                                       | **(214**   | **)** | (208 | ) | (161 | ) |
| **Operating  income from continuing operations**                                                                                                                                              | ** **                                                                                 | **15**     | ** ** | 144 |   | 96 |   |
|                                                                                                                                                                                               |                                                                                            |            |  |  |  |  |  |  |

 

----

(1) In 2006, the Company’s containerboard segment consists of 50% ofoperating income (loss) before depreciation and amortization from continuingoperations of Norampac.

 

8

----

 

Segmented Information(continued)

 

Purchases of property,plant and equipment by the Company by reportable segment are as follows:

 
|                                                                                                                                                                                          | PURCHASES OF PROPERTY,  PLANT AND EQUIPMENT |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------|----------|
|                                                                                                                                                                                          |                                        |     |   |   |   |   |   |
| **For each of the years in the three-year period ended December 31, 2008  (in millions of Canadian dollars)** | ** **                                  | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Packaging  products**                                                                                                                                                                       |                                        |     |   |   |   |   |   |
| Boxboard                                                                                                                                                                                      |                                        |     |   |   |   |   |   |
| Manufacturing                                                                                                                                                                                 | ** **                                  | **24**   |   | 23 |   | 10 |   |
| Converting                                                                                                                                                                                    | ** **                                  | **36**   |   | 36 |   | 24 |   |
| ** **                                                                                                                                                                                    |                                        | **60**   |   | 59 |   | 34 |   |
| Containerboard(1)                                                                                                                                                                             |                                        |     |   |   |   |   |   |
| Manufacturing                                                                                                                                                                                 | ** **                                  | **18**   |   | 16 |   | 13 |   |
| Converting                                                                                                                                                                                    | ** **                                  | **21**   |   | 14 |   | 10 |   |
| ** **                                                                                                                                                                                    |                                        | **39**   |   | 30 |   | 23 |   |
| Specialty  products                                                                                                                                                                           |                                        |     |   |   |   |   |   |
| Manufacturing                                                                                                                                                                                 | ** **                                  | **9**    |   | 9 |   | 10 |   |
| Converting                                                                                                                                                                                    | ** **                                  | **4**    |   | 10 |   | 6 |   |
| Recovery,  deinked pulp and others                                                                                                                                                            | ** **                                  | **28**   |   | 7 |   | 5 |   |
| ** **                                                                                                                                                                                    |                                        | **41**   |   | 26 |   | 21 |   |
| ** **                                                                                                                                                                                    |                                        | **140**  |   | 115 |   | 78 |   |
| **Tissue  papers**                                                                                                                                                                            |                                        |     |   |   |   |   |   |
| Manufacturing  and converting                                                                                                                                                                 | ** **                                  | **38**   |   | 52 |   | 27 |   |
| **Corporate**                                                                                                                                                                                 | ** **                                  | **10**   |   | 7 |   | 3 |   |
| **Total**                                                                                                                                                                                     | ** **                                  | **188**  |   | 174 |   | 108 |   |
| Purchases of  property, plant and equipment included in accounts payable                                                                                                                      |                                        |     |   |   |   |   |   |
| Beginning of  year                                                                                                                                                                            | ** **                                  | **17**   |   | 10 |   | 12 |   |
| End of year                                                                                                                                                                                   | ** **                                  | **(14**  | **)** | (17 | ) | (10 | ) |
| **Total  investing activities**                                                                                                                                                               | ** **                                  | **191**  |   | 167 |   | 110 |   |
|                                                                                                                                                                                               |                                             |          |  |  |  |  |  |  |

 

----

(1) In 2006, the Company’s containerboardsegment consists of 50% of purchase of property, plant and equipment ofNorampac.

 

Identifiable assets ofthe Company by reportable segment are as follows:

 
|                                                                                                                      |       | IDENTIFIABLE ASSETS |       |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| **As at December 31, 2008 and 2007  (in millions of Canadian dollars)** | ** ** | **2008**            | ** ** | **2007** | ** ** |
| **Packaging  products**                                                                                                   |       |                | ** ** |   |   |
| Boxboard                                                                                                                  | ** ** | **1,123**           | ** ** | 977 |   |
| Containerboard                                                                                                            | ** ** | **1,446**           | ** ** | 1,443 |   |
| Specialty  products                                                                                                       | ** ** | **585**             | ** ** | 588 |   |
| ** **                                                                                                                |       | **3,154**           | ** ** | 3,008 |   |
| **Tissue  papers**                                                                                                        | ** ** | **579**             | ** ** | 491 |   |
| **Corporate**                                                                                                             | ** ** | **280**             | ** ** | 199 |   |
| **Intersegment  eliminations**                                                                                            | ** ** | **(142**            | **)**      | (66 | ) |
| ** **                                                                                                                |       | **3,871**           | ** ** | 3,632 |   |
| **Investments(1)**                                                                                                        | ** ** | **160**             | ** ** | 137 |   |
| **Total**                                                                                                                 | ** ** | **4,031**           | ** ** | 3,769 |   |
|                                                                                                                           |            |                     |            |  |  |  |

 

----

(1) Investments included investments in significantlyinfluenced companies, notes receivable, other investments and investment inshares held for trading.

 

9

----

 

Segmented Information(continued)

 

Information by geographicsegment is as follows:

 
| **For each of the years in the three-year period ended December 31, 2008  (in millions of Canadian dollars)** | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Sales**                                                                                                                                                                                     |       |       | ** ** |     |       |     |       |
| Operations  located in Canada                                                                                                                                                                 |       |       | ** ** |     |       |     |       |
| Within Canada                                                                                                                                                                                 | ** ** | **1,479**  | ** ** | 1,476    |       | 1,149    |       |
| To the United  States                                                                                                                                                                         | ** ** | **552**    | ** ** | 559      |       | 462      |       |
| Offshore                                                                                                                                                                                      | ** ** | **60**     | ** ** | 38       |       | 17       |       |
| ** **                                                                                                                                                                                    |       | **2,091**  | ** ** | 2,073    |       | 1,628    |       |
| Operations  located in the United States                                                                                                                                                      |       |       | ** ** |     |       |     |       |
| Within the  United States                                                                                                                                                                     | ** ** | **1,260**  | ** ** | 1,229    |       | 1,128    |       |
| To Canada                                                                                                                                                                                     | ** ** | **77**     | ** ** | 53       |       | 39       |       |
| Offshore                                                                                                                                                                                      | ** ** | **2**      | ** ** | 1        |       | 2        |       |
| ** **                                                                                                                                                                                    |       | **1,339**  | ** ** | 1,283    |       | 1,169    |       |
| Operations  located in Europe                                                                                                                                                                 |       |       | ** ** |     |       |     |       |
| Within Europe                                                                                                                                                                                 | ** ** | **537**    | ** ** | 536      |       | 447      |       |
| To the United  States                                                                                                                                                                         | ** ** | **—** | ** ** | —   |       | 3        |       |
| To other  countries                                                                                                                                                                           | ** ** | **50**     | ** ** | 37       |       | 31       |       |
| ** **                                                                                                                                                                                    |       | **587**    | ** ** | 573      |       | 481      |       |
| **Total**                                                                                                                                                                                     | ** ** | **4,017**  | ** ** | 3,929    |       | 3,278    |       |

 
| ** **                         | ** ** | **2008**  | ** ** | **2007** | ** ** |
|------------------------------------|------------|-----------|------------|----------|------------|
| **Property,  plant and equipment** |       |      |       |     |       |
| Canada                             | ** ** | **1,213** |       | 1,247    |       |
| United States                      | ** ** | **593**   |       | 472      |       |
| Europe                             | ** ** | **231**   |       | 167      |       |
| **Total**                          | ** ** | **2,037** |       | 1,886    |       |

 
| ** **                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Goodwill,  customer relationships and client lists and other finite-life intangible  assets** |       |     |       |     |       |
| Canada                                                                                          | ** ** | **327**  |       | 342      |       |
| United States                                                                                   | ** ** | **113**  |       | 99       |       |
| Europe                                                                                          | ** ** | **23**   |       | 1        |       |
| **Total**                                                                                       | ** ** | **463**  |       | 442      |       |

 

10

----

 

Notes to ConsolidatedFinancial Statements

 

For each of the years in thethree-year period ended December 31, 2008

(tabular amounts in millionsof Canadian dollars, except per share amounts)

 

1. Significant AccountingPolicies

 

Basis of presentation

 

The consolidatedfinancial statements have been prepared in accordance with Canadian GAAP andinclude the following significant accounting policies.

 

Basis of consolidation

 

The consolidatedfinancial statements include the accounts of the Company and its subsidiaries.They also include the portion of the accounts of the joint ventures accountedfor using the proportionate consolidation method. Investments in significantlyinfluenced companies are accounted for using the equity method. The Companyalso identifies variable interest entities in which it has an interest anddetermines whether it is the primary beneficiary of such entities. If theCompany is the primary beneficiary of the variable interest entitiesidentified, those entities are consolidated. A variable interest entity isdefined as an entity in which the equity is not sufficient to permit the entityto finance its activities without external financial support, or the equityinvestors lack either voting control and obligation to absorb future losses orthe right to receive future returns.

 

Use of estimates

 

The preparation offinancial statements in conformity with Canadian GAAP requires the use ofestimates and assumptions that affect the reported amounts of assets andliabilities in the financial statements and disclosure of contingencies at thebalance sheet date, and the reported amounts of revenues and expenses duringthe reporting period. On a regular basis and with the information available,management reviews its estimates, including those related to environmentalcosts, employee future benefits, collectibility of accounts receivable,financial instruments, contingencies, income taxes and related valuationallowance, useful life of property, plant and equipment and impairment oflong-lived assets and goodwill. Actual results could differ from thoseestimates. When adjustments become necessary, they are reported in earnings inthe period in which they are known.

 

Revenue recognition

 

The Company recognizesits sales, which consist of product sales, when persuasive evidence of anarrangement exists, goods are shipped, significant risks and benefits ofownership are transferred, the price is fixed and determinable, and collectionof the resulting receivable is reasonably assured.

 

Financial instruments and hedging relationships

 

**Classification of financialinstruments**

** **

The classificationdepends on the purpose for which the financial instruments were acquired orissued, their characteristics and the Company’s designation of suchinstruments. The standards require that all financial assets be classified asheld for trading (“HFT”), available for sale (“AFS”), held to maturity (“HTM”)or loans and receivables. Financial liabilities should be classified as HFT orother liabilities. Derivatives are classified as HFT unless they are designatedwithin an effective hedging relationship. The standards require that allfinancial assets and liabilities, including all derivatives, be measured atfair value on initial recognition, with the exception of certain related partytransactions, and subsequently accounted for based on their classification.Settlement date accounting continues to be used by the Company for allfinancial assets. Changes in fair value of the acquired asset between the tradedate and the settlement date are reflected in earnings, other than gains andlosses on AFS financial assets, which are reflected in other comprehensiveincome.

 

The following is asummary of the accounting model the Company elected to apply to each of itssignificant categories of financial instruments:

 
| Cash  and cash equivalents                |   | Designated  as held for trading   |
|-------------------------------------------|--------|-----------------------------------|
| Accounts  receivable                      |   | Loans  and receivables            |
| Notes  receivable                         |   | Loans  and receivables            |
| Other  investments                        |   | Designated  as available for sale |
| Investment  in shares held for trading    |   | Designated  as held for trading   |
| Bank  loans and advances                  |   | Other  liabilities                |
| Accounts  payable and accrued liabilities |   | Other  liabilities                |
| Long-term  debt                           |   | Other  liabilities                |
| Derivative  instruments                   |   | Held  for trading                 |

 

11

----

 

**Held for trading**

** **

HFT financial instrumentsare financial assets and liabilities typically acquired with the objective togenerate revenues from short-term fluctuations in price. They are measured atfair value at the balance sheet date. Interest earned, gains and lossesrealized on disposal and unrealized gains and losses from change in fair valueare recorded in the statement of earnings.

 

**Held to maturity**

** **

HTM financial assets arenon-derivative financial assets with fixed or determinable payments and a fixedmaturity, other than loans and receivables, that an entity has the positiveintention and ability to hold to maturity. These financial assets are measuredat amortized cost. The Company did not hold any HTM instruments as at December 31,2008 et 2007.

 

**Available for sale**

** **

AFS financial assets arethose non-derivative financial assets that are designated as AFS or that arenot classified as loans and receivables, HTM or HFT. AFS financial assets arecarried at fair value with unrealized gains and losses included in othercomprehensive income until realized, when the cumulative gain or loss istransferred to the consolidated statement of earnings and presented within lossor gain on financial instruments. When unrealized losses on AFS securities aredetermined to be other than temporary, the cost of the financial asset iswritten down to fair value with the change recorded in net gains on investmentsin the consolidated statement of earnings. Securities that are classified as AFSand that do not have a readily available market value are recorded at cost.Dividends and interest income from AFS instruments are recorded in theconsolidated statement of earnings. The Company did not hold any AFSinstruments as at December 31, 2008 and 2007.

 

**Loans and receivables**

** **

Loans and receivables areaccounted for at amortized cost.

 

**Other liabilities**

** **

Other liabilities arerecorded at amortized cost using the effective interest rate method and includeall liabilities other than derivatives or liabilities which have beenidentified as HFT.

 

**Derivatives**

** **

The Company usesderivative financial instruments in the management of its foreign currency,commodity and interest rate exposures. The Company’s policy is not to usederivative financial instruments for trading or speculative purposes.

 

Derivatives are carriedat fair value and are reported as assets where they have a positive fair valueand as liabilities where they have a negative fair value. The change in fairvalue during the year is recorded in earnings unless the instruments are partof a hedging relationship.

 

**Embedded derivatives**

** **

Derivatives embedded inother financial instruments or contracts are separated from their hostcontracts and accounted for as derivatives when their economic characteristicsand risks are not closely related to those of the host contract. Embeddedderivative are measured at fair value with changes in fair value recognized inearnings.

 

**Transaction costs**

** **

Transaction costs relatedto HFT financial assets and liabilities are expensed as incurred. Transactioncosts related to HTM financial assets, loans and receivables and otherliabilities are considered as part of the carrying value of the asset orliability and are then amortized over the expected life of the instrument usingthe effective interest rate method. Transaction costs related to AFS assets arecapitalized on initial recognition and written off to other comprehensiveincome on the next financial reporting date.

 

**Determination of fair value**

** **

The fair value of afinancial instrument is the amount of consideration that would be agreed uponin an arm’s-length transaction between knowledgeable willing parties who areunder no compulsion to act. The fair value of a financial instrument on initialrecognition is the transaction price, which is the fair value of theconsideration given or received. Subsequent to initial recognition, the fairvalues of financial instruments that are quoted in active markets are based onbid prices for financial assets held and offer prices for financialliabilities. When independent prices are not available, fair values aredetermined by using valuation techniques which refer to observable market data.These include comparisons with similar instruments where observable marketprices exist, discounted cash flow analyses, option pricing models and othervaluation techniques commonly used by market participants. For certainderivatives, fair values may be determined in whole or in part from valuationtechniques using non-observable market data or transaction prices. A number offactors such as bid-offer spread, credit profile and model uncertainty aretaken into account, as appropriate, when values are calculated usingvaluation techniques.

 

**Hedge**

** **

When the Company usesderivatives in hedge accounting relationships, the Company formally documentsall relationships between hedging instruments and hedged items, as well as itsrisk management objective and strategy for undertaking various hedgetransactions. This process includes linking derivatives to specific assets andliabilities on the balance sheet or to specific firm commitments or forecastedtransactions. The Company also assesses whether the derivatives that are usedin hedging transactions are effective in offsetting changes in fair values orcash flows of hedged items. When hedging instruments become ineffective beforetheir maturity or the hedging relationship is terminated, deferred gains orlosses on such instruments continue to be deferred and charged to earnings inthe same period as the corresponding gains or losses for the hedged items;gains and losses realized subsequently as a result of marking to market arecharged directly to earnings. If the hedged item ceases to exist due to itsmaturity, expiry, cancellation or exercise before the hedging instrumentexpires, deferred gains or losses are charged to earnings.

 

Cash and cash equivalents

 

Cash and cash equivalentsinclude cash on hand, bank balances and short-term liquid investments withoriginal maturities of three months or less. The short-term liquid investmentsare accounted for at their estimated fair value which approximates costs.

 

Inventories

 

Inventories of finishedgoods are valued at the lower of average production cost and net realizablevalue. Inventories of raw materials and supplies are valued at the lower ofcost and replacement value which is the best available measure of their netrealizable value. Cost of raw materials and supplies is determined using theaverage cost and the first-in, first-out methods respectively.

 

12

----

 

Property, plant and equipment and depreciation

 

Property, plant andequipment are recorded at cost, including interest incurred during theconstruction period of certain property, plant and equipment. Depreciation iscalculated on a straight-line basis at annual rates varying from 3% to 5% forbuildings, 5% to 10% for machinery and equipment, and 15% to 20% for automotiveequipment, determined according to the estimated useful life of each class ofproperty, plant and equipment.

 

Grants and investment tax credits

 

Grants and investment taxcredits are accounted for using the cost reduction method and are amortized toearnings as a reduction of depreciation, using the same rates as those used toamortize the related property, plant and equipment.

 

Intangible assets

 

Customer relationshipsand client lists are recorded at cost and are amortized on a straight-linebasis over a period not exceeding 20 years.

 

Other assets

 

Deferred charges arerecorded at cost and include, in particular, the issuance costs of therevolving credit facility, which are amortized on a straight-line basis overthe anticipated period of repayment of the respective credit facility, andstart-up costs which are amortized on a straight-line basis over a period ofthree to fifteen years from the end of the start-up period.

 

Goodwill

 

Goodwill is tested forimpairment annually on December 31 or when an event or circumstanceoccurs that could potentially result in a permanent decline in value. This isaccomplished mainly by determining whether projected discounted future cashflows exceed the net book value of goodwill of the respective reporting unit.

 

Impairment of long-lived assets

 

Long-lived assets arereviewed for impairment upon the occurrence of events or changes incircumstances indicating that the carrying value of the asset may not berecoverable, as measured by comparing their net book value to the estimatedundiscounted future cash flows generated by their use. Impaired assets arerecorded at fair value, determined principally using discounted future cashflows expected from their use and eventual disposition.

 

Environmental costs

 

Environmentalexpenditures are expensed or capitalized depending upon their future economicbenefit. Expenditures incurred to prevent future environmental contaminationare capitalized and amortized on a straight-line basis at annual rates varyingfrom 5% to 10%. Expenditures that relate to an existing condition caused bypast operations, and which do not contribute to current or future revenuegeneration, are expensed. A provision for environmental costs is recorded whenit is probable that a liability has been incurred and the costs can bereasonably estimated.

 

Asset retirement obligations

 

Asset retirementobligations are recognized at fair value in the period in which the Companyincurred such obligation and if a reasonable estimate of the fair value can bemade. The associated costs are capitalized as part of the carrying value of therelated asset and are depreciated over its remaining useful life. The liabilityis accreted using a credit-adjusted risk-free interest rate of the Company.

 

Employee future benefits

 

The Company offers fundedand unfunded defined benefit pension plans, defined contribution pension plans,and group registered retirement savings plans that provide retirement benefitpayments for most of its employees. The defined benefit pension plans areusually contributory and are based on the number of years of service and, in mostcases, based on the average salaries or compensation at the end of a career.Retirement benefits are, in some cases, partially adjusted based on inflation.The Company also contributes to its employees’ complementary retirement benefitplans and other post-employment benefit plans, such as group life insurance,medical and dental plans. However, these benefits, other than pension plans,are not funded. Furthermore, the medical and dental plans upon retirement arebeing phased out and are no longer offered to the majority of the new employeesand those who do not meet certain criteria.

 

The cost of pensions andother retirement benefits earned by employees is actuarially determined usingthe projected benefit method pro-rated on years of service and management’sbest estimate of expected plan investment performance, salary escalations,retirement ages of employees and expected health care costs. The accruedbenefit obligation is evaluated using the market interest rate at theevaluation date.

 

For the purpose ofcalculating the expected return on plan assets, those assets are valued at fairvalue. Past service costs arising from a plan amendment are amortized on astraight-line basis over the average remaining service period of the group ofemployees active at the date of the amendment. The excess of the net actuarialgain or loss over the greater of (a) 10% of the accrued benefit obligationat the beginning of the year and (b) 10% of the fair value of plan assetsat the beginning of the year is amortized over the average remaining serviceperiod of active employees, which may vary from 6 to 19 years(weighted average of 12 years for pension plan and 15 for otherplans) in 2008 depending on the plan (2007—6 to 18 years (weightedaverage of 12 years for pension plan and 15 for other plans)).

 

When restructuring aplan, results in a curtailment and a settlement at the same time, thecurtailment is accounted for before the settlement.

 

13

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The measurement date ofthe employee futur benefit plans is December 31 of each year. Anactuarial evaluation is performed at least every three years. The lastevaluation took place on December 31, 2007 for approximately 10% ofthe plans, on December 31, 2006 for approximately 65% of the plans.In 2009, evaluation for 25% of the plans will be performed for December 31,2008.

 

Income taxes

 

The Company uses theliability method in accounting for income taxes. According to this method,future income taxes are determined using the difference between the accountingand tax bases of assets and liabilities. Future income tax assets andliabilities are measured using substantively enacted tax rates in effect in theyear in which these temporary differences are expected to be recovered or settled.Future income tax assets are recognized when it is more likely than not thatthe assets will be realized.

 

Foreign currency translation

 

**Foreign currencytransactions**

** **

Transactions denominatedin currencies other than the business unit’s measurement currency are recordedat the rate of exchange prevailing at the transaction date. Monetary assets andliabilities denominated in foreign currencies are translated at the rate ofexchange prevailing at the balance sheet date. Unrealized gains and losses on translationof other monetary assets and liabilities are reflected in the determination ofnet earnings for the year.

 

**Foreign operations**

** **

The Company’s foreignoperations are defined as self-sustaining. The assets and liabilities of theseoperations are translated into Canadian dollars at the rate of exchangeprevailing at the balance sheet date. Revenues and expenses are translated atthe average exchange rate for the year. Translation gains and losses arerecorded as a component of equity in accumulated other comprehensive income.

 

Stock-based compensation

 

The Company uses the fairvalue method of accounting for stock-based compensation awards granted toofficers and key employees. This method consists of recording expenses toearnings based on the vesting period of the options granted. The fair value iscalculated based on the Black-Scholes option pricing model. This model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable. When stock options areexercised, any consideration paid by employees, as well as the relatedstock-based compensation are credited to capital stock.

 

Earnings per common share

 

Earnings per common shareis determined using the weighted average number of common shares outstandingduring the year. Diluted earnings per common share is determined using thetreasury stock method to evaluate the dilutive effect of stock options,convertible instruments and equivalents, when applicable. Under this method,instruments with a dilutive effect, basically when the average market price ofa share for the period exceeds the exercise price, are considered to have beenexercised at the beginning of the period and the proceeds received areconsidered to have been used to redeem common shares of the Company at theaverage market price for the period.

 

2. Changes in AccountingPolicies

 

New accounting standards adopted

 

**2008**

** **

**a)  Inventories**

** **

On January 1, 2008,the Company adopted, without restating the comparative figures, CICA Handbook Section 3031,“Inventories”. This new standard establishes measurement and disclosurerequirements concerning inventories. The application of this new standard bythe Company decreased inventories by approximately $2 million, increasedproperty, plant and equipment by $7 million, increased future income taxesby $2 million and increased retained earnings by $3 million.

 

**b)  Going concern**

** **

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 Companyfor interim and annual financial statements beginning January 1, 2008. Theadoption of this new standard had no impact on the consolidated financialstatements.

 

**2007**

** **

**c)  Comprehensive income**

** **

On January 1, 2007,the Company adopted the Canadian Institute of Chartered Accountants (“CICA”)Handbook Section 1530, “Comprehensive Income”. It describes reportingand disclosure recommendations with respect to comprehensive income and itscomponents. Comprehensive income represents changes in net assets arising fromtransactions, events and circumstances not related to shareholders.

 

**d)  Equity**

** **

On January 1, 2007,the Company adopted CICA Handbook Section 3251, “Equity”, which describesstandards for presentation of changes in equity. As a result of theadoption of sections 3251 and 1530, the Company is now presenting aconsolidated statement of shareholders’ equity which includes information aboutcomprehensive income and accumulated other comprehensive income. Thecomparative consolidated financial statements were restated to reclassify thecumulative translation adjustments, which amounted to $9 million as at December 31,2006 to accumulated other comprehensive income.

 

14

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**e)  Financial Instruments—Recognition and Measurement**

** **

On January 1, 2007,the Company adopted CICA Handbook Section 3855, “FinancialInstruments—Recognition and Measurement”. It describes the standards forrecognizing and measuring financial instruments in the financial statements.Under this Section, financial assets available for sale, assets and liabilitiesheld for trading and derivative financial instruments, when part of a hedging relationshipor not, are measured and accounted for at fair value. Certain derivativesembedded in other contracts are also measured and accounted for at fair value.The Company selected January 1, 2003 as its transition date forembedded derivatives.

 

Upon the adoption of thisSection, the Company made the following classifications:

 
| Cash  and cash equivalents                |   | Designated  as held for trading   |
|-------------------------------------------|--------|-----------------------------------|
| Accounts  receivable                      |   | Loans  and receivables            |
| Notes  receivable                         |   | Loans  and receivables            |
| Other  investments                        |   | Designated  as available for sale |
| Investment  in shares held for trading    |   | Designated  as held for trading   |
| Bank  loans and advances                  |   | Other  liabilities                |
| Accounts  payable and accrued liabilities |   | Other  liabilities                |
| Long-term  debt                           |   | Other  liabilities                |
| Derivative  instruments                   |   | Held  for trading                 |

 

This Section wasapplied retroactively without restating the comparative figures and resulted inthe following adjustments as of January 1, 2007:

 
| Other assets                                      |   | (12 | )      |
|---------------------------------------------------|--------|-----|--------|
| Long-term debt                                    |   | (17 | )      |
| Other  liabilities                                |   | 3   |   |
|                                              |   | (14 | )      |
| Net change                                        |   | 2   |   |
| Impact on  accumulated other comprehensive income |   | 1   |   |
| Impact on  retained earnings                      |   | 1   |   |
|                                              |   | 2   |   |

 

**f)   Hedges**

** **

On January 1, 2007,the Company adopted CICA Handbook Section 3865, “Hedges”. It expands theguidelines required by Accounting Guideline 13 (“AcG-13”), “HedgingRelationships”. This Section describes when and how hedge accounting canbe applied as well as the disclosure requirements. Hedge accounting enables therecording of gains, losses, revenues and expenses from the derivative financialinstruments in the same period as for those related to the hedged item.However, any ineffective portion of a hedging relationship is recorded directlyto earnings.

 

As in previous years, theCompany continued to not apply hedge accounting to certain derivative financialinstruments, including interest rate swap agreements of notional amountstotalling US$5.2 million maturing between 2008 and 2012 andcommodity swap agreements on old corrugated containers. Accordingly, gains andlosses from these derivative financial instruments are recorded in earnings.

 

**g)  Accounting changes**

** **

As at January 1,2007, the Company adopted CICA Handbook Section 1506, “Accounting Changes”.This Section establishes criteria to be met, together with the accountingtreatment and disclosure required when there is a change in accountingpolicies, estimates and correction of errors. The adoption of this Section hadno impact on its consolidated financial position or results of operations.

 

**h)  Capital disclosures**

** **

In December 2006,the CICA published Section 1535, “Capital Disclosures”. This new standardestablished disclosure requirements concerning capital such as: qualitativeinformation about its objectives, policies and processes for managing capital;quantitative data about what it regards as capital; whether it has compliedwith any externally imposed capital requirements and, if not, the consequencesof such non-compliance. This Section is effective for interim and annualfinancial statements relating to fiscal years beginning on or after October 1,2007. Earlier adoption is encouraged and thus the Company elected to earlyadopt this new standard in its consolidated financial statements for the yearended December 31, 2007. Disclosure requirements pertaining to this Section arecontained in note 11.

 

**i)   Financial Instruments—Disclosure and Presentation**

** **

In December 2006,the CICA published two new sections: Section 3862, “FinancialInstruments—Disclosures”, and Section 3863, “FinancialInstruments—Presentation”. These new standards replace Section 3861, “FinancialInstruments—Disclosure and Presentation”, revising and enhancing its disclosurerequirements, and carrying forward unchanged its presentation requirements.These Sections are effective for interim and annual financial statementsrelating to fiscal years beginning on or after October 1, 2007. On December 31,2007, the Company elected to early adopt these new standards which had noimpact on the classification and valuation of its financial instruments.Disclosure requirements pertaining to these Sections are contained innote 18.

 

15

----

 

**j)   Others**

** **

As at January 1,2007, Boralex Inc. (“Boralex”), a significantly influenced company, changed itsdepreciation method with respect to certain operating units. This changeresulted in a decrease in retained earnings of $1 million (the Company’sshare). As at January 1, 2007, Boralex also adopted Sections 1530, 3251,3855 and 3865 of the CICA Handbook. The impact on the Companyfollowing its adoption of these Sections is reflected in notes c), d), e) andf) above.

 

New accounting standards applicable in 2009.

 

**k) Goodwill and intangible assets**

** **

In February 2008,the CICA published Section 3064, “Goodwill and Intangible Assets”. Thisnew standard establishes standards for the recognition, measurement,presentation and disclosure of goodwill and intangible assets. The requirementswill be effective for interim period and annual financial statements starting October 1,2008. The Company is presently evaluating the impact of this new standard.

 

**l)   Credit risk and the fair value of financial assets and financialliabilities**

** **

In January 2009, theCICA issued EIC-173 “Credit risk and the fair value of financial assetsand financial 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 andthe credit risk of the counterparty should be taken into account in determiningthe fair value of financial assets and financial liabilities, includingderivative instruments. As at December 31, 2008, the companyevaluated that the adoption of these recommendations would have had no impact.

 

3. Measurement Uncertainty

 

**a)  Goodwill**

** **

The Company performed itsannual goodwill impairment tests as of December 31, 2008. The impairmenttest is accomplished by determining whether the fair value of a reporting unitexceeds the carrying amount of the net assets of that reporting unit as at theassessment date. The methodology used for these tests requires the Company touse judgment and make estimates that are subjective and thus may change.

 

In determining the fairvalue of our reporting units, the Company primarily used the discounted cashflow method and several key assumptions were used for these tests includingamongst others, production levels, selling prices and volume, raw materialscosts, foreign exchange rate, weighted average cost of capital and capitalspending. The forecasts used were derived from our internal budget and forecastand supported or derived from external information on the industry.

 

The Company believes suchassumptions to be reasonable. These assumptions involve a high degree ofjudgment and complexity and reflect management best estimates based onavailable information at the assessment date. In addition, products arecommodity products; therefore, pricing is inherently volatile and often followsa cyclical pattern.

 

Considering thesensitivity of the key assumptions used, there is measurement uncertainty sinceadverse changes in one or in a combination of our key assumptions could requirea significant change in the carrying amount of goodwill.

 

**b)  Property, plant and equipment and intangible assets**

** **

Property, plant and equipmentand intangible assets (referred to as “long-lived assets”) are reviewed forimpairment when events or changes in circumstances indicate that the carryingamount of these assets may not be recoverable through future operations. Thisis accomplished by determining whether projected undiscounted future cash flowsfrom operations exceed the carrying amount of the assets at the assessmentdate. Estimates of future cash flows are based on judgment and could change.

 

For the purpose of thetests performed, estimates of undiscounted future cash flows from operationswere developed and several key assumptions were used for these tests includingamongst others, production levels, selling prices and volume, raw materialcosts and foreign exchange rates. The forecasts used were derived frommanagement internal budget and forecast and supported or derived from externalinformation on the industry.

 

The Company believes suchassumptions to be reasonable. These assumptions involve a high degree ofjudgment and complexity and reflect management best estimates with theinformation available at the assessment date. In addition, products arecommodity products; therefore, pricing is inherently volatile and often followsa cyclical pattern.

 

Considering the above,there is 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.

 

**c)  Income taxes**

** **

The Company is requiredto estimate the income taxes in each jurisdiction in which it operates. Thisincludes 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.

 

16

----

 

4. Discontinued Operations

 

In 2004, the Companydecided to initiate a divestiture plan for its Fine papers and Tissuedistribution activities. These divestitures were realized in February 2006 andMarch 2005 respectively. In addition, the Company ceased itsoperations at its Fine papers Thunder Bay, Ontario, mill on January 21,2006.

 

In 2007, the Companydecided to dispose of its Greenfield SAS pulp mill located in France and itsScierie Lemay sawmill located in Québec both of which were sold in 2008.Consequently, the assets, liabilities, earnings and cash flows from theseactivities for the current period and for all comparative periods areclassified as discontinued operations. The comparative financial information of2006 has been restated to reflect this change.

 

Financial informationrelating to these discontinued operations is as follows:

 
| ** **                                                  | ** ** | **Note**   | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|----------|------------|
| Condensed  balance sheet                                    |       |       |       |       |       |     |       |     |       |
| Current assets                                              | ** ** | ** ** |       | **—** |       | 37       |       | 44       |       |
| Long-term assets                                            | ** ** | ** ** |       | **—** |       | 14       |       | 18       |       |
| Current  liabilities                                        | ** ** | ** ** |       | **—** |       | 19       |       | 22       |       |
| Condensed  statement of earnings (loss)                     |       |       |       |       |       |     |       |     |       |
| Sales                                                       | ** ** | ** ** |       | **8**      |       | 104      |       | 200      |       |
| Depreciation and  amortization                              | ** ** | ** ** |       | **—** |       | 1        |       | 2        |       |
| Operating income  (loss)(1)                                 | ** ** | ** ** |       | **22**     |       | (20      | )          | (21      | )          |
| Interest expense                                            | ** ** | ** ** |       | **1**      |       | 4        |       | 4        |       |
| Recovery of  income taxes                                   | ** ** | ** ** |       | **3**      |       | (5       | )          | (9       | )          |
| Net earnings  (loss) from discontinued operations           | ** ** | ** ** |       | **18**     |       | (19      | )          | (16      | )          |
| Net earnings  (loss) per share from discontinued operations | ** ** | ** ** |       | **0.18**   |       | (0.19    | )          | (0.19    | )          |
| Condensed  statement of cash flows                          |       |       |       |       |       |     |       |     |       |
| Operating  activities                                       | ** ** | ** ** |       | **2**      |       | (36      | )          | (27      | )          |
| Investing  activities                                       |       | 4(a)       |       | **47**     |       | (2       | )          | 84       |       |
| Financing  activities                                       | ** ** | ** ** |       | **1**      |       | (2       | )          | (1       | )          |
| ** **                                                  |       |       |       | **50**     |       | (40      | )          | 56       |       |

 

----

(1) Operating income (loss) includes the followingitems:

 
| ** **                                                       | ** ** | **Note**  |   | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------|------------|-----------|--------|------------|------------|----------|------------|----------|------------|
| Gain on disposal  assets of Greenfield S.A.S.                    |       | 4(a)      |   | **24**     |       | —   |       | —   |       |
| Closure and  restructuring costs                                 |       | 4(b)      |   | **(1**     | **)**      | 1        |       | (2       | )          |
| Impairment of  property, plant and equipment                     |       | 4(b)      |   | **—** |       | (4       | )          | (14      | )          |
| Provision on  disposal of distribution activities of Fine papers |       | 4(c)      |   | **—** |       | —   |       | (1       | )          |
| Legal settlement                                                 |       | 4(d), (e) |   | **—** |       | (1       | )          | (1       | )          |
| Loss on disposal  of Thunder Bay assets                          |       | 4(f)      |   | **—** |       | (5       | )          | —   |       |
| ** **                                                       |       |      |   | **23**     |       | (9       | )          | (18      | )          |

 

----

| (a)    | In 2008, the Company sold  its Greenfield SAS pulp mill located in France for an amount of  $41 million (€28 million). This transaction resulted in a gain of  $24 million before related income taxes of $4 million. In 2008, the  Company sold its assets of Scierie Lemay sawmill for a cash consideration of  $6 million and a contingent consideration of $2 million. No gain or loss  resulted from this transaction.                                                                                                                                                                                                                                                                                                                                   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (b)    | In 2007, the Company  recorded a gain of $6 million related to the settlement of the pension  plan of the Thunder Bay coated Fine paper mill, closed in January 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | The Company also recorded  an impairment charge of $4 million in 2007 (2006—$14 million)  on property, plant and equipment and other assets, and severance and  inventory writedown provisions of $1 million (2007—$5 million)  related to its Scierie Lemay sawmill temporarily closed in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (c)    | On November 17, 2005,  the Company announced that it had reached an agreement for the sale of its  paper merchant division known as Cascades Resources, the Fine papers  distribution activities, to Coast Paper Limited, a subsidiary of PaperlinX  Limited. In 2005, the Company recorded a loss of $9 million to bring the  book value of the net assets to be sold to their net estimated realizable  value. On February 28, 2006, the Company completed the transaction for a  total consideration of $86 million subject to final closing adjustments.  An additional loss of $1 million was recorded in 2006.                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (d)    | In 2003, the Company was  informed that Cascades Resources was the subject of an enquiry by the  Canadian Commissioner of Competition as to whether this division and its  competitors had colluded to unduly reduce market competition among paper  merchants in Canada. On January 9, 2006, the Company entered a guilty  plea in Ontario Superior Court relating to sales of carbonless sheet paper in  Ontario and Québec. Pursuant to the plea, the Company has agreed to pay a  total of $12.5 million in equal installments over a period of six and a  half years. In 2005, a loss of $10 million was recorded in earnings  representing the discounted amount of the liability which is presented as  “Other liabilities” in the balance sheet. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (e)    | In 2007, the Company  recorded a provision of $1 million related to the settlement of the  class actions filed following the infraction described in (d) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (f)    | In 2007, the Company sold  its coated Fine paper mill located in Thunder Bay, Ontario, which resulted in  a disbursement of $5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

17

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5. Business Acquisitions andDisposals

 

**a)  2007 Acquisitions**

** **

On August 1, 2007,the Company acquired certain assets of Honeycomb Products of Michigan Inc. (“HPM”),a honeycomb board mill located in Grand Rapids, Michigan, for a purchase priceof $11 million (US$10.4 million).

 

In 2007, the Companyfinalized the allocation of the purchase price relating to the acquisition ofNorampac Inc. completed in December 2006. Accordingly, the amountsdisclosed in the table below represent the adjustments required to theallocation prepared in 2006.

 

**b)  2006 Acquisitions**

** **

On April 25, 2006,the Company’s Boxboard group announced that it had acquired certain assets fromthe paperboard division of Simkins Industries located in Ridgefield, NewJersey, and New Haven, Connecticut, for $14 million(US$12.5 million). On July 19 and August 7, 2006, the Companycompleted the acquisition of the assets of Caraustar Industries, Inc.’scoated recycled boxboard mills located in Sprague, Connecticut, and certain ofthe assets of Caraustar Industries coated recycled boxboard mill located inRittman, Ohio, for a total purchase price of $18 million(US$15 million). The Sprague mill will now operate under the name ofVersailles.

 

In 2006, the Companyfinalized the allocation of the purchase price relating to the acquisition ofthree corrugated plants from SPB Canada Inc. completed in 2005. The purchaseprice was reduced by $3 million. Accordingly, the amounts disclosed in thetable below represent the adjustments required to the allocation prepared in2005.

 

On December 29,2006, the Company acquired the remaining outstanding common shares (50%) ofNorampac Inc. from Domtar Inc. for a total purchase price of$561 million (including $1 million in transaction costs). Norampac isa manufacturer of containerboard and corrugated products principally in NorthAmerica. The balance sheet and results of Norampac are fully consolidated sincethat date as they were proportionally consolidated prior to the acquisition.

 

These acquisitions havebeen accounted for using the purchase method and the accounts and results ofoperations of these entities have been included in the consolidated financialstatements since their respective acquisition dates. The following allocationsof the purchase prices to the identifiable assets acquired and liabilitiesassumed resulted in goodwill of $16 million as at December 31,2007 and a reduction of goodwill of $7 million in 2006 followingan adjustment to the 2005 acquisition of SPB. None of this goodwill isexpected to be deductible for tax purposes with the exception of an amount of$2 million as at December 31, 2007 (2006—$7 million).

 
|                                      |       |          |       |               |       | 2007       |       |
|-------------------------------------------|------------|---------------|------------|--------------------|------------|------------|------------|
|                                      |       | **HPM**       |       |               |       |       |       |
| **Acquired company**                 | ** ** | **Specialty** | ** ** | **Norampac**       | ** ** | ** ** | ** ** |
| **Business segment**                 | ** ** | **products**  | ** ** | **Containerboard** | ** ** | **Total**  | ** ** |
| Accounts  receivable                      |       | 1             |       | —             |       | 1          |       |
| Inventories                               |       | 1             |       | —             |       | 1          |       |
| Property, plant  and equipment            |       | 2             |       | (57                | )          | (55        | )          |
| Customer  relationships and client lists  |       | 5             |       | 45                 |       | 50         |       |
| Goodwill                                  |       | 2             |       | 14                 |       | 16         |       |
|                                      |       | 11            |       | 2                  |       | 13         |       |
| Accounts payable  and accrued liabilities |       | —        |       | (1                 | )          | (1         | )          |
| Other  liabilities                        |       | —        |       | 2                  |       | 2          |       |
| Non-controlling  interest                 |       | —        |       | (3                 | )          | (3         | )          |
|                                      |       | 11            |       | —             |       | 11         |       |
| Less: Balance of  purchase price          |       | (1            | )          | —             |       | (1         | )          |
| **Total  consideration paid**             |       | 10            |       | —             |       | 10         |       |

 
|                                      |       |         |       |          |       |               |       |               |       | 2006       |       |
|-------------------------------------------|------------|--------------|------------|---------------|------------|--------------------|------------|--------------------|------------|------------|------------|
|                                      |       |         |       |          |       |               |       |               |       |       |       |
| **Acquired company**                 | ** ** | **Simkins**  | ** ** | **Caraustar** | ** ** | **SPB**            | ** ** | **Norampac**       | ** ** | ** ** | ** ** |
| **Business segment**                 | ** ** | **Boxboard** | ** ** | **Boxboard**  | ** ** | **Containerboard** | ** ** | **Containerboard** | ** ** | **Total**  | ** ** |
| Cash and cash  equivalents                |       | —       |       | —        |       | —             |       | 18                 |       | 18         |       |
| Accounts  receivable                      |       | —       |       | 7             |       | (2                 | )          | 111                |       | 116        |       |
| Inventories                               |       | —       |       | 4             |       | —             |       | 75                 |       | 79         |       |
| Property, plant  and equipment            |       | —       |       | 18            |       | —             |       | 583                |       | 601        |       |
| Other assets                              |       | —       |       | —        |       | —             |       | 13                 |       | 13         |       |
| Customer  relationships and client lists  |       | 11           |       | —        |       | 4                  |       | 24                 |       | 39         |       |
| Goodwill                                  |       | 7            |       | —        |       | (7                 | )          | 187                |       | 187        |       |
|                                      |       | 18           |       | 29            |       | (5                 | )          | 1,011              |       | 1,053      |       |
| Bank loans and  advances                  |       | —       |       | —        |       | —             |       | (2                 | )          | (2         | )          |
| Accounts payable  and accrued liabilities |       | —       |       | (6            | )          | -                  |       | (92                | )          | (98        | )          |
| Long-term debt                            |       | —       |       | —        |       | —             |       | (182               | )          | (182       | )          |
| Other  liabilities                        |       | (4           | )          | (5            | )          | 2                  |       | (155               | )          | (162       | )          |
| Non-controlling  interest                 |       | —       |       | —        |       | —             |       | (19                | )          | (19        | )          |
| **Total  consideration paid**             |       | 14           |       | 18            |       | (3                 | )          | 561                |       | 590        |       |

 

18

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**c)  2008 Disposals**

** **

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 assets of Scierie Lemay sawmill for a cash considerationof $6 million and a contingent consideration of $2 million which isequal to its depreciated book value.

 
| **Business segment**                      | ** ** | **Boxboard  (Discontinued  operations)** | ** ** | **Specialty  Products  (Discontinued  operations)** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------|------------|
| Accounts  receivable                           |       | —                                   |       | 18                                                  |       |
| Inventories                                    |       | —                                   |       | 9                                                   |       |
| Property, plant  and equipment                 |       | —                                   |       | 5                                                   |       |
| Other assets                                   |       | 8                                        |       | 4                                                   |       |
|                                           |       | 8                                        |       | 36                                                  |       |
| Accounts payable  and accrued liabilities      |       | —                                   |       | (15                                                 | )          |
|                                           |       | 8                                        |       | 21                                                  |       |
| Balance of sale  price—notes receivable   |       | (2                                       | )          | —                                              |       |
| Gain on  disposal, net of related income taxes |       | —                                   |       | 20                                                  |       |
| **Total  consideration received**              |       | 6                                        |       | 41                                                  |       |

 

**d)  2007 Disposals**

** **

On January 25, 2007,the Company sold its 40% interest in GSD Packaging, LLC, a U.S. food pailmanufacturing company of the Boxboard group, to Rock-Tenn Company for a cashconsideration of $38 million (US$32 million). The Company realized again of $25 million before income taxes of $11 million.

 
| **Business segment**                               | ** ** | **Boxboard** | ** ** |
|---------------------------------------------------------|------------|--------------|------------|
| Accounts  receivable                                    |       | 2            |       |
| Inventories                                             |       | 4            |       |
| Property, plant  and equipment                          |       | 2            |       |
| Goodwill                                                |       | 6            |       |
|                                                    |       | 14           |       |
| Accounts payable  and accrued liabilities               |       | (2           | )          |
|                                                    |       | 12           |       |
| Gain on disposal                                        |       | 25           |       |
| **Total  consideration received, net of cash disposed** |       | 37           |       |

 

**e)  2006 Disposals**

** **

On February 28,2006, the Company sold its Fine papers distribution activities for a totalconsideration of $86 million.

 

On September 7,2006, the Company disposed of its investment in a joint venture of its Boxboardgroup for a consideration of $11 million (US$10 million), of which$9 million (US$8 million) was received at closing and $2 million(US$2 million) will be received over the next two years. The Companyrealized a gain of $4 million before income taxes of $2 million.

 

Assets and liabilities atthe time of disposal where as follows:

 

 
| **Business segment**                                | ** ** | **Specialty  products  (Discontinued  operations)** | ** ** | **Boxboard** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------|------------|
| Accounts  receivable                                     |       | 56                                                  |       | 4            |       |
| Inventories                                              |       | 49                                                  |       | 3            |       |
| Property, plant  and equipment                           |       | 5                                                   |       | 4            |       |
|                                                     |       | 110                                                 |       | 11           |       |
| Accounts payable  and accrued liabilities                |       | (23                                                 | )          | (3           | )          |
| Long-term debt                                           |       | —                                              |       | (2           | )          |
|                                                     |       | 87                                                  |       | 6            |       |
| Purchase price  adjustment and gain on disposal          |       | (1                                                  | )          | 4            |       |
| Balance of sale  price—receivables and other assets |       | —                                              |       | (2           | )          |
| **Total  consideration received, net of cash disposed**  |       | 86                                                  |       | 8            |       |

 

19

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6.Inventories

 
| ** **     | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Finished goods | ** ** | **261**  |       | 257      |       |
| Raw materials  | ** ** | **150**  |       | 125      |       |
| Supplies       | ** ** | **169**  |       | 173      |       |
| ** **     |       | **580**  |       | 555      |       |

 

As at December 31,2008, the Company had applied write-downs of $3 million to finished goodsinventory (2007—$3 million), $1 million to raw materials inventory(2007—$1 million) and $3 million to supplies (2007—$2 million).As at December 31, 2008, the carrying amount of inventory carried out NRVconsisted of $11 million of finished good inventory, $1 million ofraw materials inventory and $4 million of supplies (2007—$11 million,$- million and $4 million).

 

The production cost ofinventories recognized as expense in 2008 included in cost of salesamounts to $3,348 million and $9 million is include in net earning (loss) fromdiscontinued operations. In 2007, production cost of $3,208 million wasincluded in cost of sales and $109 million was included in net earning (loss)from discontinued operations.

 

7.Property, Plant and Equipment

 
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | 2008 | ** ** |
|------------|------------|------------|------------|------------|------------|------|------------|

 
| ** **               | ** ** | **Cost**  | ** ** | **Accumulated  depreciation** | ** ** | **Net**   | ** ** |
|--------------------------|------------|-----------|------------|-------------------------------|------------|-----------|------------|
| Lands                    | ** ** | **87**    | ** ** | **—**                    | ** ** | **87**    | ** ** |
| Buildings                | ** ** | **538**   | ** ** | **170**                       | ** ** | **368**   | ** ** |
| Machinery and  equipment | ** ** | **2,740** | ** ** | **1,380**                     | ** ** | **1,360** | ** ** |
| Automotive  equipment    | ** ** | **66**    | ** ** | **48**                        | ** ** | **18**    | ** ** |
| Spare parts              | ** ** | **9**     | ** ** | **2**                         | ** ** | **7**     | ** ** |
| Others                   | ** ** | **392**   | ** ** | **195**                       | ** ** | **197**   | ** ** |
| ** **               | ** ** | **3,832** | ** ** | **1,795**                     | ** ** | **2,037** | ** ** |

 
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | 2007 | ** ** |
|------------|------------|------------|------------|------------|------------|------|------------|

 
| ** **               | ** ** | **Cost** | ** ** | **Accumulated  depreciation** | ** ** | **Net** | ** ** |
|--------------------------|------------|----------|------------|-------------------------------|------------|---------|------------|
| Lands                    |       | 81       |       | —                        |       | 81      |       |
| Buildings                |       | 517      |       | 176                           |       | 341     |       |
| Machinery and  equipment |       | 2,708    |       | 1,412                         |       | 1,296   |       |
| Automotive  equipment    |       | 65       |       | 48                            |       | 17      |       |
| Spare parts              |       | 3        |       | —                        |       | 3       |       |
| Others                   |       | 297      |       | 149                           |       | 148     |       |
|                     |       | 3,671    |       | 1,785                         |       | 1,886   |       |

 

Property, plant andequipment include assets under capital leases with a cost of $5 millionand accumulated depreciation of $3 million as at December 31,2008 (2007—$7 million and $2 million respectively). Otherproperty, plant and equipment include machinery and equipment in the process ofinstallation with a book value of $55 million (2007—$39 million),deposits on purchases of equipment amounting to $20 million(2007—$12 million) and temporarely idled properties, machinery andequipment with a net book value of $114 million (2007—$89 million) ofwhich $105 million continues to be depreciated.

 

Depreciation of property,plant and equipment amounted to $200 million for the year ended December 31,2008 (2007—$197 million; 2006—$156 million).

 

20

----

 

8.Intangible Assets, Other Assets and Goodwill

 

a)              Intangibleassets and other assets are detailed as follows:

 
| ** **                              | ** ** | **2008** | ** ** | **2007**                      | ** ** |
|-----------------------------------------|------------|----------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** |
| Intangible  assets                      |       |     |       |                          |       |   |   |   |   |   |   |   |   |
| Customer  relationship and client lists | ** ** | **162**  | ** ** | **26**                        | ** ** | **136** |   | 131 |   | 15 |   | 116 |   |
| Other  finite-life intangible assets    | ** ** | **9**    | ** ** | **3**                         | ** ** | **6** |   | 18 |   | 4 |   | 14 |   |
| ** **                              | ** ** | **171**  | ** ** | **29**                        | ** ** | **142** |   | 149 |   | 19 |   | 130 |   |

 
| ** **                                              | ** ** | **Note**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Investments in  significantly influenced companies (1)  | ** ** | ** ** |       | **147**  |       | 119      |       |
| Notes receivable                                        | ** ** | ** ** |       | **8**    |       | 7        |       |
| Other  investments                                      | ** ** | ** ** |       | **3**    |       | 11       |       |
| Investment in  shares held for trading (2)              | ** ** | ** ** |       | **2**    |       | 1        |       |
| Deferred charges  (3)                                   | ** ** | ** ** |       | **14**   |       | 14       |       |
| Employee future  benefits                               |       | 16(b)      |       | **97**   |       | 68       |       |
| Fair value of  derivative financial assets              | ** ** | ** ** |       | **13**   |       | 28       |       |
| ** **                                              |       |       |       | **284**  |       | 248      |       |
| Less: Current  portion, included in accounts receivable | ** ** | ** ** |       | **1**    |       | 11       |       |
| Total other  assets                                     | ** ** | ** ** |       | **283**  |       | 237      |       |

 

----

(1)        Investments in significantly influencedcompanies include a 34% interest in Boralex Inc. for a net book value of$121 million and a market value of $97 million (2007—$96 millionand $222 million respectively). In the opinion of management, this doesnot represent a permanent decline in value and as such, no provision has beentaken by the Company. In 2008, the Company recorded a dilution loss of0.4 million resulting from the decrease of it participation for less than0.5%. In 2007 a gain of $15 million resulting from the decrease ofits participation from 43% to 34% as a result of a public equity offering of7.3 million common shares by Boralex at a price of $15.00 each.

 

(2)        The following are the details of net changes inheld for trading investments in shares:

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Investments at  cost—Beginning of year |       | **1**    | ** ** | 1        |       |
| Adjustment to  fair value                   |       | **1**    | ** ** | —   |       |
|                                        |       | **2**    | ** ** | 1        |       |

 

(3)

 
| ** **       | ** ** | **2008** | ** ** | **2007**                      | ** ** |
|------------------|------------|----------|------------|-------------------------------|------------|
| ** **       | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** |
| Deferred charges |       |     |       |                          |       |   |   |   |   |   |   |   |   |
| Start-up cost    |       | **6**    | ** ** | **6**                         | ** ** | **—** |   | 8 |   | 7 |   | 1 |   |
| Financing costs  |       | **14**   | ** ** | **9**                         | ** ** | **5** |   | 13 |   | 7 |   | 6 |   |
| Other            |       | **12**   | ** ** | **3**                         | ** ** | **9** |   | 8 |   | 1 |   | 7 |   |
|             |       | **32**   | ** ** | **18**                        | ** ** | **14** |   | 29 |   | 15 |   | 14 |   |

 

21

----

 

b)             Goodwillfluctuated as follows:

 
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2008** | ** ** |
|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------|------------|

 
| ** **                                         | ** ** | **Packaging products** | ** ** | ** **         | ** ** | ** **              | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **Boxboard**                | ** ** | **Containerboard** | ** ** | **Specialty  products** | ** ** | **Sub-total** | ** ** | **Tissue papers** | ** ** | **Total** | ** ** |
| Carrying value  of goodwill—Beginning of year | ** ** | **27**                      | ** ** | **260**            | ** ** | **15**                  | ** ** | **302** | ** ** | **10** | ** ** | **312** | ** ** |
| Impairment                                         | ** ** | **(8**                      | **)**      | **—**         | ** ** | **—**              | ** ** | **(8** | **)** | **—** | ** ** | **(8** | **)** |
| Foreign currency  translation and others           | ** ** | **6**                       | ** ** | **10**             | ** ** | **1**                   | ** ** | **17** | ** ** | **—** | ** ** | **17** | ** ** |
| Carrying value  of goodwill—End of year       | ** ** | **25**                      | ** ** | **270**            | ** ** | **16**                  | ** ** | **311** | ** ** | **10** | ** ** | **321** | ** ** |

 
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | 2007 | ** ** |
|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------|------------|

 
| ** **                                                   | ** ** | **Packaging products** | ** ** | ** **         | ** ** | ** **              | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                                   | ** ** | **Boxboard**                | ** ** | **Containerboard** | ** ** | **Specialty  products** | ** ** | **Sub-total** | ** ** | **Tissue papers** | ** ** | **Total** | ** ** |
| Carrying value  of goodwill—Beginning of year           |       | 36                          |       | 257                |       | 10                      |       | 303 |   | 10 |   | 313 |   |
| Goodwill  resulting from business acquisitions and disposals |       | (6                          | )          | 11                 |       | 5                       |       | 10 |   | — |   | 10 |   |
| Foreign currency  translation and others                     |       | (3                          | )          | (8                 | )          | —                  |       | (11 | ) | — |   | (11 | ) |
| Carrying value  of goodwill—End of year                 |       | 27                          |       | 260                |       | 15                      |       | 302 |   | 10 |   | 312 |   |

 

c)              Amortizationof intangible and others assets amounted to $15 million for the year endedDecember 31, 2008 (2007—$13 million; 2006—$7 million).Amortization of financing costs is presented in interest expense.

 

The weighted averageamortization period is as follows (in number of years):

 
| Intangible assets                        |   |   |   |
|------------------------------------------|--------|--------|--------|
| Customer  relationships and client lists |   | 16     |   |
| Other  finite-life intangible assets     |   | 12     |   |
| Deferred charges                         |   | 6      |   |
| Start-up cost                            |   | 6      |   |
| Financing costs                          |   | 6      |   |
| Other                                    |   | 5      |   |

 

The estimated aggregateamount of amortization expense for other intangible assets and other assets ineach of the next five years is as follows:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009                                         |       | 16         |       |
| 2010                                         |       | 14         |       |
| 2011                                         |       | 14         |       |
| 2012                                         |       | 13         |       |
| 2013                                         |       | 11         |       |

 

22

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9.Long-term Debt

 
| ** **                                                                                                      | ** ** | **Note**   | ** ** | **2008**  | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|
| Revolving credit  facility, weighted average rate of 2.54% as at December 31, 2008,  maturing in 2011 |       | (a)        |       | **427**   |       | 553      |       |
| Term credit  facility, bearing interest at 2.54% as at December 31, 2008,  maturing in 2012           |       | (a)        |       | **100**   |       | 100      |       |
| 7.25% Unsecured  senior notes of US$672 million (2007—US$675 million), maturing  in 2013    |       | (b)        |       | **823**   |       | 667      |       |
| 6.75% Unsecured  senior notes of US$250 million (2007—US$250 million), maturing  in 2013    |       | (b)        |       | **306**   |       | 247      |       |
| Capital lease  obligations                                                                                      |       | (e)        |       | **1**     |       | 2        |       |
| Other debts of  subsidiaries                                                                                    | ** ** | ** ** |       | **15**    |       | 15       |       |
| Other debts  without recourse to the Company                                                                    | ** ** | ** ** |       | **47**    |       | 2        |       |
| ** **                                                                                                      |       |       |       | **1,719** |       | 1,586    |       |
| Less:  Unamortized financing costs                                                                              | ** ** | ** ** |       | **11**    |       | 12       |       |
| Total long-term  debt                                                                                           | ** ** | ** ** |       | **1,708** |       | 1,574    |       |
| Less:                                                                                                           |       |       |       |      |       |     |       |
| Current portion  of debts of subsidiaries                                                                       | ** ** | ** ** |       | **2**     |       | 3        |       |
| Current portion  of debts without recourse to the Company                                                       |       | (f)        |       | **34**    |       | 1        |       |
| ** **                                                                                                      |       |       |       | **36**    |       | 4        |       |
| ** **                                                                                                      |       |       |       | **1,672** |       | 1,570    |       |

 

----

(a)        OnDecember 29, 2006, in connection with the acquisition of the remainingoutstanding common shares of Norampac, the Company completed the refinancing ofits $875 million (including $325 million of Norampac) credit facilityto provide for new $850 million credit facilities consisting of a$750 million secured revolving credit facility maturing in December 2011 anda $100 million secured term facility maturing in October 2012. Theterm facility can be reimbursed without penalty at the Company’s option anytime prior to maturity. The Company’s obligations under the revolving creditfacility and the term facility are secured by all inventory and receivables ofthe Company and its subsidiaries located in North America and by the property,plant and equipment of five of its mills.

 

On June 27, 2007, the Company amended its creditfacility to add a new 12-month unsecured revolving credit facility in the amountof $100 million to provide additional availability of funds maturing in June 2008.On May 7, 2008, the Company amended its credit facility to extend its12-month unsecured revolving credit facility in the amount of $100 millionfrom June 2008 to June 2009 and to postpone the change ofthe required covenants until July 1, 2009. As at December 31,2008 the unsecured credit facility was unused.

 

On February 13, 2009, the Company entered into anagreement to amend its existing bank credit agreement. Under the terms of theamendment the existing financial covenants, namely the maximum funded debt tocapitalization ratio of 65% and the minimum interest coverage of 2.25x willremain unchanged until its maturity of the credit facility. As a result ofthe amendment, the interest rate applicable to borrowings outstanding wasincreased. The amendment also cancels the unsecured revolving credit facilityin the amount of $100 million which was originally scheduled to terminatein June 2009.

 

As at December 31, 2008, accounts receivable andinventories totaling approximately $825 million (2007—$749 million)as well as property, plant and equipment totaling approximately$208 million (2007—$220 million) were pledged as collateral for theCompany’s revolving credit facility.

 

(b)       Asat December 31, 2008, the fair value of the unsecured senior notes and thecapital lease obligations of the Company was estimated at $571 million (December 31,2007—$856 million) based on the market value of the unsecured senior notesand on discounted future cash flows using interest rates available for issueswith similar terms and average maturities.

 

In 2008, the Company purchased US$3 million ofnominal value of its 7.25% Unsecured senior notes for an amount ofUS$1,7 million. These notes were not cancelled and are still outstandingas at December 31, 2008 but are held by the Company. The gain resultingfrom the difference between the nominal value and the amount paid has beenrecorded in earnings in reduction of the foreign exchange loss on long-termdebt.

 

(c)        Asat December 31, 2008, the long-term debt included amounts denominated inforeign currencies of US$1,035 million and €75 million (December 31,2007—US$1,002 million and €58 million).

 

(d)       Theestimated aggregate amounts of repayments on long-term debt, excluding capitallease obligations, premium on long-term debt and other debts, in each of thenext five years are as follows:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009                                         |       | 35         |       |
| 2010                                         |       | 4          |       |
| 2011                                         |       | 431        |       |
| 2012                                         |       | 104        |       |
| 2013                                         |       | 1,133      |       |
| Thereafter                                   |       | 5          |       |

 

23

----

 

(e)        Asat December 31, 2008, future minimum payments under capital leaseobligations is $1 million for the year ending December 31, 2009.

 

(f)          Asat December 31, 2008, Reno De Medici S.p.A. (RdM) was not in compliancewith certain contractual obligations under two loans signed in 2006 withits lenders. On February 12, 2009, the lenders agreed to waive RdM’sobligations as at December 31, 2008. RdM is currently in discussion withits lenders to resolve this matter for 2009 and for the years thereafter.As a result, the long-term debt in the amount of $32 million (€19 million)is presented in the current portion.

 

10.Other Liabilities

 
| ** **                                                                   | ** ** | **Note**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Employee future  benefits                                                    |       | 16(b)      |       | **124**  |       | 110      |       |
| Future income  taxes                                                         |       | 14(c)      |       | **199**  |       | 228      |       |
| Fair value of  derivative financial liabilities                              | ** ** | ** ** |       | **43**   |       | 1        |       |
| Legal settlement                                                             |       | 4(d)       |       | **9**    |       | 11       |       |
| Non-controlling  interest                                                    | ** ** | ** ** |       | **22**   |       | 25       |       |
| Other                                                                        | ** ** | ** ** |       | **16**   |       | 9        |       |
| ** **                                                                   |       |       |       | **413**  |       | 384      |       |
| Less: Current  portion, included in accounts payable and accrued liabilities | ** ** | ** ** |       | **36**   |       | 7        |       |
| Total other  liabilities                                                     | ** ** | ** ** |       | **377**  |       | 377      |       |

 

11.Capital Stock

 
| ** **                                       | ** ** | **Note** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Common shares                                    |       | (b),(d)  |       | **506**  |       | 509      |       |
| Adjustment  relating to stock options and others |       | (c)      |       | **9**    |       | 8        |       |
| ** **                                       |       |     |       | **515**  |       | 517      |       |

 

a)            Capitalrisk management

 

Capitalis defined as long-term debt, bank loans and advances net of cash and cashequivalents and shareholders’ equity which includes capital stock.

 
| ** **                                 | ** ** | **2008**  | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|-----------|------------|----------|------------|
| Cash and cash  equivalent                  | ** ** | **(11**   | **)**      | (25      | )          |
| Bank loan and  advances                    | ** ** | **104**   |       | 47       |       |
| Long-term debt,  including current portion | ** ** | **1,708** |       | 1,574    |       |
| ** **                                 |       | **1,801** |       | 1,596    |       |
| Shareholders’  equity                 | ** ** | **1,256** |       | 1,199    |       |
| Total capital                              | ** ** | **3,057** |       | 2,795    |       |

 

The Company’sobjectives when managing capital are:

 

·                  tosafeguard the Company’s ability to continue as a going concern in order toprovide returns to shareholders;

 

·                  tomaintain an optimal capital structure and reduce the cost of capital;

 

·                  tomake proper capital investments that are significant to ensure the Companyremains competitive;

 

·                  toredeem common shares based on an annual redemption program.

 

TheCompany sets the amount of capital in proportion to risk. The Company managesits capital structure and makes adjustments to it in the light of changes ineconomic conditions and the risk characteristics of the underlying assets. Inorder to maintain or adjust the capital structure, the Company may adjust theamount of dividends paid to shareholders, return capital to shareholders, issuenew shares and acquire or sell assets to improve its financial performance andflexibility.

 

TheCompany monitors capital on a monthly and quarterly basis based on differentfinancial ratios and non-financial performance indicators. Also, the Companymust conform to certain financial ratios under its various credit agreements.These are a maximum ratio of funded debt to capitalization of 65% and a minimuminterest coverage ratio of 2.25x. The Company must also comply with aconsolidated interest coverage ratio to incur additional debt. Funded debt isdefined as liabilities as per the consolidated balance sheet, includingguarantees and liens granted in respect of funded debt of another person butexcluding other long-term liabilities, trade accounts payable, obligations underoperating leases and other accrued obligations (2008—$1,714 million;2007—$1,619 million). The capitalization ratio is calculated as “shareholders’equity” as shown in consolidated balance sheet plus the funded debt. Theinterest coverage ratio is defined as EBITDA to interest expense. The EBITDA isdefined as net income of the last four quarters plus interest expense, incometaxes, amortization and depreciation, expense for stock options and dividendsreceived from a person who is not a credit party (2008—$285 million;2007—$310 million). Excluded from net income are share of results ofequity investments and gains or losses from non-recurring items. Interestexpense is calculated as interest and financial charges determined inaccordance with Canadian GAAP plus any capitalized interest but excluding theamortization of deferred financing costs, upfront and financing costs and alsounrealized gains or losses arising from hedging agreements. It also excludesany gains or losses on the translation of any long-

 

24

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termdebt denominated in a foreign currency. The consolidated interest coverageratio to incur additional debt is calculated as defined in the senior notesindenture dated February 5, 2003.

 

As of December 31, 2008, the funded debt tocapitalization ratio stood at 57.7% and the interest coverage ratio was at2.95x. The Company is in compliance with the ratio requirements of its lenderswhich were successfully renegotiated on February 13, 2009 as describedabove. If cash is available, the Company will use it to reduce its revolvingfacility utilization.

 

The Company’s credit facility is subject to customaryterms and conditions for loans of this nature, including limits on incurringadditional indebtedness and granting liens or selling assets without theconsent of the lenders.

 

Theunsecured senior notes are subject to customary covenants restricting theCompany’s ability to, among other things, incur additional debt, pay dividendsand make other restricted payments as defined in the Indenture dated February 5,2003.

 

On aregular basis, the Company meets with the rating agencies. On August 13,2008, the credit rating related to the Company’s secured and unsecured debt andoverall corporate rating was downgraded by Standard & Poor’sreflecting, in their view, the Company’s deteriorating financial risk profileand high leverage. Their outlook is negative. On October 6, 2008, Moody’sInvestors Service revised its outlook to negative reflecting, in their view,the Company’s weakened credit protection metrics and liquidity position but didnot change its rating. The downgrade from Standard & Poor’s did nothave any effects on the Company’s credit agreement with respect to itscovenants and interest rate margins.

 

TheCompany normally invests between $100 and $200 million yearly inpurchases of property, plant and equipment. These amounts are carefullyreviewed during the course of the year in relation to operating results andstrategic actions approved by the Board. These investments, combined withannual maintenance, enhance the stability of the Company’s business units andimprove cost competitiveness through new technology and improved processprocedures.

 

TheCompany has an annual share redemption program in place to redeem itsoutstanding common shares when the market price is judged appropriate bymanagement. In addition to limitations to the normal course issuer bid, theCompany’s ability to redeem common shares is limited by its senior notesindenture.

 

b)           Theauthorized capital stock of the Company consists of an unlimited number ofcommon shares, without nominal value, and an unlimited number of Class Aand B shares issuable in series without nominal value. Over the past two years,the common shares have fluctuated as follows:

 
| ** **                                  | ** ** | ** ** | ** ** | **2008**                       | ** ** | **2007**   | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **Note**   | ** ** | **Number of shares** | ** ** | **$**      | ** ** | **Number of shares** | ** ** | **$** | ** ** |
| Balance—Beginning  of year             | ** ** | ** ** | ** ** | **99,144,351**                 |       | **509**    |       | 99,533,654 |   | 510 |   |
| Shares issued on  exercise of stock options |       | (c)        | ** ** | **—**                     | ** ** | **—** |       | 103,397 |   | 1 |   |
| Redemption of  common shares                |       | (d)        |       | **(595,500**                   | **)**      | **(3**     | **)**      | (492,700 | ) | (2 | ) |
| Balance—End of  year                   | ** ** | ** ** | ** ** | **98,548,851**                 |       | **506**    |       | 99,144,351 |   | 509 |   |

 

c)            Underthe terms of a share option plan adopted on December 15, 1998 forofficers and key employees of the Company, 6,300,075 common shares have specificallyreserved for issuance. Each option will expire at a date not to exceed10 years following the grant date of the option. The exercise price of anoption shall not be lower than the market value of the share at the date ofgrant, determined as the average of the closing price of the share on theToronto Stock Exchange on the five trading days preceding the date of grant.The terms for exercising the options granted before December 31,2003 are 25% of the number of shares under option within 12 monthsafter the date of grant, and up to an additional 25% every 12 months afterthe first, second and third anniversary dates of grant. The terms forexercising the options granted in 2004 and thereafter are 25% of thenumber of shares under option within 12 months after the first anniversary dateof grant, and up to an additional 25% every 12 months after the second,third and fourth anniversary dates of grant. Options cannot be exercised if themarket value of the share is lower than its book value at the date of grant.The stock-based compensation cost related to these options amounted to$1 million (2007—$1.4 million; 2006—$1.4 million).

 

Changesin the number of options outstanding as at December 31 are asfollows:

 
| ** **                            | ** ** | **2008**                    | ** ** | **2007**                                            | ** ** | **2006**                    | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Number of  options** | ** ** | **Weighted  average  exercise price  $ ** | ** ** | **Number of  options** | ** ** | **Weighted  average  exercise price  $** | ** ** | **Number of  options** | ** ** | **Weighted  average  exercise price  $** | ** ** |
| Beginning of  year                    | ** ** | **2,459,056**               | ** ** | **11.28**                                           |       | 2,315,391                   |       | 11.14 |   | 2,115,167 |   | 11.03 |   |
| Granted                               | ** ** | **539,384**                 | ** ** | **7.81**                                            |       | 422,068                     |       | 11.83 |   | 417,416 |   | 11.49 |   |
| Exercised                             | ** ** | **—**                  | ** ** | **—**                                          |       | (103,397                    | )          | 7.76 |   | (131,229 | ) | 9.35 |   |
| Forfeited                             | ** ** | **(94,934**                 | **)**      | **12.00**                                           |       | (175,006                    | )          | 12.78 |   | (85,963 | ) | 13.03 |   |
| End of year                           | ** ** | **2,903,506**               | ** ** | **10.61**                                           |       | 2,459,056                   |       | 11.28 |   | 2,315,391 |   | 11.14 |   |
| Options  exercisable—End of year | ** ** | **31,496**                  | ** ** | **8.29**                                            |       | 31,496                      |       | 8.29 |   | 1,426,071 |   | 10.47 |   |

 

25

----

 

The following options were outstanding as at December 31, 2008:

 
| ** **            | ** ** | **Options  outstanding**    | ** ** | **Options  exercisable**                                | ** ** | ** **                  | ** ** |
|-----------------------|------------|-----------------------------|------------|---------------------------------------------------------|------------|-----------------------------|------------|
| **Year granted** | ** ** | **Number of  options** | ** ** | **Weighted  average exercise  price $ ** | ** ** | **Number of  options** | ** ** | **Weighted  average exercise  price $ ** | ** ** | **Expiration date** | ** ** |
| 1999                  |       | 284,415                     |       | 8.49                                                    |       | 1,770                       |       | 12.29 |   | 2009 |   |
| 2000                  |       | 29,726                      |       | 8.05                                                    |       | 29,726                      |       | 8.05 |   | 2010 |   |
| 2001                  |       | 272,011                     |       | 6.82                                                    |       | —                      |       | — |   | 2011 |   |
| 2002                  |       | 179,171                     |       | 13.24                                                   |       | —                      |       | — |   | 2012 |   |
| 2003                  |       | 207,449                     |       | 13.04                                                   |       | —                      |       | — |   | 2013 |   |
| 2004                  |       | 315,190                     |       | 13.01                                                   |       | —                      |       | — |   | 2014 |   |
| 2005                  |       | 310,696                     |       | 12.73                                                   |       | —                      |       | — |   | 2015 |   |
| 2006                  |       | 372,294                     |       | 11.49                                                   |       | —                      |       | — |   | 2016 |   |
| 2007                  |       | 400,161                     |       | 11.83                                                   |       | —                      |       | — |   | 2017 |   |
| 2008                  |       | 532,393                     |       | 7.81                                                    |       | —                      |       | — |   | 2018 |   |
|                  |       | 2,903,506                   |       |                                                    |       | 31,496                      |       |   |   |   |   |

 

Thefollowing assumptions were used to estimate the fair value, at the date ofgrant, of each option issued to employees:

 
| ** **                                     | ** ** | **2008**         | ** ** | **2007**     | ** ** | **2006**     | ** ** |
|------------------------------------------------|------------|------------------|------------|--------------|------------|--------------|------------|
| Risk-free  interest rate                       | ** ** | **4.1**          | **%**      | 4.2          | %          | 4.5          | %          |
| Expected  dividend yield                       | ** ** | **2.14**         | **%**      | 1.37         | %          | 1.46         | %          |
| Expected life of  options                      | ** ** | **6 years** |       | 6 years |       | 6 years |       |
| Expected  volatility                           | ** ** | **24**           | **%**      | 24           | %          | 33           | %          |
| Weighted average  fair value of issued options | ** ** | **$**            | **1.73**   |         | $          | 3.22         |       | $ | 3.65 |   |
|                                                |            |                  |            |              |            |              |            |  |  |  |

 

d)           In2008, in the normal course of business, the Company renewed its redemptionprogram of a maximum of 4,946,517 common shares with the Toronto StockExchange, which shares represent approximately 5% of issued and outstandingcommon shares. The redemption authorization is valid from March 13,2008 to March 12, 2009. In 2008, the Company redeemed595,500 common shares under this program for a consideration ofapproximately $4 million (2007—$5 million; 2006—$4 million).

 

e)            Thebasic and diluted net earnings (loss) per common share are calculated asfollows:

 
| ** **                                              | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Net earnings  (loss) available to common shareholders   | ** ** | **(55.2**  | **)**      | 94.8     |       | 3.3      |       |
| Weighted average  number of common shares               | ** ** | **98.8**   |       | 99.3     |       | 80.9     |       |
| Dilution effect  of stock options                       | ** ** | **—** |       | —   |       | 0.1      |       |
| Adjusted  weighted average number of common shares      | ** ** | **98.8**   |       | 99.3     |       | 81.0     |       |
| Basic and  diluted net earnings (loss) per common share | ** ** | **(0.56**  | **)**      | 0.95     |       | 0.04     |       |

 

Incalculating diluted earnings per share for 2008, 2007 and 2006, stockoptions of 2,903,506, 2,429,330 and 1,636,110 respectively wereexcluded due to their antidilutive effect.

 

f)              TheCompany offers to its Canadian employees a share purchase plan of its commonshares. Employees can contribute voluntarily up to a maximum of 5% of theirsalary and, if certain conditions are met, the Company will contribute to theplan 25% of the employee’s contribution.

 

Theshares are purchased on the market on a predetermined date each month. For theyear ended December 31, 2008, the Company’s contribution to the planamounted to $0.7 million (2007—$0.7 million and2006—$0.6 million).

 

g)           TheCompany has a Deferred Share Unit Plan for the benefit of its externaldirectors allowing them to receive all or a portion of their annualcompensation in the form of Deferred Share Units (DSUs). A DSU is a notionalunit equivalent in value to the Company’s common share. Upon resignation fromthe Board of Directors, participants are entitled to receive the payment oftheir cumulated DSUs in the form of cash based on the average price of theCompany’s common shares as traded on the open market during the five daysbefore the date of the participant’s resignation.

 

TheDSU expense and the related liability are recorded at the grant date. Theliability is adjusted periodically to reflect any variation in the market valueof the common shares. As at December 31, 2008, the Company had a total of109,190 DSUs outstanding (2007—63,200), representing a long-term liabilityof $0.4 million (2007—$0.5 million).

 

26

----

 

**12.**** ****Losses (Gains) on Disposal andOther**

 

a)  Other gains and losses aredetailed as follows:

 
| ** **                                                                    | ** ** | **Note**        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|----------|------------|----------|------------|
| Loss on a  contribution to a joint venture                                    |       | 21              |       | 5        |       | —   |       | —   |       |
| Losses (gains)  on disposal of property, plant and equipment and other assets |       | 12(b), (c), (d) |       | —   |       | 6        |       | —   |       |
| Legal settlement                                                              |       | 12(e)           |       | —   |       | 2        |       | —   |       |
| Gain on business  disposal                                                    |       | 5(d)            |       | —   |       | (25      | )          | (4       | )          |
| ** **                                                                    |       | ** **      |       | **5**    |       | (17      | )          | (4       | )          |

 

----

(b) InMay 1, 2007, the Company sold the building of its Toronto (Pickering)tissue converting facility, closed in 2005, for an amount of $7 million.The Company realized a gain of $1 million.

 

(c) In2007, the Company completed the sale of its Red Rock linerboard mill located inOntario which was indefinitely shut down. The agreement resulted in the Companypaying the purchaser $10 million. An amount of $5 million has beenpaid in 2007 and the remaining $5 million is expected to be paidin 2009.

 

(d) In2007, the Company sold an investment in a privately-held company affiliated toa related director for a cash consideration and a gain of $3 million.

 

(e) In2007, the Company recorded a provision of $2 million as a settlementrelated to the action filed by ServiceCore, Inc.

 

**13.**** ****Impairment and OtherRestructuring Costs**

 

In 2008, the Companyclosed the operation of its Dopaco converting plant located in Bakersfield,California. The Company recorded a provision of $3 million. The Companyannounced the restructuring of its North American boxboard operations with itscontainerboard operations. As a result of this change the Company recorded arestructuring provision of $6 million. Following the temporary closure ofthe Toronto boxboard mill discussed above, the Company recorded a restructuringprovision of $6 million. The Company also incurred restructuring costs inthe amount of $3 million as a result of several costs reduction measuresin its Tissue and Specialty Products Group as well as to its Larochetteboxboard mill in France. The Company also recorded an impairment of$2 million on the property, plant and equipment of one waste paperrecovery center of the Specialty Products Group that ceased operations.

 

The Company also recordedan additional provision of $5 million related to the pension plansettlement and other closure cost of its Containerboard Red Rock mill closed in2006. The Company recorded an impairment charge of $4 million on theremaining value of the property, plant and equipment of this mill. This groupalso recorded an impairment charge of $1 million on equipment of the convertingsector and a $1 million of restructuring cost in 2008.

 

In 2008, ourjoint-venture RdM, announced the definite closure of one machine at itsBlendecques boxboard mill in France. This decision resulted in a closure andrestructuring cost provision of $3 million and an impairment charge of$1 million. These amounts represent our share of the results of RdM.

 

As a result of theimpairment test performed on its goodwill, the Company recorded an impairmentcharge of $8 million in 2008 related to the goodwill allocated to theboxboard manufacturing mills.

 

In 2007, the Companyrecorded closure and restructuring provisions relating to the permanent closureof its Red Rock containerboard mill. The Company also recorded an impairmentcharge on property, plant and equipment not in service in the ContainerboardGroup. The Company also recorded severance provisions following a restructuringprogram announced at its St-Jérôme, Québec, fine paper mill.

 

In 2006, the Companyannounced the permanent shut down of its specialty products board mill inFrance and of its converting boxboard plant in Montréal, Québec. The Companyalso ceased for an indefinite period the operation of the Red Rock, Ontario,containerboard mill, the Fjordcell pulp mill and Scierie Lemay sawmill inQuébec, both of the Boxboard group.

 

27

----

 

a)  The impairment charges andclosure and restructuring costs are detailed as follows:

 
| ** **                          | ** ** | **2008**       | ** ** | **2007**                                   | ** ** | **2006**       | ** ** |
|-------------------------------------|------------|----------------|------------|--------------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **Impairment** | ** ** | **Closure and  restructuring  costs** | ** ** | **Impairment** | ** ** | **Closure and  restructuring  costs** | ** ** | **Impairment** | ** ** | **Closure and  restructuring  costs** | ** ** |
| Boxboard-Toronto                    | ** ** | **—**     | ** ** | **6**                                      |       | —         |       | — |   | — |   | — |   |
| Boxboard-Corporate                  | ** ** | **—**     | ** ** | **6**                                      |       | —         |       | — |   | — |   | — |   |
| Boxboard-Montréal              | ** ** | **—**     | ** ** | **—**                                 |       | —         |       | — |   | — |   | 1 |   |
| Boxboard-Fjordcell                  | ** ** | **—**     | ** ** | **—**                                 |       | —         |       | — |   | — |   | 1 |   |
| Boxboard-Dopaco  (Bakersfield)      | ** ** | **—**     | ** ** | **3**                                      |       | —         |       | — |   | — |   | — |   |
| Boxboard-Europe  (La Rochette) | ** ** | **—**     | ** ** | **1**                                      |       | —         |       | — |   | — |   | — |   |
| Boxboard-RdM  (Blendecques)         | ** ** | **1**          | ** ** | **3**                                      |       | —         |       | — |   | — |   | — |   |
| Boxboard-Goodwill  (manufacturing)  | ** ** | **8**          | ** ** | **—**                                 |       | —         |       | — |   | — |   | — |   |
| Containerboard-Red  Rock and others | ** ** | **5**          | ** ** | **6**                                      |       | 3              |       | 5 |   | 40 |   | 12 |   |
| Specialty  products                 | ** ** | **2**          | ** ** | **1**                                      |       | —         |       | 1 |   | — |   | 3 |   |
| Specialty  products-board mill      | ** ** | **—**     | ** ** | **—**                                 |       | —         |       | — |   | 7 |   | 3 |   |
| Tissue                              | ** ** | **—**     | ** ** | **1**                                      |       | —         |       | — |   | — |   | — |   |
| ** **                          | ** ** | **16**         | ** ** | **27**                                     |       | 3              |       | 6 |   | 47 |   | 20 |   |

 

b)  The following table shows thereconciliation of all closure and restructuring cost provisions. The balance asat December 31, 2008 is expected to be paid in 2009. It includes theprovisions presented in discontinued operations:

 
| ** **                                   | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Balance-Beginning  of year                   | ** ** | **19**     | ** ** | 47       |       | 55       |       |
| Additional  provisions                       |       | ** ** | ** ** |     |       |     |       |
| Severance and  pension liability             | ** ** | **26**     | ** ** | 7        |       | 26       |       |
| Writedown of  inventories                    | ** ** | **—** | ** ** | 4        |       | (2       | )          |
| Others                                       | ** ** | **1**      | ** ** | 16       |       | —   |       |
| Non-monetary  items                          |       | ** ** | ** ** |     |       |     |       |
| Writedown of  inventories                    | ** ** | **—** | ** ** | (4       | )          | 2        |       |
| Pension  liability adjustments and others    | ** ** | **—** | ** ** | (7       | )          | (7       | )          |
| Liability  assumed from Norampac acquisition | ** ** | **—** | ** ** | —   |       | 8        |       |
| Closure and  restructuring cost payments     | ** ** | **(24**    | **)**      | (44      | )          | (35      | )          |
| Balance-End of  year                         | ** ** | **22**     | ** ** | 19       |       | 47       |       |

 

**14.**** ****Income Taxes**

 

a)  The provision for (recovery of)income taxes is as follows:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current    | ** ** | **20**   | ** ** | 33       |       | 34       |       |
| Future     | ** ** | **(52**  | **)**      | (22      | )          | (28      | )          |
| ** ** |       | **(32**  | **)**      | 11       |       | 6        |       |

 

28

----

 

b)  The provision for income taxesbased on the effective income tax rate differs from the provision for incometaxes based on the combined basic rate for the following reasons:

 
| ** **                                                                                                     | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Provision for  (recovery of) income taxes based on the combined basic Canadian and  provincial income tax rate | ** ** | **(35**    | **)**      | 34       |       | 6        |       |
| Adjustment for  income taxes arising from the following:                                                       |       | ** ** | ** ** |     |       |     |       |
| Difference in  statutory income tax rate of foreign operations                                                 | ** ** | **(2**     | **)**      | (9       | )          | (4       | )          |
| Unrecognized tax  benefit arising from current losses                                                          | ** ** | **10**     | ** ** | 9        |       | 8        |       |
| Non-taxable  portion of foreign exchange gain on long-term debt                                                | ** ** | **38**     | ** ** | (10      | )          | —   |       |
| Permanent  differences (1)                                                                                     | ** ** | **(32**    | **)**      | (1       | )          | —   |       |
| Permanent  differences–others                                                                             | ** ** | **(4**     | **)**      | —   |       | —   |       |
| Increase  (decrease) in future income taxes resulting from a substantively enacted  change in tax rates        | ** ** | **—** | ** ** | (16      | )          | (3       | )          |
| Charges for  calculation of temporary differences                                                              | ** ** | **—** | ** ** | 2        |       | —   |       |
| Others                                                                                                         | ** ** | **(7**     | **)**      | 2        |       | (1       | )          |
| ** **                                                                                                     |       | **3**      |       | (23      | )          | —   |       |
| Provision for  (recovery of) income taxes                                                                      | ** ** | **(32**    | **)**      | 11       |       | 6        |       |

 

----

(1)The amount of $32 million for the ended December 31, 2008represents the non taxable portion of the gain realized on the varioustransactions concluded in 2008 with respect mainly to foreign exchangederivatives contracts (see note 18).

 

c)  Future income taxes include thefollowing items:

 
| ** **                                                | ** ** | **2008**   | ** ** | **2007** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------|------------|
| **Future  income tax assets**                             |       | ** ** | ** ** |     |       |
| Tax benefit  arising from income tax losses               | ** ** | **206**    | ** ** | 163      |       |
| Employee future  benefits                                 | ** ** | **28**     | ** ** | 26       |       |
| Unused tax  credits and expenses on research not deducted | ** ** | **27**     | ** ** | 18       |       |
| Others                                                    | ** ** | **25**     | ** ** | 20       |       |
| Valuation  allowance                                      | ** ** | **(84**    | **)**      | (44      | )          |
| ** **                                                |       | **202**    |       | 183      | ** ** |
| **Future  income tax liabilities**                        |       | ** ** | ** ** |     |       |
| Property, plant  and equipment                            | ** ** | **274**    | ** ** | 265      |       |
| Foreign exchange  gain on long-term debt                  | ** ** | **30**     | ** ** | 68       |       |
| Employee future  benefits                                 | ** ** | **13**     | ** ** | 12       |       |
| Other assets                                              | ** ** | **46**     | ** ** | 45       |       |
| Others                                                    | ** ** | **26**     | ** ** | 17       |       |
| ** **                                                |       | **389**    |       | 407      | ** ** |
| **Future  income taxes**                                  | ** ** | **(187**   | **)**      | (224     | )          |
| Future income  taxes included in Accounts receivable      | ** ** | **12**     | ** ** | 4        |       |
| Future income  taxes included in Other liabilities        | ** ** | **(199**   | **)**      | (228     | )          |
| ** **                                                |       | **(187**   | )          | (224     | )          |

 

29

----

 

d)  The Company has accumulatedlosses for income tax purposes amounting to approximately $601 millionwhich may be carried forward to reduce taxable income in future years. The futuretax benefit resulting from the deferral of $378 million of these losseshas been recognized in the accounts as a future income tax asset. Income taxlosses as at December 31, 2008 are detailed as follows:

 
| ** **    | ** ** | **Unrecognized  tax losses** | ** ** | **Recognized  tax losses** | ** ** | **Total  tax losses** | ** ** | **Maturity** | ** ** |
|---------------|------------|-----------------------------------|------------|---------------------------------|------------|----------------------------|------------|--------------|------------|
| Canada        |       | —                            |       | 11                              |       | 11                         |       | 2010         |       |
|          |       | —                            |       | 18                              |       | 18                         |       | 2014         |       |
|          |       | —                            |       | 42                              |       | 42                         |       | 2015         |       |
|          |       | —                            |       | 23                              |       | 23                         |       | 2026         |       |
|          |       | —                            |       | 30                              |       | 30                         |       | 2027         |       |
|          |       | —                            |       | 62                              |       | 62                         |       | 2028         |       |
| United States |       | 2                                 |       | —                          |       | 2                          |       | 2012         |       |
|          |       | 2                                 |       | 5                               |       | 7                          |       | 2018         |       |
|          |       | 2                                 |       | 16                              |       | 18                         |       | 2019         |       |
|          |       | 2                                 |       | 7                               |       | 9                          |       | 2020         |       |
|          |       | —                            |       | 8                               |       | 8                          |       | 2021         |       |
|          |       | —                            |       | 5                               |       | 5                          |       | 2022         |       |
|          |       | —                            |       | 8                               |       | 8                          |       | 2023         |       |
| Europe        |       | 215                               |       | 143                             |       | 358                        |       | Indefinitely |       |
|          |       | 223                               |       | 378                             |       | 601                        |       |         |       |

 

**15.**** ****Additional Information**

 

a)  Changes in non-cash workingcapital components are detailed as follows:

 
| ** **                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accounts  receivable                      | ** ** | **14**   | ** ** | (47      | )          | (13      | )          |
| Inventories                               | ** ** | **10**   | ** ** | (47      | )          | 10       |       |
| Accounts payable  and accrued liabilities | ** ** | **(55**  | **)**      | 5        |       | 38       |       |
| ** **                                |       | **(31**  | **)**      | (89      | )          | 35       |       |

 

b)  Additional information

 
| ** **         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest paid      | ** ** | **97**   |       | 108      |       | 80       |       |
| Income taxes  paid | ** ** | **22**   |       | 21       |       | 10       |       |

 

30

----

 

**16.**** ****Employee Future Benefits**

 

a)  The expense for employee futurebenefits as at December 31 is as follows:

 
| ** **                                                                                                     | ** ** | **2008**               | ** ** | **2007**             | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                     | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other Plans** | ** ** |
| Current service  costs                                                                                         | ** ** | **13**                 | ** ** | **3**                | ** ** | 13 |   | 3 |   |
| Interest cost                                                                                                  | ** ** | **34**                 | ** ** | **5**                | ** ** | 37 |   | 6 |   |
| Past service  costs                                                                                            | ** ** | **2**                  | ** ** | **—**           | ** ** | 2 |   | 1 |   |
| Actual return on  plan assets                                                                                  | ** ** | **91**                 | ** ** | **—**           | ** ** | (19 | ) | — |   |
| Actuarial losses  on accrued benefit obligation                                                                | ** ** | **(100**               | **)**      | **(18**              | **)**      | (16 | ) | (6 | ) |
| Curtailment and  settlement                                                                                    | ** ** | **6**                  | ** ** | **(3**               | **)**      | (5 | ) | — |   |
| Others                                                                                                         | ** ** | **4**                  | ** ** | **3**                | ** ** | (2 | ) | (1 | ) |
| Benefit costs  before adjustments to recognize long-term nature of employee future benefit  costs              | ** ** | **50**                 | ** ** | **(10**              | **)**      | 10 |   | 3 |   |
| Difference  between expected return and actual return on plan assets for the year                              | ** ** | **(133**               | **)**      | **—**           | ** ** | (26 | ) | — |   |
| Difference  between actuarial loss for the year and actuarial loss on accrued benefit  obligation for the year | ** ** | **101**                | ** ** | **17**               | ** ** | 17 |   | 6 |   |
| Difference  between amortization of past service costs and actual plan amendments for the  year                | ** ** | **—**             | ** ** | **—**           | ** ** | (1 | ) | (1 | ) |
| Others                                                                                                         | ** ** | **(4**                 | **)**      | **(3**               | **)**      | 3 |   | 1 |   |
| Adjustments to  recognize long-term nature of employee future benefit costs                                    | ** ** | **(36**                | **)**      | **14**               | ** ** | (7 | ) | 6 |   |
| Recognized costs  for defined benefit pension plans                                                            | ** ** | **14**                 | ** ** | **4**                | ** ** | 3 |   | 9 |   |
| Recognized costs  for defined contribution pension plans                                                       | ** ** | **21**                 | ** ** | **—**           | ** ** | 21 |   | — |   |
| Total expense  for employee future benefits                                                                    | ** ** | **35**                 | ** ** | **4**                | ** ** | 24 |   | 9 |   |

 

Total cash payments foremployee future benefits for 2008, consisting of cash contributed by theCompany to its funded pension plans, including its defined contribution plans,and cash payments made directly to beneficiaries for its unfunded other benefitplans, including its collective RRSPs, amount to $59 million(2007—$67 million). Total estimated cash payments for employee futurebenefits are $60 million for 2009.

 

31

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b)  The funded status of the definedbenefit plans and the other complementary retirement benefit plans andpost-employment benefit plans as at December 31 are as follows:

 

 
| ** **                                          | ** ** | **2008**               | ** ** | **2007**             | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other Plans** | ** ** |
| **Accrued  benefit obligation**                     |       |                   |       |                 |       |   |   |   |   |
| Beginning of  year                                  | ** ** | **629**                | ** ** | **110**              | ** ** | 780 |   | 112 |   |
| Current service  costs                              | ** ** | **13**                 | ** ** | **3**                | ** ** | 13 |   | 3 |   |
| Interest cost                                       | ** ** | **34**                 | ** ** | **5**                | ** ** | 37 |   | 6 |   |
| Employees’  contributions                      | ** ** | **4**                  | ** ** | **—**           | ** ** | 4 |   | — |   |
| Actuarial losses                                    | ** ** | **(100**               | **)**      | **(18**              | **)**      | (16 | ) | (6 | ) |
| Benefits paid                                       | ** ** | **(40**                | **)**      | **(7**               | **)**      | (33 | ) | (5 | ) |
| Business  acquisitions, disposals and closures      | ** ** | **(56**                | **)**      | **(4**               | **)**      | (154 | ) | — |   |
| Past service  costs                                 | ** ** | **2**                  | ** ** | **—**           | ** ** | 2 |   | 1 |   |
| Others                                              | ** ** | **7**                  | ** ** | **3**                | ** ** | (4 | ) | (1 | ) |
| End of year                                         | ** ** | **493**                | ** ** | **92**               | ** ** | 629 |   | 110 |   |
| **Plan  assets**                                    |       | ** **             | ** ** | ** **           | ** ** |   |   |   |   |
| Beginning of  year                                  | ** ** | **626**                | ** ** | **—**           | ** ** | 753 |   | — |   |
| Actual return on  plan assets                       | ** ** | **(91**                | **)**      | **—**           | ** ** | 19 |   | — |   |
| Employer’s  contributions                      | ** ** | **31**                 | ** ** | **7**                | ** ** | 41 |   | 5 |   |
| Employees’  contributions                      | ** ** | **4**                  | ** ** | **—**           | ** ** | 4 |   | — |   |
| Benefits paid                                       | ** ** | **(40**                | **)**      | **(7**               | **)**      | (33 | ) | (5 | ) |
| Business  acquisitions, disposals and closures      | ** ** | **(57**                | **)**      | **—**           | ** ** | (155 | ) | — |   |
| Others                                              | ** ** | **3**                  | ** ** | **—**           | ** ** | (3 | ) | — |   |
| End of year                                         | ** ** | **476**                | ** ** | **—**           | ** ** | 626 |   | — |   |
| **Reconciliation  of funded status**                |       | ** **             | ** ** | ** **           | ** ** |   |   |   |   |
| Fair value of  plan assets                          | ** ** | **476**                | ** ** | **—**           | ** ** | 626 |   | — |   |
| Accrued benefit  obligation                         | ** ** | **493**                | ** ** | **92**               | ** ** | 629 |   | 110 |   |
| Funded status of  plan—deficit                 | ** ** | **(17**                | **)**      | **(92**              | **)**      | (3 | ) | (110 | ) |
| Unrecognized net  actuarial loss                    | ** ** | **81**                 | ** ** | **(14**              | **)**      | 42 |   | 1 |   |
| Unamortized  transitional balance                   | ** ** | **(2**                 | **)**      | **(1**               | **)**      | (2 | ) | (1 | ) |
| Unamortized past  service costs                     | ** ** | **20**                 | ** ** | **4**                | ** ** | 19 |   | 3 |   |
| Others                                              | ** ** | **(5**                 | **)**      | **(1**               | **)**      | 4 |   | 1 |   |
| Accrued benefit  asset (liability)—End of year | ** ** | **77**                 | ** ** | **(104**             | **)**      | 60 |   | (106 | ) |

 

Thenet amount recognized on the balance sheet as at December 31 isdetailed as follows:

 
| ** **                                                                               | ** ** | **2008**               | ** ** | **2007**             | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                               | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Total** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Total** | ** ** |
| Employee future  benefit asset, included in Other assets                                 | ** ** | **97**                 | ** ** | **—**           | ** ** | **97** | ** ** | 68 |   | — |   | 68 |   |
| Employee future  benefit liability, included in Other liabilities                        | ** ** | **(20**                | **)**      | **(104**             | **)**      | **(124** | **)** | (4 | ) | (106 | ) | (110 | ) |
| Employee future  benefit liability, included in Accounts payable and accrued liabilities | ** ** | **—**             | ** ** | **—**           | ** ** | **—** | ** ** | (4 | ) | — |   | (4 | ) |
| ** **                                                                               | ** ** | **77**                 | ** ** | **(104**             | **)**      | **(27** | **)** | 60 |   | (106 | ) | (46 | ) |

 

c)  The following amounts relate toplans that are not fully funded as at December 31:

 
| ** **                  | ** ** | **2008**               | ** ** | **2007**             | ** ** |
|-----------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                  | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other Plans** | ** ** |
| Fair value of  plan assets  | ** ** | **217**                | ** ** | **—**           | ** ** | 117 |   | — |   |
| Accrued benefit  obligation | ** ** | **(268**               | **)**      | **(92**              | **)**      | (160 | ) | (110 | ) |
| Funded deficit              | ** ** | **(51**                | **)**      | **(92**              | **)**      | (43 | ) | (110 | ) |

 

32

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d)  The main actuarial assumptionsadopted in measuring the accrued benefit obligation and expenses as at December 31 areas follows:

 
| ** **                                                    | ** ** | **2008**               | ** ** | **2007**             | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other Plans** | ** ** |
| **Accrued  benefit obligation as at December 31**        |       | ** **             | ** ** | ** **           | ** ** |   |   |   |   |
| Discount rate                                                 | ** ** | **7.50**               | **%**      | **7.50**             | **%**      | 5.50 | % | 5.50 | % |
| Rate of  compensation increase                                | ** ** | **2.50 to 3.75**       | **%**      | **2.25 to 3.90**     | **%**      | 2.00 to 3.75 | % | 2.00 to 5.00 | % |
| **Benefit  costs for years ended December 31**           |       | ** **             | ** ** | ** **           | ** ** |   |   |   |   |
| Discount rate                                                 | ** ** | **5.50**               | **%**      | **5.50**             | **%**      | 5.25 | % | 5.25 | % |
| Expected  long-term return on assets                          | ** ** | **7.00**               | **%**      | **—**           | ** ** | 7.00 | % | — |   |
| Rate of  compensation increase                                | ** ** | **2.00 to 3.75**       | **%**      | **2.00 to 3.75**     | **%**      | 2.00 to 5.00 | % | 2.25 to 3.50 | % |
| **Assumed  health care cost trend rates at December 31** |       | ** **             | ** ** | ** **           | ** ** |   |   |   |   |
| Rate increase in  health care costs                           | ** ** | ** **             | ** ** | **9.20 to 10.00**    | **%**      |   |   | 5.60 to 9.50 | % |
| Cost trend rates  decline to                                  | ** ** | ** **             | ** ** | **5.00**             | **%**      |   |   | 4.30 to 5.00 | % |
| Year the rate  should stabilize                               | ** ** | ** **             | ** ** | **2018**             | ** ** |   |   | 2015 |   |

 

e)  Assumed rate increases in healthcare costs have a significant effect on the amounts reported for the healthcare plans. A 1% change in assumed health care cost trend rates would have thefollowing effects for 2008:

 
| ** **                                   | ** ** | **Increase of 1%** | ** ** | **Decrease of 1%** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Current service  costs and interest cost     |       | 0.7                          |       | (0.1                         | )          |
| Accrued benefit  obligation—End of year |       | 2.5                          |       | (2.3                         | )          |

 

 

f)   The plan assets allocation andinvestment target allocation as at December 31 are detailed asfollows:

 
| ** **                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| **Plan  assets allocation** |       |     |       |     |       |
| Money market                | ** ** | **3**    | **%**      | 3        | %          |
| Debt securities             | ** ** | **39**   | **%**      | 43       | %          |
| Equity  securities          | ** ** | **58**   | **%**      | 54       | %          |
| Total                       | ** ** | **100**  | **%**      | 100      | %          |

 

Theplan assets do not include shares or debt securities of the Company. Annualbenefit annuities, of an approximate value of $3 million, are pledged byinsurance contracts established by the Company.

 
| ** **                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| **Investment  target allocation** |       |     |       |     |       |
| Money market or  others           | ** ** | **6**    | **%**      | 4        | %          |
| Debt securities                   | ** ** | **43**   | **%**      | 42       | %          |
| Equity  securities                | ** ** | **51**   | **%**      | 54       | %          |
| Total                             | ** ** | **100**  | **%**      | 100      | %          |

 

Targetallocation is established so as to maximize return while considering anacceptable level of risk in order to meet the plan obligations on along-term basis.

 

Investmentobjectives for the plan assets are the following: optimizing return whileconsidering an acceptable level of risk, maintaining an adequate diversification,controlling the risk according to different asset categories, and maintaining along-term objective of return on investments.

 

Investmentguidance is established for each investment manager. It includes parametersthat must be followed by managers and presents criteria for diversification,non-eligible assets and minimum quality of investments as well as for returnobjectives. Unless indicated otherwise, the managers cannot use any derivativeproduct or invest more than 10% of their assets in one particular security.

 

33

----

 

g)  Estimated future benefitpayments

 

Futurebenefit payments for defined benefit pension plans and other post-employmentbenefits, taking into consideration future participation, are estimated asfollows:

 
| ** **                      | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------|------------|
| Years ending  December 31, |       |                   |       |                 |       |
| 2009                            |       | 49                     |       | 6                    |       |
| 2010                            |       | 34                     |       | 6                    |       |
| 2011                            |       | 34                     |       | 6                    |       |
| 2012                            |       | 35                     |       | 7                    |       |
| 2013                            |       | 36                     |       | 7                    |       |
| 2014-2018                       |       | 198                    |       | 43                   |       |

 

**17.**** ****Commitments and Contingencies**

 

a)  Future minimum payments underoperating leases and other commercial commitments (mainly composed of rawmaterials, natural gas, steam and electricity) are as follows:

 
| ** **                      | ** ** | **Operating leases** | ** ** | **Other commercial  commitments** | ** ** |
|---------------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| Years ending  December 31, |       |                      |       |                                   |       |
| 2009                            |       | 42                        |       | 130                                    |       |
| 2010                            |       | 35                        |       | 69                                     |       |
| 2011                            |       | 27                        |       | 41                                     |       |
| 2012                            |       | 20                        |       | 24                                     |       |
| 2013                            |       | 14                        |       | 17                                     |       |
| Thereafter                      |       | 37                        |       | 66                                     |       |

 

b)  The Company has guaranteed thepayment of approximately $1 million under operating leases held by thirdparties. These guarantees are not likely to be called and, therefore, noliability has been recognized in the consolidated financial statements.

 

Inaddition, the Company has guaranteed the debt of one of its joint ventures. Themaximum amount guaranteed is US$0.5 million (2007—US$1.5 million). Asat December 31, 2008, the debt of this joint venture, guaranteed by theCompany, amounts to US$0.5 million (2007—US$0.9 million). Thisguarantee is not likely to be called and, as a result, no liability has beenrecognized in the consolidated financial statements.

 

c)  In the normal course ofoperations, the Company is party to various legal actions and contingencies,mostly related to contract disputes, environmental and product warranty claims,and labour issues. While the final outcome with respect to legal actions outstandingor pending as at December 31, 2008 cannot be predicted withcertainty, it is management’s opinion that the outcome will not have a materialadverse effect on the Company’s consolidated financial position, results of itsoperations or its cash flows.

 

d)  The Company is currently workingwith representatives of the Ontario Ministry of the Environment (MOE)—NorthernRegion regarding its potential responsibility for an environmental impactidentified at its former Thunder Bay facility (the “Mill”). The MOE hasrequested that the Company look into a management site plan relating to thesediment quality adjacent to the Mill’s lagoon. Several meetings have been heldduring the year with the MOE and the other potentially responsible party (“PRP”),and a study on the sediment quality and potential remediation options hascommenced. It is not possible at this time to estimate the Company’s obligationbecause of the uncertainty surrounding the extent of the environmental impact,the portion to be shared with the PRP, the potential remediation alternativesand the concurrence of the MOE.

 

**18.**** ****Financial Instruments**

 

The Company’s activitiesexpose it to a variety of financial risks: market risk (including currencyrisk, fair value interest rate risk, cash flow interest rate risk and pricerisk), credit risk and liquidity risk. The Company’s overall risk managementprogram focuses on the unpredictability of the financial market and seeks tominimize potential adverse effects on the Company’s financial performance. TheCompany uses derivative financial instruments to hedge certain risk exposures.

 

Risk management iscarried out by a central treasury department and management committee actingunder policies approved by the Board of Directors. They identify, evaluate and hedgefinancial risks in close cooperation with the business units. The boardprovides guidance for overall risk management, covering specific areas, such asforeign exchange risk, interest rate risk, credit risk, use of derivativefinancial instruments and non-derivative financial instruments, and investmentof excess liquidity.

 

**a)**  Market risk

** **

**(i)**Currencyrisk

** **

The Company operatesinternationally and is exposed to foreign exchange risks arising from variouscurrencies as a result of its export of goods produced in Canada, the UnitedStates, France and Germany. These risks are partially covered by purchases,debt and forward exchange contracts. Foreign exchange risk arises from futurecommercial transactions, recognized assets and liabilities, and net investmentsin foreign operations.

 

34

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Management has implemented a policy to manage foreign exchange riskagainst its functional currency. The Company manages the foreign exchangeexposure by entering into various foreign exchange forward contracts andcurrency option instruments related to anticipated sales, purchases, interestexpense and repayment of long-term debt. The Company may designate theseforeign exchange forward contracts as a cash flow hedge of future anticipatedsales, purchases, interest expense and repayment of long-term debt denominatedin foreign currencies. Gains or losses from these derivative financialinstruments designated as hedges are recorded in accumulated othercomprehensive income net of related income taxes and are reclassified toearnings as adjustments to sales, cost of sales, interest expense or foreignexchange on long term-debt in the same period as the respective hedged itemaffects earnings.

 

The Company’s riskmanagement policy is to hedge up to 50% of anticipated cash flows (mainlyexport sales and purchases of raw materials) in each major foreign currency forthe subsequent 12 months. However, the policy enable the Company toincrease the hedge to 90% for a certain period or to allow the hedge period upto 36 months. In 2008, approximately 26% of sales from our Canadianoperations were made to the United States and 20% of sales from Europeanoperations (excluding Sweden and Italia) were made in countries in a currencyother than the euro. Our operation in Sweden is also exposed to currency risk,mainly the euro and the British pound (GBP). The total sales of 2008 fromthis operation impacted by euro or GBP were approximately $44 million.

 

The following tablesummarizes the Company’s commitments to buy and sell foreign currencies as at December 31,2008 and 2007:

 
| **2008**                                                  | ** ** | **Exchange rate** | ** ** | **Maturity**               | ** ** | **Notional amount  (in millions)** | ** ** | **Fair value  (in millions)** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|
| Buy contracts:                                            |       |                   |       |                       |       |                                         |       |                                    |       |
| Foreign exchange  forward contracts (US$for CAN$)(1)      |       | 1.1740                 |       | February 15, 2013     |       | US$385                                       |       | 4.6                                     |       |
| Foreign exchange  forward contracts (US$for CAN$)(1)      |       | 1.1340                 |       | May 31, 2013          |       | US$125                                       |       | 5.8                                     |       |
| Foreign exchange  forward contracts (US$for CAN$)         |       | 1.1041                 |       | 0 to  12 months  |       | US$4.3                                       |       | 0.4                                     |       |
| Buy options (2):                                          |       |                   |       |                       |       |                                         |       |                                    |       |
| Currency option  instruments (US$for CAN$)           |       | 1.0110                 |       | February 15, 2013     |       | US$12.5                                      |       | 2.2                                     |       |
| Sell options:                                             |       |                   |       |                       |       |                                         |       |                                    |       |
| Currency option  instruments (US$for CAN$)           |       | 1.0115                 |       | February 14, 2013     |       | US$25                                        |       | (2.4                                    | )          |
| Sell contracts:                                           |       |                   |       |                       |       |                                         |       |                                    |       |
| Foreign exchange  forward contracts (US$for CAN$)         |       | 1.1474                 |       | 0 to  12 months  |       | US$78                                        |       | (5.1                                    | )          |
| Foreign exchange  forward contracts (US$for CAN$)         |       | 1.2433                 |       | 13 to  24 months |       | US$13                                        |       | 0.4                                     |       |
| Foreign exchange  forward contracts (US$for €)       |       | 0.7613                 |       | 0 to  12 months  |       | US$0.2                                       |       | —                                  |       |
| Foreign exchange  forward contracts (GBP for SEK)         |       | 12.5354                |       | 0 to  12 months  |       | GBP2.3                                       |       | 0.4                                     |       |
| Foreign exchange  forward contracts (€ for SEK) |       | 9.8164                 |       | 0 to  12 months  |       | €6.6                                    |       | (1.2                                    | )          |
| Foreign exchange  forward contracts (GBP for €)      |       | 1.1285                 |       | 0 to 12 months   |       | GBP1.2                                       |       | 0.2                                     |       |
| Foreign exchange  forward contracts (€ for CAN) |       | 1.6202                 |       | 0 to  12 months  |       | €0.5                                    |       | —                                  |       |
| Buy options:                                              |       |                   |       |                       |       |                                         |       |                                    |       |
| Currency option  instruments (US$for CAN$)           |       | 1.0785                 |       | 0 to  12 months  |       | US$36.0                                      |       | (10.0                                   | )          |
| Currency option  instruments (US$for CAN$)           |       | 1.2585                 |       | 13 to  24 months |       | US$20                                        |       | (2.8                                    | )          |
| Currency option  instruments (US$for €)         |       | 0.7171                 |       | 0 to12 months    |       | US$0.9                                       |       | —                                  |       |
| Currency option  instruments (GBP$for €)        |       | 1.1165                 |       | 0 to12 months    |       | GBP0.1                                       |       | —                                  |       |
| Sell options(2):                                          |       |                   |       |                       |       |                                         |       |                                    |       |
| Currency option  instruments (US$for CAN$)           |       | 1.0767                 |       | 0 to  12 months  |       | US$9                                         |       | (1.5                                    | )          |

 

----

(1)    On July 1, 2008, the Company designated as cash flow hedges ofrepayment of long-term denominated in US dollars foreign exchange forwardcontracts amounting to US$850 million. In October 2008, the Companyterminated, prior to maturity, foreign exchange forward contracts amounting toUS$837.5 million for net cash proceeds of approximately $150 million.As these contracts were designated, as cash flow hedges, their fair value incrementis recorded under “Accumulated Other Comprehensive Income (Loss)” and will berecognized in earnings mostly in 2013. Currently with the termination of theseinstruments, the Company entered into new foreign exchange forward contracts.

 

(2)   Instruments not designated as hedges.

 

35

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| **2007**                                                  | ** ** | **Exchange rate** | ** ** | **Maturity**              | ** ** | **Notional amount  (in millions)** | ** ** | **Fair value  (in millions)** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|
| Buy contracts:                                            |       |                   |       |                      |       |                                         |       |                                    |       |
| Foreign exchange  forward contracts (US$for CAN$) (1)     |       | 0.9911                 |       | February 15, 2013    |       | US$600                                       |       | 6.0                                     |       |
| Foreign exchange  forward contracts (US$for CAN$) (1)     |       | 0.9539                 |       | May 31, 2013         |       | US$250                                       |       | 9.1                                     |       |
| Sell options (2):                                         |       |                   |       |                      |       |                                         |       |                                    |       |
| Currency option  instruments (US$for CAN$)           |       | 1.0115                 |       | February 15, 2013    |       | US$50                                        |       | (2.0                                    | )          |
| Sell contracts:                                           |       |                   |       |                      |       |                                         |       |                                    |       |
| Foreign exchange  forward contracts (US$for CAN$)         |       | 1.0616                 |       | 0 to  12 months |       | US$29.5                                      |       | 2.1                                     |       |
| Foreign exchange  forward contracts (US$for €)       |       | 0.6808                 |       | 0 to  12 months |       | US$14.8                                      |       | —                                  |       |
| Foreign exchange  forward contracts (GBP for SEK)         |       | 13.632                 |       | 0 to  12 months |       | GBP1.8                                       |       | 0.2                                     |       |
| Foreign exchange  forward contracts (€ for SEK) |       | 9.33                   |       | 0 to  12 months |       | €                                       | 5          |                                    | (0.1       | ) |
| Foreign exchange  forward contracts (GBP for €)      |       | 2.7335                 |       | 0 to  12 months |       | GBP0.012                                     |       | —                                  |       |
| Buy options(2):                                           |       | Strike rate            |       |                      |       |                                         |       |                                    |       |
| Currency option  instruments (US$for CAN$)                |       | 1.00 to 1.1830    |       | 0 to  12 months |       | US$33.5                                      |       | 3.0                                     |       |
| Currency option  instruments (US$for CAN$)                |       | 1.00                   |       | 13 to 24 months |       | US$3.0                                       |       | —                                  |       |
| Currency option  instruments (US$for €)              |       | 0.7179                 |       | 0 to  12 months |       | US$2.2                                       |       | (0.1                                    | )          |
| Sell options (2):                                         |       |                   |       |                      |       |                                         |       |                                    |       |
| Currency option  instruments (US$for CAN$)                |       | 1.08 to 1.10      |       | 0 to  12 months |       | US$15                                        |       | (0.2                                    | )          |
|                                                           |            |                        |            |                           |            |                                              |            |                                         |            |  |

 

----

(1)   In 2007, the Company entered into foreignexchange forward contracts and option agreements not designated as hedges.These contracts and agreements, maturing in 2013, have been contracted to fixthe currency rate at a weighted average rate of US$0.9813/CAN$on a notionalamount of US$850 million.

 

(2)   Instruments not designated as hedges.

 

In 2008, if the Canadiandollar had strengthened by $0.01 against the U.S. dollar on average forthe year with all other variables held constant, the operating income beforedepreciation for the year would have been approximately $4 million lower,based on the net exposure of the total U.S. sales less U.S. purchases of theCompany’s Canadian operations and the operating income before depreciation ofthe Company’s U.S. operations but excluding the effect of this change on thedenominated working capital components. The interest expense would have beenapproximately $0.7 million lower arising mainly from the Company’s U.S.dollar denominated unsecured senior notes.

 

In 2008, if the Canadiandollar had strengthened by $0.01 against the euro with all other variables heldconstant, the operating income before depreciation for the year would not havechanged following the translation of the Company’s European operationsoperating income.

 

**Risk of currency on translationof self-sustaining foreign subsidiaries**

 

The Company has certaininvestments in foreign operations, whose net assets are exposed to foreigncurrency translation risk. The Company may designate part of its long-term debtdenominated in foreign currencies as a hedge of the net investment inself-sustaining foreign subsidiaries. Gains or losses resulting from thetranslation to Canadian dollars of long-term debt denominated in foreigncurrencies and designated as net investment hedges are recorded in accumulatedother comprehensive income net of related income taxes.

 

The table below shows theeffect on consolidated equity of a 10% change in the value of the Canadiandollar against the US dollar and the Euro as at December 31. Thecalculation includes the effect of currency hedge of net investment in USforeign entities and assumes that no changes occurs other than a singlecurrency exchange rate movement.

 

The exposures used in thecalculations are the foreign currency denominated equity and the hedging levelas a December 31, with the hedging instruments being the long-term debtdenominated in U.S. dollar.

 

Consolidated Shareholder’sequity: Currency effect before tax of a 10% movement.

 
| ** **                                              | ** ** | **2008**               | ** ** | **2007**   | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------|------------|
| **In millions of Canadian dollars** | ** ** | **Before hedges** | ** ** | **Hedges** | ** ** | **Net impact** | ** ** | **Before hedges** | ** ** | **Hedges** | ** ** | **Net impact** | ** ** |
| 10% change in  the CAN/US rate                     | ** ** | **67**                 | ** ** | **50**     | ** ** | **17** |   | 60 |   | 60 |   | — |   |
| 10% change in  the CAN/Euro rate                   | ** ** | **19**                 | ** ** | **—** | ** ** | **19** |   | 9 |   | — |   | 9 |   |

 

**(ii) Price risk**

** **

The Company is exposed tocommodity price risk on old corrugated containers, electricity and natural gas.The Company uses derivative commodity contracts to help manage its productioncosts. The Company may designate these derivatives as cash flow hedges ofanticipated purchases of raw material, natural gas and electricity. Gains orlosses from these derivative financial instruments designated as hedges arerecorded in accumulated other comprehensive income net of related income taxesand are reclassified to earnings as adjustments to cost of sales in the sameperiod as the respective hedged item affects earnings.

 

36

----

 

The fair value of thesecontracts is as follows:

 
| ** **                   | ** ** | **2008**              | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **Quantity**          | ** ** | **Maturity** | ** ** | **Fair value** | ** ** |
| Old corrugated containers(1) | ** ** | **141,000 s.t.** | ** ** | **2009 to 2011** | ** ** | **(10.8** | **)** |
| Sorted office  papers        | ** ** | **10,800 s.t.**  | ** ** | **2009 to 2010** | ** ** | **(0.2** | **)** |
| Electricity                  | ** ** | **209,364 MWh**       | ** ** | **2009 to 2011** | ** ** | **(3.4** | **)** |
| Natural gas:                 | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Canadian  portfolio          | ** ** | **2,507,000 GJ**      | ** ** | **2009 to 2012** | ** ** | **0.7** | ** ** |
| U.S. porfolio                | ** ** | **3,710,500 mmBtu**   | ** ** | **2009 to 2013** | ** ** | **(8.3** | **)** |

 
| ** **                   | ** ** | **2007**         | ** ** |
|------------------------------|------------|------------------|------------|
| ** **                   | ** ** | **Quantity**     | ** ** | **Maturity** | ** ** | **Fair value** | ** ** |
| Old corrugated containers(2) |       | 83,500 s.t. |       | 2008 |   | 2.3 |   |
| Electricity                  |       | 79,344 MWh       |       | 2008 |   | 0.2 |   |
| Natural gas:                 |       |             |       |   |   |   |   |
| Canadian  portfolio          |       | 5,115,000 GJ     |       | 2008 to 2012 |   | 4.6 |   |
| U.S. porfolio                |       | 3,951,700 mmBtu  |       | 2008 to 2011 |   | 2.0 |   |

 

----

(1)   These instruments are not designated as hedgesand exclude linerboard/old corrugated containers spread of $57,000 s.t. with afair value of $(1.5) million use for sales price risk and purchase oflineboard.

 

(2)   These instruments are not designated as hedges.

 

The table below shows theeffect of changes in the price of old corrugated containers, electricity andnatural gas as at December 31. The calculation includes the effect ofprice hedge of these commodities and assumes that no changes occur other than asingle change in price.

 

The exposures used in thecalculations are the commodity consumption and the hedging level as at December 31,with the hedging instruments being derivatives commodity contracts. It excludescommodity consumption of RdM.

 

Consolidated commodityconsumption: Price changes effect before tax.

 
| ** **                                                 | ** ** | **2008**               | ** ** | **2007**   | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|------------|------------|
| **In millions of Canadian dollars(1)** | ** ** | **Before hedges** | ** ** | **Hedges** | ** ** | **Net impact** | ** ** | **Before hedges** | ** ** | **Hedges** | ** ** | **Net impact** | ** ** |
| US 15$/s.t.  change in recycle paper price                 | ** ** | **41**                 | ** ** | **3**      | ** ** | **38** |   | 41 |   | 2 |   | 39 |   |
| US 30$/s.t.  change in commercial pulp price               | ** ** | **7**                  | ** ** | **—** | ** ** | **7** |   | 7 |   | — |   | 7 |   |
| US 1$/mmBTU.  change in natural gas price                  | ** ** | **13**                 | ** ** | **8**      | ** ** | **5** |   | 16 |   | 11 |   | 5 |   |
| US 1$/MWh change  in electricity                           | ** ** | **3**                  | ** ** | **—** | ** ** | **3** |   | 3 |   | — |   | 3 |   |

 

----

(1)   Sensitivity calculated with an exchange rate of$CAN/$US 1.25 for 2007 and 2008.

 

**(iii) Cash flow and fair value interest rate risk**

** **

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

 

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

 

When appropriate, theCompany analyzes its interest rate risk exposure. Various scenarios aresimulated taking into consideration refinancing, renewal of existing positions,alternative financing and hedging. Based on these scenarios, the Companycalculates the impact on earnings of a defined interest rate shift. For eachsimulation, the same interest rate shift is used for all currencies. Thescenarios are run only for liabilities that represent the majorinterest-bearing positions. Based on the long-term debt as at December 31,2008, the impact on interest expense of a 1% change in rate would beapproximately $5.3 million (impact on net earnings is approximately$3.7 million).

 

As at December 31,2008, approximately 31% (2007—42%) of the Company’s long-term debt was atvariable rates.

 

In addition, the Companyholds one interest rate swap agreement not designated as a hedge. Thisagreement, maturing in 2012, has been contracted to fix interest rate of 9.47%on a notional amount of US$2.1 million. As at December 31, 2008, thisagreement is recorded as a liability at its fair value of $0.6 million(2007—$0.4 million).

 

The Company enters intofixed-to-floating interest rate swaps to hedge the fair value interest raterisk arising from the unsecured senior notes. In April 2004, the Companyentered into interest rate swap agreements for a notional amount of$50 million, maturing in 2013. These agreements are designated as hedgesof the change in fair value of an equivalent portion of the Company’s 6.75%Unsecured senior notes. Gains or losses from these derivative financialinstruments are recorded in earnings as interest expense. However, acorresponding amount is recorded as an adjustment to the carrying value of the6.75% Unsecured senior notes. This amount is presented in other debt.Accordingly, the interest rate changed from a fixed rate of 6.75% to an averagefloating rate paid in 2008 of 6.40% (2007—6.89%) on a notional amount ofUS$50 million. As at December 31, 2008, the fair value of theseinstruments represented an unrealized gain of $2 million (2007—unrealizedloss of $0.3 million).

 

37

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**(iv) The loss (gain) on derivatives financialinstruments is as follows:**

 
| ** **                                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Unrealized loss  (gain) on derivative financial instruments | ** ** | **27**   |       | —   |       | (5       | )          |
| Realized loss  (gain) on derivative financial instruments   | ** ** | **1**    |       | (6       | )          | 2        |       |
| ** **                                                  |       | **28**   |       | (6       | )          | (3       | )          |

 

**b) Credit risk**

 

Credit risk arises from cash and cash equivalents, derivative financialinstruments and deposits with banks and financial institutions. The Companyreduces this risk by dealing with creditworthy financial institutions.

 

The Company is exposed to credit risk on the accounts receivable fromits customers. In order to reduce this risk, the Company’s credit policiesinclude the analysis of the financial position of its customers and the regularreview of their credit limits. In addition, the Company believes there is noparticular concentration of credit risks due to the geographic diversity ofcustomers and the procedures for the management of commercial risks. Derivativefinancial instruments include an element of credit risk should the counterpartybe unable to meet its obligations.

 

Trade receivables are recognized initially at fair value andsubsequently measured at amortized cost using the effective interest method,less provision for doubtful accounts. An allowance for doubtful accounts oftrade receivables is established when there is objective evidence that theCompany will not be able to collect all amounts due according to the originalterms of the receivables. Significant financial difficulties of the debtor,probability that the debtor will enter into bankruptcy or financialreorganization, and default or delinquency in payments are consideredindicators that the trade receivable is impaired. Each trade account receivablebalance is evaluated separately to identify impairment. The amount of theallowance for doubtful accounts is the difference between the asset’s carryingamount and the present value of estimated cash flows. The carrying amount ofthe asset is reduced through the use of an allowance account, and the amount ofthe loss is recorded in the consolidated statement of earnings within “sellingand administrative expenses”. When a trade receivable is uncollectible, it iswritten off against the allowance for doubtful account. Subsequent recoveriesof amounts previously written off are credited against “selling andadministrative expenses” in the consolidated statement of earnings.

 

As at December 31, 2008, approximately 11% of trade receivable isoutstanding for more than 90 days from the date of invoice, while approximately49.3% is current (less than 30 days) excluding RdM.

 

For RdM, approximately 22% of trade receivables are outstanding formore than 90 days from the date of invoice, while approximately 78% are current(as terms of payment).

 

**c) Liquidity risk**

 

Liquidity risk is the risk that the Company will not be able to meetits obligations as they fall due. The following are the contractual maturitiesof financial liabilities as at December 31, 2008:

 
|   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2008** | ** ** |
|--------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------|------------|

 
| ** **                                   | ** ** | **Carrying  amount** | ** ** | **Contractual  cash flows** | ** ** | **Less than  one year** | ** ** | **Between one  and two years** | ** ** | **Between two  and five years** | ** ** | **More than  five years** | ** ** |
|----------------------------------------------|------------|----------------------|------------|-----------------------------|------------|-------------------------|------------|--------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **$**                | ** ** | **$**                       | ** ** | **$**                   | ** ** | **$**                          | ** ** | **$**                           | ** ** | **$**                     | ** ** |
| Non-derivative  financial liabilities:       | ** ** | ** **           | ** ** | ** **                  | ** ** | ** **              | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **                | ** ** |
| Bank loans and  advances                     | ** ** | **104**              | ** ** | **104**                     | ** ** | **104**                 | ** ** | **—**                     | ** ** | **—**                      | ** ** | **—**                | ** ** |
| Accounts payable  and accrued liabilities    | ** ** | **586**              | ** ** | **586**                     | ** ** | **586**                 | ** ** | **—**                     | ** ** | **—**                      | ** ** | **—**                | ** ** |
| Revolving credit  facility                   | ** ** | **427**              | ** ** | **484**                     | ** ** | **19**                  | ** ** | **19**                         | ** ** | **446**                         | ** ** | **—**                | ** ** |
| Term credit  facility                        | ** ** | **100**              | ** ** | **118**                     | ** ** | **5**                   | ** ** | **5**                          | ** ** | **108**                         | ** ** | **—**                | ** ** |
| Unsecured senior  notes                      | ** ** | **1,129**            | ** ** | **1,468**                   | ** ** | **81**                  | ** ** | **81**                         | ** ** | **1,306**                       | ** ** | **—**                | ** ** |
| Capital lease  obligations                   | ** ** | **1**                | ** ** | **1**                       | ** ** | **1**                   | ** ** | **—**                     | ** ** | **—**                      | ** ** | **—**                | ** ** |
| Other debts of  subsidiaries                 | ** ** | **15**               | ** ** | **9**                       | ** ** | **2**                   | ** ** | **1**                          | ** ** | **2**                           | ** ** | **4**                     | ** ** |
| Other debts  without recourse to the Company | ** ** | **47**               | ** ** | **47**                      | ** ** | **34**                  | ** ** | **4**                          | ** ** | **9**                           | ** ** | **—**                | ** ** |
| Legal settlement                             | ** ** | **9**                | ** ** | **9**                       | ** ** | **3**                   | ** ** | **3**                          | ** ** | **3**                           | ** ** | **—**                | ** ** |
| Derivative  instrument financial liabilities | ** ** | **43**               | ** ** | **43**                      | ** ** | **31**                  | ** ** | **9**                          | ** ** | **3**                           | ** ** | **—**                | ** ** |
| ** **                                   | ** ** | **2,461**            | ** ** | **2,869**                   | ** ** | **866**                 | ** ** | **122**                        | ** ** | **1,877**                       | ** ** | **4**                     | ** ** |

 

38

----

 

As at December 31, 2008, the Company had unused credit facilities of$307 million, net of outstanding letters of credit of $37 million (December 31,2007—$293 million). The 2008 unused amount excludes the unsecured revolvingcredit facility of $100 million cancelled on February 13, 2009. The paymentbetween two and five years include the maturity of our revolving and termcredit facilities of December 2011 and October 2012 and of our Unsecured seniornotes in February and June 2013.

 
|   |   |   |   |   |   |   |   |   |   |   |   | 2007 |   |
|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------|--------|

 
| ** **                                   | ** ** | **Carrying  amount** | ** ** | **Contractual  cash flows** | ** ** | **Less than  one year** | ** ** | **Between one  and two years** | ** ** | **Between two  and five years** | ** ** | **More than  five years** | ** ** |
|----------------------------------------------|------------|----------------------|------------|-----------------------------|------------|-------------------------|------------|--------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **$**                | ** ** | **$**                       | ** ** | **$**                   | ** ** | **$**                          | ** ** | **$**                           | ** ** | **$**                     | ** ** |
| Non-derivative  financial liabilities:       |       |                 |       |                        |       |                    |       |                           |       |                            |       |                      |       |
| Bank loans and  advances                     |       | 47                   |       | 47                          |       | 47                      |       | —                         |       | —                          |       | —                    |       |
| Accounts payable  and accrued liabilities    |       | 572                  |       | 572                         |       | 572                     |       | —                         |       | —                          |       | —                    |       |
| Revolving credit  facility                   |       | 553                  |       | 676                         |       | 31                      |       | 31                             |       | 614                             |       | —                    |       |
| Term credit  facility                        |       | 100                  |       | 128                         |       | 6                       |       | 6                              |       | 116                             |       | —                    |       |
| Unsecured senior  notes                      |       | 914                  |       | 1,254                       |       | 66                      |       | 66                             |       | 195                             |       | 927                       |       |
| Capital lease  obligations                   |       | 2                    |       | 2                           |       | 2                       |       | —                         |       | —                          |       | —                    |       |
| Other debts                                  |       | 17                   |       | 11                          |       | 2                       |       | 3                              |       | 2                               |       | 4                         |       |
| Legal settlement                             |       | 11                   |       | 12                          |       | 3                       |       | 3                              |       | 6                               |       | —                    |       |
| Derivative  instrument financial liabilities |       | 1                    |       | 1                           |       | —                  |       | 1                              |       | —                          |       | —                    |       |
|                                         |       | 2,217                |       | 2,703                       |       | 729                     |       | 110                            |       | 933                             |       | 931                       |       |

 

As at December 31, 2007, the Company had unused credit facilities of$293 million, net of outstanding letters of credit of $34 million (December 31,2006—$295 million). The 2007 unused amount includes the unsecured revolvingcredit facility of $100 million maturing in June 2008.

 

**19. AccumulatedOther Comprehensive Income (Loss)**

 

Accumulated other comprehensive income (loss)

 

a)

 
| ** **                                                                                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Foreign currency  translation of self-sustaining foreign subsidiaries, net of hedging  activities and net of related income tax of $42 million (2007—$40 million)          | ** ** | **141**  | ** ** | (49      | )          |
| Unrealized gains  arising from foreign exchange forward contracts designated as cash flow hedges,  net of related income taxes of $25 million (2007—$(1.7) million)        | ** ** | **(57**  | **)**      | 4        |       |
| Unrealized gains  arising from interest rate swap agreements designated as cash flow hedges net  of related income tax of $1.5 million (2007—$0.2 million)                 | ** ** | **(2**   | **)**      | —   |       |
| Unrealized gains  arising from commodity derivative financial instruments designated as cash  flow hedges, net of related income taxes of $(3) million (2007—$(1) million) | ** ** | **3**    | ** ** | 2        |       |
| ** **                                                                                                                                                                      |       | **85**   | ** ** | (43      | )          |

 

b) Change in foreign currency translation ofself-sustaining foreign subsidiaries is as follows:

 
| ** **                                                                                                                                     | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Balance—Beginning  of year**                                                                                                            | ** ** | **(49**    | **)**      | (9       | )          | (36      | )          |
| Effect of  changes in exchange rates during the year:                                                                                          |       |       | ** ** |     |       |     |       |
| On net  investment in self-sustaining foreign subsidiaries                                                                                     | ** ** | **176**    | ** ** | (136     | )          | 23       |       |
| On certain  long-term debt denominated in foreign currencies designated as a hedge of net  investments in self-sustaining foreign subsidiaries | ** ** | **17**     | ** ** | 116      |       | 1        |       |
| Future income  taxes on designated long-term debt                                                                                              | ** ** | **(3**     | **)**      | (20      | )          | —   |       |
| Others                                                                                                                                         | ** ** | **—** | ** ** | —   |       | 3        |       |
| **Balance—End  of year**                                                                                                                  | ** ** | **141**    | ** ** | (49      | )          | (9       | )          |

 

39

----

 

**20. RelatedParty Transactions**

 

The Company entered into the following transactions with relatedparties:

 
| ** **                                                 | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Joint ventures(1)                                          |       |       |       |     |       |     |       |
| Sales                                                      | ** ** | **30**     |       | 23       |       | 34       |       |
| Revenue from  services                                     | ** ** | **5**      |       | 4        |       | 12       |       |
| Purchases                                                  | ** ** | **7**      |       | 2        |       | 30       |       |
| Significantly  influenced companies                        |       |       |       |     |       |     |       |
| Sales                                                      | ** ** | **74**     |       | 62       |       | 35       |       |
| Purchases                                                  | ** ** | **45**     |       | 38       |       | 23       |       |
| Entity  controlled by a related director of the Company(2) |       |       |       |     |       |     |       |
| Purchases                                                  | ** ** | **—** |       | 5        |       | 7        |       |

 

----

(1)  Representthe portion of transactions or balances not eliminated upon proportionateconsolidation of the joint ventures.

(2)  SinceNovember 2007, this entity is no longer controlled by a related director of theCompany.

 

These transactions occurred in the normal course of operations and aremeasured at the exchange amount, which is the amount of considerationestablished and agreed to by the related parties.

 

The balance sheets as at December 31 included the following balanceswith related parties:

 
| ** **                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Joint ventures(1)                   |       |     |       |     |       |
| Accounts  receivable                | ** ** | **6**    |       | 3        |       |
| Accounts payable                    | ** ** | **2**    |       | 2        |       |
| Significantly  influenced companies |       |     |       |     |       |
| Accounts  receivable                | ** ** | **5**    |       | 6        |       |
| Accounts payable                    | ** ** | **3**    |       | 3        |       |

 

----

(1)  Represent the portion oftransactions or balances not eliminated upon proportionate consolidation of thejoint ventures.

 

**21.Interests in Joint Ventures**

 

a)     On March 1, 2008, Reno DeMedici S.p.A. (“RdM”), a public company based in Milan, Italy, and the Companycompleted a transaction relating to the combination of RdM and the Europeanrecycled cartonboard business of Cascades S.A. The transaction resulted in theCompany contributing its manufacturing assets of recycled boxboard located inBlendecques, France, and Arnsberg, Germany, and its sheeting center inWednesbury, U.K., having a net book value of $92 million (€62 million) inexchange for 115.6 million or 30.6% of the outstanding shares of RdMrepresenting a contribution of $81 million (€54 million) and a cashconsideration adjustment of $3.7 million (€2.4 million). As of the date oftransaction, the Company’s share of the cash and cash equivalents owned by RdM,net of the cash transferred from its assets, amounted to $5.2 million (€3 million).The Company’s investment in RdM is proportionally consolidated since that dateas the Company and a group of current shareholders have joint control of RdM.The Company recorded a loss of $5 million on this transaction. In addition theCompany acquired, on the open market, 9.6 million shares of RdM representing2.6% of the outstanding shares for a cash consideration of $4.2 million (€2.7 million).The interests in joint ventures include, in 2008, our share of the balancesheet, results and cash flow information of RdM since March 1, 2008.

 

40

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b)    The major components of theinterests in joint ventures in the consolidated financial statements are asfollows:

 
| ** **                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Consolidated  balance sheets                           |       |     | ** ** |     |       |     |       |
| Current assets                                         | ** ** | **148**  | ** ** | 25       |       | 33       |       |
| Long-term assets                                       | ** ** | **169**  | ** ** | 27       |       | 33       |       |
| Current  liabilities                                   | ** ** | **144**  | ** ** | 10       |       | 9        |       |
| Long-term debt,  net                                   | ** ** | **12**   | ** ** | 1        |       | 2        |       |
| Cash and cash  equivalents at end of year              | ** ** | **5**    | ** ** | 3        |       | 5        |       |
| Total assets                                           | ** ** | **317**  | ** ** | 52       |       | 66       |       |
| Total debt(1)                                          | ** ** | **85**   | ** ** | 4        |       | 4        |       |
| Consolidated  statements of earnings                   |       |     | ** ** |     |       |     |       |
| Sales                                                  | ** ** | **308**  | ** ** | 86       |       | 757      |       |
| Depreciation and  amortization                         | ** ** | **12**   | ** ** | 3        |       | 33       |       |
| Operating income                                       | ** ** | **7**    | ** ** | 11       |       | 89       |       |
| Financial  expenses                                    | ** ** | **4**    | ** ** | —   |       | 14       |       |
| Net earnings  (loss)                                   | ** ** | **(9**   | **)**      | 9        |       | 25       |       |
| Consolidated  statements of cash flows                 |       |     | ** ** |     |       |     |       |
| Operating  activities                                  | ** ** | **(3**   | **)**      | 4        |       | 60       |       |
| Investing  activities                                  | ** ** | **2**    | ** ** | (6       | )          | (26      | )          |
| Financing  activities                                  | ** ** | **2**    | ** ** | —   |       | (30      | )          |
| Additional  information                                |       |     | ** ** |     |       |     |       |
| Dividends  received by the Company from joint ventures | ** ** | **5**    | ** ** | 5        |       | 22       |       |

 

----

(1)  Includesbank loans and advances, current portion of long-term debt, and long-term debt.

 

**22.****Summary of Differences BetweenCanadian and United States Generally Accepted Accounting Principles**

 

The consolidated financialstatements have been prepared in accordance with Canadian GAAP which differs incertain respects from United States generally accepted accounting principles (“U.S.GAAP”). Such differences, as they relate to the Company, are summarized below.

 

**1  Recent Accounting Pronouncements**

 

1.1      Effective December31, 2006, the Company adopted SFAS 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans—an amendment of FASB Statements No.87, 88, 106, and 132(R)”. This standard requires an employer to (i) recognizethe overfunded or underfunded status of a defined benefit plan as an asset orliability with changes in that funded status recognized through comprehensiveincome; and (ii) measure the funded status of a plan as of the year-end date.The impact of adopting SFAS 158 effective December 31, 2006 is summarized inthe table below. In accordance with the transition provision of the standard,prior period financial statements were not restated.

 
| ** **                                   | ** ** | **Before applying  SFAS 158** | ** ** | **Incremental  effect of applying  SFAS 158** | ** ** | **After applying  SFAS 158** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------|------------|------------------------------|------------|
| Other assets, intangible assets and goodwill |       | 632                           |       | (13                                           | )          | 619                          |       |
| Other liabilities                            |       | 165                           |       | 21                                            |       | 186                          |       |
| Future income taxes                          |       | 295                           |       | (12                                           | )          | 283                          |       |
| Accumulated other comprehensive income       |       | (18                           | )          | (22                                           | )          | (40                          | )          |

 

1.2      In September2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157).SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements, and thereforedoes not require any new fair value measurements. SFAS No. 157 is effective forfiscal years beginning after November 15, 2007 (January 1, 2008 for theCompany). In February 2008, the FASB amended SFAS No. 157 to exclude leasingtransactions and to delay the effective date by one year for nonfinancialassets and liabilities that are recognized or disclosed at fair value in thefinancial statements on a nonrecurring basis. The adoption of SFAS 157 as itrelates to the Company’s financial assets and liabilities, effective as of January1, 2008, did not have an impact on its results of operations or financial position.

 

41

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SFAS No. 157 establishes a fair value hierarchy, whichprioritizes the inputs to valuation techniques used to measure fair value intothree levels. A financial instrument’s categorization within the fair valuehierarchy is based upon the lowest level of input that is available andsignificant to the fair value measurement. SFAS No. 157 establishes andprioritizes three levels of inputs that may be used to measure fair value:

 

·      Level 1—Quoted prices in active markets foridentical assets or liabilities.

 

·      Level 2—Observable inputs other than quotedprices in active markets for identical assets and liabilities, quoted pricesfor identical or similar assets or liabilities in inactive markets, or otherinputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

 

·      Level 3—Inputs that are generally unobservableand typically reflect management’s estimates of assumptions that marketparticipants would use in pricing the asset or liability.

 

The following table presents information about theCompany’s financial assets and financial liabilities measured at fair value ona recurring basis as of December 31, 2008, in accordance with SFAS No. 157 andindicates the fair value hierarchy of our valuation techniques to determinesuch fair value.

 

Fair value measurement at reporting date using:

 
| **Derivative  financial instruments**          | ** ** | **December 31,  2008** | ** ** | **Quoted prices in  active markets  for identical  assets  (Level 1)** | ** ** | **Significant  observable inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
|------------------------------------------------|------------|------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
| Assets                                         |       |                   |       |                                                                   |       |                                          |       |                                             |       |
| Held for trading investment in shares          |       | 2                      | (*)        | 2                                                                      |       |                                          |       |                                             |       |
| Fair value of derivative financial assets      |       | 13                     |       | —                                                                 |       | 13                                            | (**)       | —                                           |       |
| Total                                          |       | 15                     |       | 2                                                                      |       | 13                                            |       | —                                           |       |
| Liabilities                                    |       |                   |       |                                                                   |       |                                          |       |                                             |       |
| Fair value of derivative financial liabilities |       | 43                     |       | —                                                                 |       | 43                                            | (**)       | —                                           |       |
| Total                                          |       | 43                     |       | —                                                                 |       | 43                                            |       | —                                           |       |

 

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(*)     The Companyowns an investment in Junex, a company quoted on a Canadian stock market.

(**)  Derivativefinancial instruments include foreign exchange options and old corrugatedcontainers, electricity and natural gas contracts. Fair value measurements forthe Company’s derivatives are classified under Level 2 because suchmeasurements are determined using published market prices or estimated based onobservable inputs such as interest rates, yield curves, spot and futureexchange rates.

 

1.3      In February2007, the FASB published SFAS 159, “The Fair Value Option for Financial Assetsand Financial Liabilities—including an amendment of FASB Statement No. 115”.This standard permits entities to choose to measure many financial instrumentsand certain other assets and liabilities at fair value on aninstrument-by-instrument basis under a fair value option. This new standardwill be effective for fiscal years beginning after November 15, 2007. Thecompany chose not to make this fair value accounting election for any of itsfinancial assets and liabilities. Accordingly, any financial assets and liabilitieswithin the scope of SFAS 159 will continue to be carried at their historicalamortized cost basis, adjusted for other than temporary impairments in value.As a result, the adoption of SFAS 159, effective as of January 1, 2008, did nothave an impact on the Company’s results of operations or financial position.

 

1.4      In May 2008,the FASB issued Statement No. 162, “Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS 162”). This Statement identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with US GAAP. SFAS 162 is effective on November 16, 2008,60 days following the Securities and Exchange Commission’s approval of thePublic Company Accounting Oversight Board amendments to AU Section 411 on September16, 2008, “The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles.” As a result, the adoption of SFAS 162, effective as of January1, 2008, did not have an impact on the Company’s results of operations orfinancial position.

 

1.5      On October 10,2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a FinancialAsset When the Market for That Asset Is Not Active, which clarifies theapplication of SFAS No. 157 in a market that is not active and provides anexample to illustrate key considerations in determining the fair value of afinancial asset when the market for that financial asset is not active. FSP157-3 became effective on October 10, 2008, and its adoption did not have amaterial impact on the Company’s financial position or results of operations.

 

42

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**2  Reconciliation to United States generallyaccepted accounting principles (U.S. GAAP)**

 

The following summary sets out the material adjustments to the Company’sreported net earnings (loss), shareholders’ equity and balance sheet whichwould be made in order to reconcile to U.S. GAAP. It also sets out a statementof changes in shareholders’ equity under U.S. GAAP.

 

2.1                 Reconciliationof net earnings (loss)

 
| ** **                                                                             | ** ** | **Note** | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| Net earnings (loss) under Canadian GAAP                                                | ** ** |     |       | **(55**    | **)**      | 95       |       | 3        |       |
| U.S. GAAP adjustments:                                                                 |       |     |       | ** ** | ** ** |     |       |     |       |
| Start-up costs                                                                         |       | (a)      |       | **3**      | ** ** | —   |       | 1        |       |
| Investment tax credit                                                                  |       | (b)      |       | **(1**     | **)**      | —   |       | —   |       |
| Gain realized on formation of Norampac                                                 |       | (c)      |       | **—** | ** ** | (4       | )          | (5       | )          |
| Change in fair value arising from foreign exchange  forward contracts                  |       | (d)      |       | **—** | ** ** | —   |       | (2       | )          |
| Change in fair value arising from commodity  derivative financial instruments          |       | (d)      |       | **1**      | ** ** | —   |       | (3       | )          |
| Inventory costs                                                                        |       | (e)      |       | **(1**     | **)**      | 6        |       | —   |       |
| Employee future benefits                                                               |       | (f)      |       | **(1**     | **)**      | (2       | )          | (1       | )          |
| Excess of redemption price of Class B preferred  shares on their paid-up capital       |       | (g)      |       | **—** | ** ** | (1       | )          | (1       | )          |
| Tax effect on U.S. GAAP adjustments                                                    | ** ** |     |       | **5**      | ** ** | (4       | )          | 4        |       |
| Net earnings (loss) under U.S. GAAP                                                    | ** ** |     |       | **(49**    | **)**      | 90       |       | (4       | )          |
| Net earnings (loss) under U.S. GAAP from continuing operations                         | ** ** |     |       | **(67**    | **)**      | 109      |       | 12       |       |
| Net earnings (loss) under U.S. GAAP from discontinued  operations                      | ** ** |     |       | **18**     | ** ** | (19      | )          | (16      | )          |
| ** **                                                                             |       |     |       | **(49**    | **)**      | 90       |       | (4       | )          |
| Basic net earnings (loss) under U.S. GAAP from  continuing operations per common share | ** ** |     |       | **(0.67**  | **)**      | 1.10     |       | 0.15     |       |
| Basic and diluted net earnings (loss) under U.S.  GAAP per common share                | ** ** |     |       | **(0.49**  | **)**      | 0.91     |       | (0.05    | )          |

 

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2.2                 Statementof changes in shareholders’ equity under U.S. GAAP

 
| ** **                                                                                                         | ** ** | **2008**              | ** ** | **2007**   | ** ** | **2006**              | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                                                                         | ** ** | **Number  of shares** | ** ** | **Amount** | ** ** | **Number  of shares** | ** ** | **Amount** | ** ** | **Number  of shares** | ** ** | **Amount** | ** ** |
| ** **                                                                                                         | ** ** | ** **            | ** ** | **$**      | ** ** | ** **            | ** ** | **$** | ** ** | ** ** | ** ** | **$** | ** ** |
| Common stock                                                                                                       |       |                  |       |       | ** ** |                  |       |   |   |   |   |   |   |
| Balance—Beginning of year                                                                                     | ** ** | **99,144,351**        | ** ** | **502**    | ** ** | 99,533,654            |       | 503 |   | 80,818,540 |   | 259 |   |
| Shares issued                                                                                                      | ** ** | **—**            | ** ** | **—** | ** ** | —                |       | — |   | 18,868,585 |   | 250 |   |
| Shares issued on exercise of stock options                                                                         |       | **—**            |       | **—** | ** ** | 103,397               |       | 1 |   | 131,229 |   | 2 |   |
| Redemption of common shares                                                                                        | ** ** | **(595,500**          | **)**      | **(3**     | **)**      | (492,700              | )          | (2 | ) | (284,700 | ) | (1 | ) |
| Share issue costs, net of related income taxes                                                                     | ** ** | **—**            | ** ** | **—** | ** ** | —                |       | — |   | — |   | (7 | ) |
| Balance—End of year                                                                                           | ** ** | **98,548,851**        | ** ** | **499**    | ** ** | 99,144,351            |       | 502 |   | 99,533,654 |   | 503 |   |
| Adjustment relating to stock options                                                                               |       |                  |       |       | ** ** |                  |       |   |   |   |   |   |   |
| Balance—Beginning of year                                                                                     | ** ** | ** **            |       | **11**     | ** ** |                  |       | 10 |   |   |   | 8 |   |
| Adjustment for the year                                                                                            | ** ** | ** **            |       | **1**      | ** ** |                  |       | 1 |   |   |   | 2 |   |
| Balance—End of year                                                                                           | ** ** | ** **            |       | **12**     | ** ** |                  |       | 11 |   |   |   | 10 |   |
| Retained earnings                                                                                                  |       |                  |       |       | ** ** |                  |       |   |   |   |   |   |   |
| Balance—Beginning of year                                                                                     | ** ** | ** **            |       | **762**    | ** ** |                  |       | 691 |   |   |   | 711 |   |
| Net earnings (loss) for the year                                                                                   | ** ** | ** **            |       | **(49**    | **)**      |                  |       | 90 |   |   |   | (4 | ) |
| Dividend on common shares                                                                                          | ** ** | ** **            |       | **(16**    | **)**      |                  |       | (16 | ) |   |   | (13 | ) |
| Excess of common share redemption price over its  paid-up capital                                                  | ** ** | ** **            |       | **(1**     | **)**      |                  |       | (3 | ) |   |   | (3 | ) |
| Balance—End of year                                                                                           | ** ** | ** **            |       | **696**    | ** ** |                  |       | 762 |   |   |   | 691 |   |
| Accumulated other comprehensive income                                                                             |       |                  |       |       | ** ** |                  |       |   |   |   |   |   |   |
| Balance—Beginning of year                                                                                     | ** ** | ** **            |       | **(79**    | **)**      |                  |       | (40 | ) |   |   | (51 | ) |
| Annual changes—net of tax                                                                                     |       |                  |       |       | ** ** |                  |       |   |   |   |   |   |   |
| Foreign currency translation                                                                                       | ** ** | ** **            |       | **190**    | ** ** |                  |       | (41 | ) |   |   | 27 |   |
| Change in fair value of foreign exchange forward  contracts designated as cash flow hedges                         | ** ** | ** **            |       | **(61**    | **)**      |                  |       | 4 |   |   |   | — |   |
| Change in fair value of commodity derivative  financial instruments designated as cash flow hedges                 | ** ** | ** **            |       | **(2**     | **)**      |                  |       | 2 |   |   |   | (7 | ) |
| Minimum pension liability                                                                                          | ** ** | ** **            |       | **—** | ** ** |                  |       | — |   |   |   | 13 |   |
| Unrecognized actuarial gains and losses and past  service costs on defined benefit pension and other benefit plans | ** ** | ** **            |       | **(8**     | **)**      | **—**            |       | (5 | ) |   |   | (22 | ) |
| Rounding                                                                                                           |       |                  |       | **—** | ** ** |                  |       | 1 |   |   |   | — |   |
| Balance—End of year                                                                                           | ** ** | ** **            |       | **40**     | ** ** |                  |       | (79 | ) |   |   | (40 | ) |
| Rounding                                                                                                           | ** ** | ** **            |       | **—** | ** ** |                  |       | (2 | ) |   |   | 2 |   |
| Shareholders’ equity—End of year                                                                         | ** ** | ** **            |       | **1,247**  | ** ** |                  |       | 1,194 |   |   |   | 1,166 |   |

 

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2.3                 Reconciliationof shareholders’ equity

 
| ** **                                                                                                         | ** ** | **Note**   | ** ** | **2008**   | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Shareholders’ equity under Canadian GAAP                                                                      | ** ** | ** ** |       | **1,256**  | ** ** | 1,199    |       |
| U.S. GAAP adjustments:                                                                                             |       |       |       |       | ** ** |     |       |
| Start-up costs                                                                                                     |       | (a)        |       | **(2**     | **)**      | (5       | )          |
| Investment tax credit                                                                                              |       | (b)        |       | **5**      | ** ** | 6        |       |
| Gain realized on formation of Norampac                                                                             |       | (c)        |       | **44**     | ** ** | 44       |       |
| Unrealized gains arising from commodity derivative  financial instruments                                          |       | (d)        |       | **—** | ** ** | (1       | )          |
| Inventory costs                                                                                                    |       | (e)        |       | **—** | ** ** | 6        |       |
| Employee future benefits                                                                                           |       | (f)        |       | **(14**    | **)**      | (13      | )          |
| Unrecognized actuarial gains and losses and past  service costs on defined benefit pension and other benefit plans |       | (f)        |       | **(67**    | **)**      | (55      | )          |
| Tax effect on above adjustments                                                                                    | ** ** | ** ** |       | **18**     | ** ** | 6        |       |
| Excess of redemption price of Class B preferred  shares on their paid up capital net of related taxes              |       | (g)        |       | **7**      | ** ** | 7        |       |
| Shareholders’ equity under U.S. GAAP                                                                          | ** ** | ** ** |       | **1,247**  | ** ** | 1,194    |       |

 

2.4                 Reconciliationof balance sheet

 
| ** **                                   | ** ** | ** **                | ** ** | **2008**           | ** ** | **2007**   | ** ** |
|----------------------------------------------|------------|---------------------------|------------|--------------------|------------|------------|------------|
| ** **                                   | ** ** | **Note**                  | ** ** | **Canadian  GAAP** | ** ** | **Other**  | ** ** | **RDM  impact (m)** | ** ** | **U.S.  GAAP** | ** ** | **Canadian  GAAP** | ** ** | **U.S.  GAAP** | ** ** |
| Current assets                               |       | (d)                       |       | **1,248**          | ** ** | **—** | ** ** | **(121** | **)** | **1,127** |   | 1,204 |   | 1,203 |   |
| Property, plant and equipment                |       | (b) (d) and (f)           |       | **2,037**          | ** ** | **33**     | ** ** | **(110** | **)** | **1,960** |   | 1,886 |   | 1,925 |   |
| Intangible assets, other assets and goodwill |       | (1.1) (e) (b) (c) and (j) |       | **746**            | ** ** | **(40**    | **)**      | **57** | ** ** | **763** |   | 679 |   | 679 |   |
| Current liabilities                          | ** ** | ** **                |       | **726**            | ** ** | **—** | ** ** | **(138** | **)** | **588** |   | 623 |   | 623 |   |
| Long-term debt                               |       | (c)                       |       | **1,672**          | ** ** | **11**     | ** ** | **(11** | **)** | **1,672** |   | 1,570 |   | 1,582 |   |
| Other liabilities                            |       | (1.1) and (a) to (e)      |       | **377**            | ** ** | **(9**     | **)**      | **(25** | **)** | **343** |   | 377 |   | 408 |   |
| Shareholders’ equity                    |       | (1.1) and (a) to (e)      |       | **1,256**          | ** ** | **(9**     | **)**      | **—** | ** ** | **1,247** |   | 1,199 |   | 1,194 |   |

 

2.5                 Reconciliationof income statement

 
| ** **                                          | ** ** | ** **       | ** ** | **2008**               | ** ** |
|-----------------------------------------------------|------------|------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **Note**         | ** ** | **Canadian GAAP** | ** ** | **Other** | ** ** | **RDM impact (m)** | ** ** | **U.S. GAAP** | ** ** |
| Sales                                               | ** ** | ** **       | ** ** | **4,017**              | ** ** | **—** | ** ** | **(211** | **)** | **3,806** |   |
| Costs of sales and expenses                         | ** ** | (a) ,(e) and (m) | ** ** | **(4,002**             | **)**      | **(8** | **)** | **219** |   | **3,789** |   |
| **Operating Income from continuing operations**     | ** ** | ** **       | ** ** | **15**                 | ** ** | **(8** | **)** | **8** |   | **15** |   |
| Interest expense                                    | ** ** | ** **       | ** ** | **102**                | ** ** | **—** | ** ** | **(4** | **)** | **98** |   |
| Foreign exchange loss (gain) on long term debt      | ** ** | ** **       | ** ** | **24**                 | ** ** | **—** | ** ** | **—** |   | **24** |   |
| ** **                                          | ** ** | ** **       | ** ** | **(111**               | **)**      | **(8** | **)** | **12** |   | **(107** | **)** |
| Provision for income tax                            | ** ** | (b), (l)         | ** ** | **32**                 | ** ** | **10** | ** ** | **—** |   | **42** |   |
| Share of results of significant influence companies | ** ** | ** **       | ** ** | **8**                  | ** ** | **4** | ** ** | **(12** | **)** | **—** |   |
| Non controlling interests                           | ** ** | ** **       | ** ** | **(2**                 | **)**      | **—** | ** ** | **—** |   | **(2** | **)** |
| Discontinued operations                             | ** ** | ** **       | ** ** | **18**                 | ** ** | **—** | ** ** | **—** |   | **18** |   |
| **Net Loss**                                        | ** ** | ** **       | ** ** | **(55**                | **)**      | **6** | ** ** | **—** |   | **(49** | **)** |

 

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| ** **                                           | ** ** | ** **       | ** ** | **2007**           | ** ** | **2006**  | ** ** |
|------------------------------------------------------|------------|------------------|------------|--------------------|------------|-----------|------------|
| ** **                                           | ** ** | **Note**         | ** ** | **Canadian  GAAP** | ** ** | **Other** | ** ** | **U.S.  GAAP** | ** ** | **Canadian  GAAP** | ** ** | **Other** | ** ** | **U.S.  GAAP** | ** ** |
| Sales                                                |       |             |       | 3,929              |       | —    |       | 3,929 |   | 3,278 |   | — |   | 3,278 |   |
| Costs  of sales and expenses                         |       | (a), (e) and (m) |       | 3,785              |       | 17        |       | 3,802 |   | 3,182 |   | 12 |   | 3,194 |   |
| **Operating  Income from continuing operations**     |       | ** **       |       | **144**            |       | **(17**   | **)**      | **127** |   | **96** |   | **(12** | **)** | **84** |   |
| Interest  expense                                    |       |             |       | 102                |       | —    |       | 102 |   | 79 |   | — |   | 79 |   |
| Foreign  exchange loss (gain) on long term debt      |       |             |       | (59                | )          | —    |       | (59 | ) | — |   | — |   | — |   |
|                                                 |       |             |       | 101                |       | (17       | )          | 84 |   | 17 |   | (12 | ) | 5 |   |
| Provision  for income tax                            |       | (b), (l)         |       | (11                | )          | 12        |       | 1 |   | (6 | ) | 5 |   | (1 | ) |
| Share  of results of significant influence companies |       |             |       | 27                 |       | —    |       | 27 |   | 8 |   | — |   | 8 |   |
| Non  controlling interests                           |       |             |       | (3                 | )          | —    |       | (3 | ) | **—** |   | **—** |   | **—** |   |
| Discontinued  Operations                             |       |             |       | (19                | )          | —    |       | (19 | ) | (16 | ) | — |   | (16 | ) |
| **Net  Earning**                                     |       | ** **       |       | **95**             |       | **(5**    | **)**      | **90** |   | **3** |   | **(7** | **)** | **(4** | **)** |

 

2.6                 Mainadjustments explanations

 

a)                      Under Canadian GAAP, start-up costs are deferred and amortized overa period not exceeding five years. Under U.S. GAAP, start-up costs areaccounted for under Statement of Position (“SOP”) No. 98-5, “Reporting on theCosts of Start-Up Activities”, and are included in the statement of earnings inthe period they are incurred.

 

b)                     Under U.S. GAAP, investment tax credits are accounted for as a taxrecovery. Under Canadian GAAP, investment tax credits are accounted for as areduction of the underlying investment.

 

c)                      On December 30, 1997, the Company and Domtar Inc. merged theirrespective containerboard and corrugated packaging operations to form Norampac Inc.,a 50-50 joint venture. Under Canadian GAAP, a portion of the gain realized onthe transaction of an original amount of approximately $58 million, net ofrelated taxes, was recorded against property, plant and equipment and goodwill.Under U.S. GAAP, this gain would have been recognized in earnings on December 30,1997. Therefore, an adjustment is required to adjust amortization expensesrecorded under Canadian GAAP. As disclosed in note 5(b), the Company acquiredthe remaining outstanding common shares of Norampac on December 29, 2006.Therefore since this date, the goodwill is not amortized anymore and thedifference recorded before became a permanent difference. In addition, underU.S. GAAP, additional liabilities have been included in the allocation of thepurchase price at the date of the transaction with respect to employee futurebenefits with a corresponding adjustment to goodwill.

 

d)                     In 2007, the Company adopted sections 1530, 3251, 3855 and 3865 (referredto as the “Sections”) of the CICA Handbook with respect to measurement andrecognition of financial instruments, hedges, equity and comprehensive income.These Sections essentially harmonized Canadian GAAP and U.S. GAAP except forthe classification of deferred financing costs. Under Canadian GAAP, thosecosts are added to the carrying value of the related long-term debt. Under U.S.GAAP, deferred financing costs are classified in other assets. As of December 31,2008 the reclassification of those costs amounted to $11 million ($12 millionin 2007). With the exception of the latter, the adjustment resulting from theadoption of these Sections effective January 1, 2007 under Canadian GAAP had noimpact on U.S. GAAP. Under Canadian GAAP, prior to January 1, 2007, gains andlosses were charged to earnings in the same period as the respective hedgeditem affected earnings.

 

e)                      Prior to January 1, 2008, the cost of inventories under US GAAPincluded, among other things, an allocation of the depreciation expense onproduction equipment as well as other indirect costs. For the year ended December31, 2007, the Company recorded an amount of $6 million as cumulative adjustmentrelating to the allocation of such costs as a component of inventory. Starting January1, 2008, the Company adopted, retroactively without restatements of priorperiods, Section 3031 of the CICA Handbook establishing new measurementrequirements which essentially harmonized the Canadian and U.S. GAAP.

 

f)                        Under U.S. GAAP in accordance with SFAS 158, the Company recognizesthe overfunded or underfunded status of its defined benefits plans as an assetor liability with changes in that funded status recognized throughcomprehensive income. Prior to the adoption of SFAS 158, a minimum pensionliability adjustment was recorded in accumulated other comprehensive income forplans whose accumulated benefit obligation exceeded the fair value of planassets. The excess of its liability over the intangible assets, which can alsobe recorded for the plan, was recorded in comprehensive income. This adjustmentis not required under Canadian GAAP. Differences between Canadian and U.S. GAAPremain with respect to the amortization of actuarial gains and losses arisingprior to January 1, 2000.

 

g)                     In 2003, the Company redeemed all of the outstanding Class Bpreferred shares of a subsidiary for a consideration of $16 million. UnderCanadian GAAP, the excess of the redemption price of $10 million over therecorded capital was included in retained earnings. Under U.S. GAAP, as thesepreferred shares represent a non-controlling interest, the excess of $10 millionwould have been recorded as an increase of $15 million to property, plant andequipment and an increase of $5 million in future income tax liabilities. Theadjustment of $15 million to property, plant and equipment is amortized on astraight-line basis over a period of 20 years. In addition, under U.S. GAAP,the premium paid on redemption would be classified under investing activitiesrather than financing activities.

 

h)                     Under U.S. GAAP, financing charges incurred in 2006 amounting to $3 millionwould be classified under operating activities rather than financingactivities.(2008—nil, 2007—nil)

 

i)                         Under Canadian GAAP, costs related to share issuance are presentedin retained earnings, net of related income taxes. Under U.S. GAAP, shareissuance costs (2008—nil, 2007—nil, 2006—$7 million) are recorded as areduction of capital stock net of related income taxes.

 

46

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j)                         Prior to January 1, 2007, the Company’s deferred financing costsunder Canadian GAAP were amortized on a straight-line basis over theanticipated period of repayment of the underlying debt. Under U.S. GAAP, suchcosts are amortized using the effective interest method. For the year ended December31, 2006, amortization expense under both methods is not materially different.Starting January 1, 2007, the Company adopted Section 3855 of the CICA Handbookwhich essentially harmonizes Canadian GAAP with U.S. GAAP and was applied prospectively.

 

k)                      Under Canadian GAAP, the Company accounts for its deferred shareunit plan using the intrinsic value model. Under U.S. GAAP, the deferred shareunit plan is accounted for at fair value using a Black-Scholes option pricingmodel. Both methods do no result in materially different results for each ofthe years presented.

 

l)                         Under U.S. GAAP, income tax expense would be reduced by $8 millionin 2008 (2007—$13 million; 2006—$9 million) for tax credits relating toresearch and development expenses, which are recognized as a reduction of costof sales under Canadian GAAP.

 

m)                   Under Canadian GAAP, investments in joint ventures are accounted forusing the proportionate consolidation method. Under U.S. GAAP, they areaccounted for using the equity method. The different accounting treatmentsaffect only the presentation and classification of financial statement itemsand not net earnings or shareholders’ equity. Rules prescribed by the U.S.Securities and Exchange Commission (“SEC”) permit the use of the proportionateconsolidation method in the reconciliation to U.S. GAAP provided the jointventure is an operating entity and the significant financial operating policiesare, by contractual arrangement, jointly controlled by all parties having anequity interest in the joint venture. As required, the Company discloses innote 22 the major components of its financial statements resulting from the useof the proportionate consolidation method to account for its interests in jointventures. For RDM, the exemption is not possible, therefore for reconciliationpurposes the joint venture has been accounted for under the equity method. Theimpacts are disclosed in the column RDM Impact. For the other joint ventures,the exemption applies and even under US GAAP they remain consolidated with theproportionate method.

 

n)                     Under US GAAP, the consolidated cash flows would not besignificantly different from the presentation under Canadian GAAP, except thatRDM would be shown as an equity investment and not proportionally consolidated.In addition, some total in operating activities under Canadian GAAP would notbe presented under U.S. GAAP.

 

**3  Accounting pronouncements not yet adoptedunder U.S. GAAP**

 

3.1                 InDecember 2007, FASB issued FAS 141(R), “Business Combinations” (“SFAS 141(R)”),which will replace FAS 141 prospectively for business combinations consummatedafter the effective date of December 15, 2008. Under SFAS 141(R), businesscombinations will be accounted for under the “acquisition method”, compared tothe “purchase method” mandated by FAS 141. Significant changes will result fromapplying the acquisition method, including: more acquisitions will be accountedfor as business combinations rather than as asset acquisitions; acquisitionrelated costs of the acquirer will be expensed as incurred, whereas under FAS 141these costs are capitalized as part of the business combination; and the assetsacquired and liabilities assumed are recorded at 100% of fair value even ifless than 100% is obtained, whereas under FAS 141 only the controlling interest’sportion is recorded at fair value. In the event of the Company being involvedin a future business combination, the Company will evaluate the application ofSFAS 141(R).

 

3.2                 InDecember 2007, FASB issued FAS 160, “Non-Controlling Interests in ConsolidatedFinancial Statements” (“SFAS 160”) which is effective for fiscal years beginningafter December 15, 2008. Under FAS 160, non-controlling interests will bemeasured at 100% of the fair value of assets acquired and liabilities assumed.Under current standards, the non-controlling interest is measured at bookvalue. For presentation and disclosure purposes, non-controlling interests willbe classified as a separate component of shareholders’ equity. In addition,SFAS 160 will change the manner in which increases and decreases in ownershippercentages are accounted for. The provisions of SFAS 160 are to be appliedprospectively with the exception of the presentation and disclosure provisions,which are to be applied for all prior periods presented in the financialstatements. The Company is currently evaluating the impact that the adoption ofthis standard might have on its disclosure.

 

3.3                 InMarch 2008, the FASB issued Statement No. 161, “Disclosures about DerivativeInstruments and Hedging Activities” (“SFAS 161”). This Statement changes thedisclosure requirements for derivative instruments and hedging activities,requiring us to provide enhanced disclosures about (a) how and why the Companyuses derivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under FASB Statement No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”) and (c) howderivative instruments and related hedged items affect our financial position,financial performance and cash flows. SFAS 161 is effective for fiscal yearsbeginning after November 15, 2008. The Company is currently evaluating theimpact that the adoption of this standard might have on its disclosure.

 

3.4                 InApril 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of theUseful Life of Intangible Assets” (“FSP FAS 142-3”). This Staff Position amendsthe factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This newguidance also provides additional disclosure requirements related to recognizedintangible assets. FSP FAS 142-3 is effective for fiscal years beginning after December15, 2008 and interim periods within those fiscal years. Early adoption isprohibited. The impact of adopting this standard will be limited to intangibleidentified on or after January 1, 2009. The Company is currently evaluating theimpact, if any, that the adoption of this standard might have on itsdisclosures concerning already recognized intangible assets.

 

3.5                 InJune 2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities” (“FSP EITF 03-6-1”). This Staff Position states that unvestedshare-based payment awards that contain non-forfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andshall be included in the computation of earnings per share pursuant to thetwo-class method. FSP EITF 03-6-1 is effective for financial statements issuedfor fiscal years beginning after December 15, 2008, and interim periods withinthose years. All prior-period earnings per share (“EPS”) data presented shallbe adjusted retrospectively (including interim financial statements, summariesof earnings and selected financial data) to conform with the provisions of thisStaff Position. Early application is not permitted. The Company does not expectthe adoption of this accounting guidance to impact its EPS.

 

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3.6                 InJune 2008, the EITF reached a consensus in Issue No. 07-5, “Determining Whetheran Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF07-5”). This Issue addresses the determination of whether an instrument (or anembedded feature) is indexed to an entity’s own stock, which is the first partof the scope exception in paragraph 11(a) of SFAS 133. EITF 07-5 is effectivefor fiscal years beginning after December 15, 2008, and interim periods withinthose fiscal years. Early application is not permitted. The Company does notexpect the adoption of this accounting guidance to impact its results ofoperations or financial position.

 

3.7                 InJune 2008, the EITF reached a consensus in Issue No. 08-3, “Accounting byLessees for Nonrefundable Maintenance Deposits” (“EITF 08-3”). This issueaddresses the accounting for nonrefundable maintenance deposits paid by thelessee to the lessor. EITF 08-3 is effective for fiscal years beginning after December15, 2008, and interim periods within those fiscal years. Earlier application isnot permitted. The Company does not expect the adoption of this accountingguidance to impact its results of operations or financial position.

 

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**Historical Financial Information—10 Years**

 
| **For the years ended December 31  (in millions of Canadian dollars,  except per share amounts and ratios)  (unaudited)  Historical financial information are  not adjusted to reclass the impact of  discontinued operations.** | ** ** | **2008**          | ** ** | **2007**      | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**       | ** ** | **2003**       | ** ** | **2002**      | ** ** | **2001**      | ** ** | **2000**      | ** ** | **1999**      | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------|------------|---------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| **Highlights—Consolidated  Results**                                                                                                                                                                                                                                                                                                                |       |              | ** ** |          |       |          |       |          |       |           |       |           |       |          |       |          |       |          |       |          |       |
| Sales                                                                                                                                                                                                                                                                                                                                                    | ** ** | **4,025**         | ** ** | 4,033         |       | 3,481         |       | 3,862         |       | 3,692          |       | 3,449          |       | 3,591         |       | 3,217         |       | 3,031         |       | 2,776         |       |
| Cost of sales  and expenses                                                                                                                                                                                                                                                                                                                              | ** ** | **3,720**         | ** ** | 3,693         |       | 3,167         |       | 3,600         |       | 3,433          |       | 3,199          |       | 3,167         |       | 2,837         |       | 2,692         |       | 2,467         |       |
| Operating income  before depreciation and amortization (OIBD) excluding specific items                                                                                                                                                                                                                                                                   | ** ** | **305**           | ** ** | 340           |       | 314           |       | 262           |       | 259            |       | 250            |       | 424           |       | 380           |       | 339           |       | 309           |       |
| Depreciation and  amortization                                                                                                                                                                                                                                                                                                                           | ** ** | **214**           | ** ** | 209           |       | 163           |       | 174           |       | 161            |       | 145            |       | 139           |       | 132           |       | 125           |       | 117           |       |
| Operating income  excluding specific items                                                                                                                                                                                                                                                                                                               | ** ** | **91**            | ** ** | 131           |       | 151           |       | 88            |       | 98             |       | 105            |       | 285           |       | 248           |       | 214           |       | 192           |       |
| Interest expense                                                                                                                                                                                                                                                                                                                                         | ** ** | **103**           | ** ** | 106           |       | 83            |       | 83            |       | 79             |       | 83             |       | 72            |       | 86            |       | 89            |       | 85            |       |
| Foreign exchange  loss (gain) on long-term debt                                                                                                                                                                                                                                                                                                          | ** ** | **24**            | ** ** | (59           | )          | —        |       | (10           | )          | (18            | )          | (72            | )          | —        |       | 14            |       | 10            |       | (14           | )          |
| Specific items                                                                                                                                                                                                                                                                                                                                           | ** ** | **54**            | ** ** | 7             |       | 76            |       | 159           |       | 13             |       | 22             |       | 4             |       | (7            | )          | 1             |       | 3             |       |
| ** **                                                                                                                                                                                                                                                                                                                                               |       | **(90**           | **)**      | 77            | ** ** | (8            | )          | (144          | )          | 24             |       | 72             |       | 209           |       | 155           |       | 114           |       | 118           |       |
| Provision for  (recovery of) income taxes                                                                                                                                                                                                                                                                                                                | ** ** | **(29**           | **)**      | 6             |       | (3            | )          | (40           | )          | 3              |       | 14             |       | 61            |       | 49            |       | 49            |       | 42            |       |
| Share of results  of significantly influenced companies                                                                                                                                                                                                                                                                                                  | ** ** | **(8**            | **)**      | (27           | )          | (8            | )          | (7            | )          | (2             | )          | 3              |       | (22           | )          | (3            | )          | (5            | )          | (5            | )          |
| Share of results  attributed to non-controlling interests                                                                                                                                                                                                                                                                                                | ** ** | **2**             | ** ** | 3             |       | —        |       | —        |       | —         |       | —         |       | 1             |       | —        |       | 3             |       | 8             |       |
| Net earnings  (loss)                                                                                                                                                                                                                                                                                                                                     | ** ** | **(55**           | **)**      | 95            |       | 3             |       | (97           | )          | 23             |       | 55             |       | 169           |       | 109           |       | 67            |       | 73            |       |
| Net earnings  (loss) per common share                                                                                                                                                                                                                                                                                                                    | ** ** | **$**             | **(0.56**  | **)**         | $          | 0.95          |       | $             | 0.04       |           | $          | (1.19          | )          | $             | 0.28       |          | $          | 0.66          |       | $             | 2.07       |   | $ | 1.33 |   | $ | 1.00 |   | $ | 1.08 |   |
| **Highlights—Consolidated  Cash Flow**                                                                                                                                                                                                                                                                                                              |       |              | ** ** |          |       |          |       |          |       |           |       |           |       |          |       |          |       |          |       |          |       |
| Cash flow  generated by operating activities                                                                                                                                                                                                                                                                                                             | ** ** | **126**           | ** ** | 53            |       | 191           |       | 100           |       | 157            |       | 140            |       | 325           |       | 314           |       | 169           |       | 141           |       |
| Cash flow from  operations                                                                                                                                                                                                                                                                                                                               | ** ** | **150**           | ** ** | 163           |       | 174           |       | 100           |       | 164            |       | 166            |       | 313           |       | 249           |       | 214           |       | 192           |       |
| per common share                                                                                                                                                                                                                                                                                                                                         | ** ** | **$**             | **1.52**   | ** **    | $          | 1.64          |       | $             | 2.15       |           | $          | 1.23           |       | $             | 2.01       |          | $          | 2.03          |       | $             | 3.84       |   | $ | 3.08 |   | $ | 3.20 |   | $ | 2.87 |   |
| Purchase of  property, plant & equipment                                                                                                                                                                                                                                                                                                             | ** ** | **191**           | ** ** | 169           |       | 110           |       | 121           |       | 130            |       | 122            |       | 129           |       | 122           |       | 148           |       | 128           |       |
| Business  acquisitions and cash from a joint venture                                                                                                                                                                                                                                                                                                     | ** ** | **(5**            | **)**      | 10            |       | 572           |       | 52            |       | 120            |       | 31             |       | 131           |       | 148           |       | 31            |       | 13            |       |
| Business  disposals                                                                                                                                                                                                                                                                                                                                      | ** ** | **47**            | ** ** | 37            |       | 94            |       | —        |       | 14             |       | —         |       | 4             |       | —        |       | 1             |       | 17            |       |
| Net change in  long-term debt                                                                                                                                                                                                                                                                                                                            | ** ** | **149**           | ** ** | 91            |       | 178           |       | 91            |       | 107            |       | 127            |       | (26           | )          | (29           | )          | 30            |       | (40           | )          |
| Dividends on  common shares                                                                                                                                                                                                                                                                                                                              | ** ** | **16**            | ** ** | 16            |       | 13            |       | 13            |       | 13             |       | 13             |       | 10            |       | 9             |       | 7             |       | 7             |       |
| per common share                                                                                                                                                                                                                                                                                                                                         | ** ** | **$**             | **0.16**   | ** **    | $          | 0.16          |       | $             | 0.16       |           | $          | 0.16           |       | $             | 0.16       |          | $          | 0.16          |       | $             | 0.12       |   | $ | 0.12 |   | $ | 0.11 |   | $ | 0.10 |   |
| Dividend yield                                                                                                                                                                                                                                                                                                                                           | ** ** | **4.6**           | **%**      | 1.9           | %          | 1.2           | %          | 1.6           | %          | 1.2            | %          | 1.3            | %          | 0.8           | %          | 1.2           | %          | 1.6           | %          | 1.1           | %          |
| **Highlights—Consolidated  Balance Sheet (as at December 31)**                                                                                                                                                                                                                                                                                      |       |              | ** ** |          |       |          |       |          |       |           |       |           |       |          |       |          |       |          |       |          |       |
| Current assets  less current liabilities                                                                                                                                                                                                                                                                                                                 | ** ** | **522**           | ** ** | 581           |       | 574           |       | 530           |       | 502            |       | 508            |       | 386           |       | 348           |       | 384           |       | 353           |       |
| Property, plant  & equipment                                                                                                                                                                                                                                                                                                                         | ** ** | **2,037**         | ** ** | 1,886         |       | 2,063         |       | 1,562         |       | 1,700          |       | 1,636          |       | 1,604         |       | 1,481         |       | 1,376         |       | 1,355         |       |
| Total assets                                                                                                                                                                                                                                                                                                                                             | ** ** | **4,031**         | ** ** | 3,769         |       | 3,911         |       | 3,046         |       | 3,144          |       | 2,927          |       | 2,959         |       | 2,733         |       | 2,627         |       | 2,434         |       |
| Total long-term  debt                                                                                                                                                                                                                                                                                                                                    | ** ** | **1,708**         | ** ** | 1,574         |       | 1,666         |       | 1,297         |       | 1,226          |       | 1,110          |       | 1,095         |       | 1,103         |       | 1,096         |       | 1,044         |       |
| Non-controlling  interests                                                                                                                                                                                                                                                                                                                               | ** ** | **22**            | ** ** | 25            |       | 19            |       | —        |       | —         |       | 3              |       | 2             |       | 18            |       | 31            |       | 185           |       |
| Shareholder’s  equity                                                                                                                                                                                                                                                                                                                               | ** ** | **1,256**         | ** ** | 1,199         |       | 1,157         |       | 897           |       | 1,059          |       | 1,056          |       | 1,065         |       | 870           |       | 766           |       | 647           |       |
| per common share                                                                                                                                                                                                                                                                                                                                         | ** ** | **$**             | **12.74**  | ** **    | $          | 12.09         |       | $             | 11.62      |           | $          | 11.10          |       | $             | 13.02      |          | $          | 12.93         |       | $             | 13.02      |   | $ | 10.75 |   | $ | 9.47 |   | $ | 9.67 |   |
| **Stock  Market Highlights**                                                                                                                                                                                                                                                                                                                             |       |              | ** ** |          |       |          |       |          |       |           |       |           |       |          |       |          |       |          |       |          |       |
| Shares issued  and outstanding (in millions)                                                                                                                                                                                                                                                                                                             | ** ** | **98.5**          | ** ** | 99.1          |       | 99.5          |       | 80.8          |       | 81.4           |       | 81.7           |       | 81.8          |       | 81.0          |       | 80.9          |       | 66.9          |       |
| Trading volume  (in millions)                                                                                                                                                                                                                                                                                                                            | ** ** | **39.8**          | ** ** | 63.2          |       | 31.7          |       | 23.6          |       | 24.6           |       | 25.9           |       | 41.3          |       | 31.7          |       | 13.9          |       | 8.9           |       |
| Market capitalization                                                                                                                                                                                                                                                                                                                                    | ** ** | **339**           | ** ** | 837           |       | 1,317         |       | 812           |       | 1,090          |       | 1,012          |       | 1,281         |       | 843           |       | 554           |       | 589           |       |
| Closing price                                                                                                                                                                                                                                                                                                                                            | ** ** | **$**             | **3.44**   | ** **    | $          | 8.44          |       | $             | 13.23      |           | $          | 10.05          |       | $             | 13.40      |          | $          | 12.38         |       | $             | 15.65      |   | $ | 10.41 |   | $ | 6.85 |   | $ | 8.80 |   |
| High                                                                                                                                                                                                                                                                                                                                                     | ** ** | **$**             | **8.90**   | ** **    | $          | 15.80         |       | $             | 14.78      |           | $          | 13.95          |       | $             | 14.80      |          | $          | 16.87         |       | $             | 18.25      |   | $ | 10.44 |   | $ | 10.50 |   | $ | 10.25 |   |
| Low                                                                                                                                                                                                                                                                                                                                                      | ** ** | **$**             | **3.00**   | ** **    | $          | 7.46          |       | $             | 9.66       |           | $          | 7.35           |       | $             | 11.21      |          | $          | 11.15         |       | $             | 10.30      |   | $ | 6.41 |   | $ | 6.05 |   | $ | 7.50 |   |
| **Key  Financial Ratios**                                                                                                                                                                                                                                                                                                                                |       |              | ** ** |          |       |          |       |          |       |           |       |           |       |          |       |          |       |          |       |          |       |
| Net earnings  (loss) / sales                                                                                                                                                                                                                                                                                                                             | ** ** | **-1.4**          | **%**      | 2.4           | %          | 0.1           | %          | -2.5          | %          | 0.6            | %          | 1.6            | %          | 4.7           | %          | 3.4           | %          | 2.2           | %          | 2.6           | %          |
| Sales / total  assets*                                                                                                                                                                                                                                                                                                                                   | ** ** | **1.0****·** | **x**      | 1.1**·** | x          | 1.2**·** | x          | 1.3**·** | x          | 1.2**·**  | x          | 1.2**·**  | x          | 1.2**·** | x          | 1.2**·** | x          | 1.2**·** | x          | 1.1**·** | x          |
| Total assets /  average shareholder’s equity*                                                                                                                                                                                                                                                                                                       | ** ** | **3.3****·** | **x**      | 3.2**·** | x          | 3.2**·** | x          | 3.1**·** | x          | 3.0**·**  | x          | 2.8**·**  | x          | 3.1**·** | x          | 3.3**·** | x          | 3.7**·** | x          | 3.9**·** | x          |
| Return on  shareholders’ equity*                                                                                                                                                                                                                                                                                                                    | ** ** | **-4.5**          | **%**      | 8.1           | %          | 0.3           | %          | -9.9          | %          | 2.2            | %          | 5.2            | %          | 17.5          | %          | 13.3          | %          | 9.5           | %          | 11.7          | %          |
| Return on total  assets (OIBD / average total assets)*                                                                                                                                                                                                                                                                                                   | ** ** | **7.8**           | **%**      | 8.9           | %          | 10.6          | %          | 8.4           | %          | 8.5            | %          | 8.5            | %          | 14.9          | %          | 14.2          | %          | 13.4          | %          | 12.6          | %          |
| OIBD / sales                                                                                                                                                                                                                                                                                                                                             | ** ** | **7.6**           | **%**      | 8.4           | %          | 9.0           | %          | 6.8           | %          | 7.0            | %          | 7.2            | %          | 11.8          | %          | 11.8          | %          | 11.2          | %          | 11.1          | %          |
| OIBD / interest                                                                                                                                                                                                                                                                                                                                          | ** ** | **3.0****·** | **x**      | 3.2**·** | x          | 3.8**·** | x          | 3.2**·** | x          | 3.3**·**  | x          | 3.0**·**  | x          | 5.9**·** | x          | 4.4**·** | x          | 3.8**·** | x          | 3.6**·** | x          |
| Current assets  less current liabilities / sales*                                                                                                                                                                                                                                                                                                        | ** ** | **13.0**          | **%**      | 14.4          | %          | 13.3          | %          | 13.7          | %          | 13.6           | %          | 14.7           | %          | 10.7          | %          | 10.8          | %          | 12.7          | %          | 12.7          | %          |
| Net funded debt  / OIBD*                                                                                                                                                                                                                                                                                                                                 | ** ** | **5.9****·** | **x**      | 4.7**·** | x          | 3.8**·** | x          | 5.0**·** | x          | 4.8**·**  | x          | 4.5**·**  | x          | 2.7**·** | x          | 3.1**·** | x          | 3.5**·** | x          | 3.6**·** | x          |
| Total debt /  total debt + shareholder’s equity                                                                                                                                                                                                                                                                                                     | ** ** | **59.1**          | **%**      | 57.5          | %          | 59.6          | %          | 59.9          | %          | 54.6           | %          | 52.2           | %          | 52.9          | %          | 58.0          | %          | 61.3          | %          | 63.6          | %          |
| Price to  earnings                                                                                                                                                                                                                                                                                                                                       | ** ** | **n/a**           | ** ** | 8.9**·** | x          | 331**·** | x          | n/a           |       | 47.9**·** | x          | 18.8**·** | x          | 7.6**·** | x          | 7.8**·** | x          | 6.9**·** | x          | 8.1**·** | x          |
| Price to book  value                                                                                                                                                                                                                                                                                                                                     | ** ** | **0.3****·** | **x**      | 0.7**·** | x          | 1.1**·** | x          | 0.9**·** | x          | 1.0**·**  | x          | 1.0**·**  | x          | 1.2**·** | x          | 1.0**·** | x          | 0.7**·** | x          | 0.9**·** | x          |

 

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* Prior to 2007, ratios are calculatedexcluding the impact of the Norampac acquisition.

 

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