(Title of Class)

For annual reports, indicate by check mark the information filed with this Form:

o Annual Information form		þ Audited annual financial statements

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Common Shares — 230,967,488 shares

     Indicate by check mark whether the Registrant by filing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “Yes” is marked, indicate the file number assigned to the Registrant in connection with such Rule.

Yes o		82-		No þ

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days.

Yes þ		No o

 

 

FORWARD-LOOKING STATEMENTS

This annual report on Form 40-F may contain forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar’s future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as “anticipate”, “believe”, “expect”, “intend”, “aim”, “target”, “plan”, “continue”, “estimate”, “may”, “will”, “should” and similar expressions. These statements reflect management’s current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties such as, but not limited to, general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign currency exchange rates, the ability to integrate acquired businesses into existing operations, the ability to realize anticipated cost savings, the performance of manufacturing operations, and other factors referenced herein and in Domtar’s continuous disclosure filings. These factors should be considered carefully and undue reliance should not be placed on the forward-looking statements. Although the forward-looking statements contained in this annual report on Form 40-F are based upon what management believes to be reasonable estimates and assumptions, Domtar cannot ensure that actual results will not be materially different from those expressed or implied by these forward-looking statements. Domtar assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances. These risks, uncertainties and other factors include, among other things, those discussed under “Risk Factors” as well as those discussed elsewhere in this annual report on Form 40-F.

Form 40-F

Domtar Inc.

March 27, 2006

TABLE OF CONTENTS

Disclosure Controls and Procedures;

Management’s Discussion and Analysis of Annual Results of Operations;

Management’s statement of responsibility and Auditors’ report;

Audited consolidated financial statements of Domtar Inc. as at and for the year ended December 31, 2005;

Audit Committee;

Code of Ethics;

Principal Accountant fees and services;

Exhibits

1.0		Consent of Independent Auditors
2.1		CEO 302 Certification
2.2		CFO 302 Certification
3.1		CEO 906 Certification
3.2		CFO 906 Certification

DISCLOSURE CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

In accordance with the rules of the Securities and Exchange Commission, Domtar maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by Domtar in the reports that it files or submits pursuant to the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Domtar’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of these disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, Domtar’s Chief Executive Officer and Chief Financial Officer concluded that Domtar’s system of disclosure controls and procedures is effective.

Change in Internal Controls over Financial Reporting

Domtar maintains a system of internal controls over financial reporting. There were no changes in Domtar’s internal controls that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, Domtar’s internal control over financial reporting.

MANAGEMENT’S DISCUSSION & ANALYSIS

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Domtar Inc.
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Annual Report

Montreal, Quebec, February 22, 2006

In accordance with industry practice, in this MD&A, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons, and the term “tonne” or the symbol “MT” refers to a metric ton. In this MD&A, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars, and the term “dollars” and the symbols “$” and “CAN$” refer to Canadian dollars. The term “U.S. dollars” and the symbol “US$” refer to United States dollars.

FORWARD-LOOKING STATEMENTS

This MD&A may contain forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar’s future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “aim,” “target,” “plan,” “continue,” “estimate,” “may,” “will,” “should” and similar expressions. These statements reflect management’s current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties such as, but not limited to, general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign currency exchange rates, the ability to integrate acquired businesses into existing operations, the ability to realize anticipated cost savings, the performance of manufacturing operations, and other factors referenced herein and in Domtar’s continuous disclosure filings. These factors should be considered carefully and undue reliance should not be placed on the forward-looking statements. Although the forward-looking statements contained in this MD&A are based upon what management believes to be reasonable estimates and assumptions, Domtar cannot ensure that actual results will not be materially different from those expressed or implied by these forward-looking statements. Domtar assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances. These risks, uncertainties and other factors include, among other things, those discussed under “Risk Factors” as well as those discussed elsewhere in this MD&A.

MANAGEMENT’S DISCUSSION & ANALYSIS

23
Domtar Inc.
2005
Annual Report

2005 Overview

Our 2005 results were negatively impacted by the continued strengthening of the Canadian dollar and higher costs, especially for purchased fiber, chemicals, energy and freight. This was only partially offset by higher U.S. dollar selling prices for most of our products. In order to preserve cash, reduce our cost base and return the Company to profitability as quickly as possible, we announced in October 2005 the suspension of our common share dividend, and in November 2005, a restructuring plan which included the permanent closures of mills and paper machines and which entailed a charge of approximately $400 million in the fourth quarter. We anticipate that additional costs related to this restructuring plan of approximately $80 million will occur over the next few years.

     Despite all the challenges encountered, we achieved our goal of delivering annualized targeted savings of $100 million by the end of 2005, mainly due to headcount reductions. We also improved our product offering by broadening our range of Domtar Earth Choice^® environmental FSC papers and by completing the transition, in all of our mills, to the production of the new 92 bright standard for our paper products.

Our Business
Domtar’s reporting segments correspond
to the following business activities: Papers,
Paper Merchants, Wood and Packaging.

1 Including sales of Domtar paper through our Paper Merchants business.
2 Excluding sales of Domtar paper.

SALES BY SEGMENT
— 2005 —

PAPERS

We are the third largest integrated manufacturer and marketer of uncoated free sheet paper in North America. We operate four pulp and paper facilities in Canada (reflecting the announced permanent closure of the Cornwall and Ottawa mills and the decision to sell the Vancouver mill) and five in the United States, with an annual paper production capacity of approximately 2.3 million tons, complemented by strategically located warehouses and sales offices. Approximately 65% of our paper production capacity is located in the United States, and approximately 90% of our paper sales are made to customers in the United States. Uncoated and coated free sheet papers are used for business, commercial printing and publication, and technical and specialty applications. The chart on the next page illustrates the principal paper products we produce and our annual paper production capacity.

     We sell paper primarily through a large network of owned and independent merchants that distribute our paper products throughout North America. We also sell our products to a variety of customers, including business offices, office equipment manufacturers, retail outlets, commercial printers, publishers and converters. In addition, we sell pulp in excess of our own internal requirements. We also purchase pulp to optimize paper production and reduce freight costs. In 2005, our net market pulp position (the amount of pulp produced in excess of our internal requirements) was approximately 554,000 tons. In 2006, our net market pulp position is expected to be approximately 950,000 tons as a result of the announced paper mill closures.

     Our Papers business is our most important segment, representing 55% of consolidated sales in 2005, or 61% when including sales of Domtar paper through our own Paper Merchants business.

MANAGEMENT’S DISCUSSION & ANALYSIS

24
Domtar Inc.
2005
Annual Report

COMMERCIAL PRINTING

TECHNICAL AND

CATEGORY

BUSINESS PAPERS

AND PUBLICATION PAPERS

SPECIALTY PAPERS

UNCOATED

COATED

UNCOATED AND

TYPE

FREESHEET

FREESHEET

COATED FREESHEET

GRADE

Copy

Premium imaging/technology papers

Offset Business converting

Lightweight Opaques Text, covered writing

Lightweight

Flexible packaging Abrasive papers Decorative papers Imaging papers Label papers Medical disposables

APPLICATION

Photocopies Office documents Presentations

Pamphlets Brochures Direct Mail Commercial printing Forms & envelopes

Stationery Brochures Annual reports Books Catalogs

Brochures Annual reports Books Magazines Catalogs

Food & candy wrappings Surgical growns Repositionable note pads Security check papers

CAPACITY *

As at February 22, 2006:

approximately 2.3 million tons

0.8 million tons 36%

0.1 million tons 4%

0.7 million tons 28%

0.2 million tons 11%

0.1 million tons 5%

0.4 million tons 16%

PAPER MERCHANTS

Our Paper Merchants business comprises the purchasing, warehousing, sale and distribution of various products made by Domtar and other manufacturers. These products include business and printing papers, graphic arts supplies and certain industrial products. Domtar-owned paper merchants operate in the United States and Canada under a single banner and umbrella name, the Domtar Distribution Group, which is the fifth largest paper merchant organization in North America. Ris Paper operates throughout the Northeast, Mid-Atlantic and Midwest areas from 20 locations in the United States, including 16 distribution centers. The Canadian business operates as Buntin Reid in three locations in Ontario; JBR/La Maison du Papier in two locations in Quebec; and The Paper House from two locations in Atlantic Canada. Our Paper Merchants business represented 21% of consolidated sales in 2005, or 15% when excluding sales of Domtar paper.

WOOD

Our Wood business comprises the manufacturing, marketing and distribution of lumber and wood-based value-added products, and the management of forest resources. We operate eight sawmills (four in Quebec and four in Ontario, following the permanent closure of the Chapleau, Ontario sawmill effective March 6, 2005 and the permanent closure of Grand-Remous and Malartic sawmills effective in the second quarter of 2006) and one remanufacturing facility (in Quebec), for an annual capacity of approximately 1.1 billion board feet of lumber. We also have investments in four businesses that produce wood products. We seek to optimize 17 million acres of forestland directly licensed or owned by the Corporation in Canada and the United States through efficient management and the application of certified sustainable forest management practices such that a continuous supply of wood is available for future needs. Our Wood business represented 11% of consolidated sales in 2005.

PACKAGING

Our Packaging business comprises our 50% ownership interest in Norampac, a joint venture between Domtar Inc. and Cascades Inc. We do not manage the day-to-day operations of Norampac. The Board of Directors of Norampac is composed of four representatives each from Domtar Inc. and Cascades Inc. The Chairman of the Board is proposed by Domtar Inc. and appointed by the Board, while the President and Chief Executive Officer is proposed by Cascades Inc. and appointed by the Board. Norampac’s debt is non-recourse to Domtar Inc. As required by GAAP, we account for our 50% interest in Norampac using the proportionate consolidation method.

     Norampac’s network of 26 corrugated packaging plants (reflecting the closure of the Concord plant in March 2005, the Buffalo plant in August 2005, the expected closure of the

MANAGEMENT’S DISCUSSION & ANALYSIS

25
Domtar Inc.
2005
Annual Report

Montreal plant in the second quarter of 2006 and the acquisition of three corrugated packaging plants in October 2005), strategically located across Canada and the United States, provides full-service packaging solutions and produces a broad range of products. Norampac’s eight containerboard mills (located in Ontario, Quebec, British Columbia, New York State and northern France), having a combined annual capacity of approximately 1.45 million tons, directly or indirectly supply essentially all the containerboard requirements of the corrugated packaging plants. Our Packaging business represented 13% of consolidated sales in 2005.

BUSINESS STRATEGY

Our overall strategic objective is to be a world leader in the paper industry. We have developed our business strategies around three pillars: meeting and anticipating the ever-changing needs of customers, providing our shareholders with attractive returns, and fostering a dynamic and creative environment for our employees in which shared human values and personal commitment prevail.

Our business strategies are to continue to:

–		anticipate and meet the needs of our customers in order to enhance customer loyalty
–		improve the productivity of our mills and the quality of our products and services
–		broaden our distribution capabilities
–		grow through acquisitions and alliances within our areas of expertise
–		maintain strict financial discipline
–		foster the personal growth and participation of employees
–		act as a responsible corporate citizen.

Summary of Financial Results

		2005				2004				2003
(IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
Sales			4,966				5,115				5,167
EBITDA1			224				428				514
Excluding specified items2			351				434				511
Operating profit (loss)1			(463	)			49				(95	)
Excluding specified items2			(24	)			66				126
Net loss			(388	)			(42	)			(193	)
Excluding specified items2			(86	)			(33	)			(10	)
Net loss per share (in dollars):
Basic			(1.69	)			(0.19	)			(0.86	)
Basic, excluding specified items2			(0.37	)			(0.15	)			(0.05	)
Diluted			(1.69	)			(0.19	)			(0.86	)
Operating profit (loss), excluding specified items, per segment2:
Papers			(74	)			(7	)			126
Paper Merchants			16				21				20
Wood			(3	)			(13	)			(66	)
Packaging			30				52				48
Corporate			7				13				(2	)
Total			(24	)			66				126
Average exchange rates		CAN $	1.211				1.301				1.401
		US $	0.826				0.769				0.714
Dividends per share (in dollars):
Series A Preferred Shares			2.25				2.25				2.25
Series B Preferred Shares			0.78				0.73				0.86
Common shares			0.18				0.24				0.22
Total assets			5,192				5,681				5,848
Total long-term debt, including current portion			2,259				2,034				2,059

MANAGEMENT’S DISCUSSION & ANALYSIS

26
Domtar Inc.
2005
Annual Report

SPECIFIED ITEMS AFFECTING RESULTS AND NON-GAAP MEASURES

Our operating results include specified items that, in our view, do not typify normal operating activities, thus affecting the comparability of our results. We define specified items as items such as the impacts of impairment of assets, facility or machine closures, changes in income tax legislation, debt restructuring, unrealized mark-to-market gains or losses on hedging contracts not considered as hedges for accounting purposes, foreign exchange impact on long-term debt translation and other items that, in our view, do not typify normal operating activities.

     To measure our performance and that of our business segments from period to period without regard to variations caused by these specified items, we focus on certain measures excluding specified items. These financial measures excluding specified items are non-GAAP measures. We believe that it is useful for investors and other users to be aware of the specified items that positively or adversely impacted our GAAP results, and that these non-GAAP measures provide investors and other users with a measure of performance to compare our results between periods without regard to these specified items. Measures excluding specified items have no standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies, and therefore should not be considered in isolation. The following tables reconcile these measures excluding specified items to their closest GAAP financial measures.

SPECIFIED ITEMS Years ended December 31

														2005																2004																2003
(IN MILLIONS OF						OPER-								NET LOSS								OPER-								NET LOSS								OPERATING								NET LOSS
CANADIAN DOLLARS,						ATING				NET				PER SHARE								ATING				NET				PER SHARE								PROFIT				NET				PER SHARE
UNLESS OTHERWISE NOTED)		EBITDA				LOSS				LOSS				(IN DOLLARS)				EBITDA				PROFIT				LOSS				(IN DOLLARS)				EBITDA				(LOSS)				LOSS				(IN DOLLARS)
As per GAAP*			224				(463	)			(388	)			(1.69	)			428				49				(42	)			(0.19	)			514				(95	)			(193	)			(0.86	)
Specified items
Sales of property, plant and equipment (i)			(7	)			(7	)			(6	)							(33	)			(33	)			(21	)							—				—				—				—
Closure and restructuring costs (ii)			121				433				285								37				48				33								1				24				16
Unrealized mark-to- market gains or losses(iii)			3				3				2								2				2				1								(6	)			(6	)			(4	)
Foreign exchange gains or losses on long-term debt(iv)			—				—				(4	)							—				—				(4	)							—				—				(8	)
Income tax legislation																																			—				—
changes(v)			—				—				9								—				—				—								—				—				31
Legal settlement(vi)			13				13				13								—				—				—								—				—
Refinancing costs (vii)			—				—				5								—				—				—								—				—				12
Impairment of assets (viii)			—				—				—								—				—				—								—				201				135
Write-off of deferred costs (ix)			—				—				—								—				—				—								2				2				1
Insurance recoveries (x)			(3	)			(3	)			(2	)							—				—				—								—				—				—
			127				439				302				1.32				6				17				9				0.04				(3	)			221				183				0.81
Excluding specified items			351				(24	)			(86	)			(0.37	)			434				66				(33	)			(0.15	)			511				126				(10	)			(0.05	)

*

Except for EBITDA and operating profit (loss), which are non-GAAP measures.

MANAGEMENT’S DISCUSSION & ANALYSIS

27
Domtar Inc.
2005
Annual Report

SPECIFIED ITEMS three months ended December 31

														2005																2004																2003
(IN MILLIONS OF						OPER-								NET LOSS								OPER-								NET LOSS								OPER-								NET LOSS
CANADIAN DOLLARS,						ATING				NET				PER SHARE								ATING				NET				PER SHARE								ATING				NET				PER SHARE
UNLESS OTHERWISE NOTED)		E(L)BITDA				LOSS				LOSS				IN DOLLARS)				EBITDA				LOSS				LOSS				(IN DOLLARS)				EBITDA				LOSS				LOSS				IN DOLLARS)
As per GAAP*			(77	)			(478	)			(348	)			(1.51	)			90				(12	)			(26	)			(0.11	)			55				(265	)			(231	)			(1.01	)
Specified items
Sales of property, plant and equipment(i)			—				—				—								(29	)			(29	)			(17	)							—				—				—
Closure and restructuring costs (ii)			99				402				265								29				40				27								6				29				19
Unrealized mark-to- market gains or losses (iii)			3				3				2								(1	)			(1	)			(1	)							—				—				—
Foreign exchange gains or losses on long-term debt (iv)			—				—				—								—				—				(3	)							—				—				(3	)
Income tax legislation changes (v)			—				—				9								—				—				—								—				—				31
Legal settlement (vi)			13				13				13								—				—				—								—				—				—
Refinancing costs (vii)			—				—				—								—				—				—								—								5
Impairment of assets (viii)			—				—				—								—				—				—								—				201				135
Write-off of deferred costs (ix)			—				—				—								—				—				—								2				2				1
			115				418				289				1.26				(1	)			10				6				0.02				8				232				188				0.82
Excluding specified items			38				(60	)			(59	)			(0.25	)			89				(2	)			(20	)			(0.09	)			63				(33	)			(43	)			(0.19	)

*

Except for EBITDA and operating profit (loss), which are non-GAAP measures.

(i)		Our results reflect gains or losses on sales of property, plant and equipment. These gains or losses are presented under “Net gains on disposals of property, plant and equipment” in the financial statements.
(ii)		Our results reflect closure and restructuring charges. These charges are presented under “Closure and restructuring costs” in the financial statements. See “Closure and restructuring costs” for further information.
(iii)		Our results include unrealized mark-to-market gains or losses on commodity swap contracts and foreign exchange contracts not considered as hedges for accounting purposes. Such gains or losses are presented under “Selling, general and administrative” expenses in the financial statements.
(iv)		Our results include foreign exchange gains or losses on the translation of a portion of our long-term debt. Such gains or losses are presented under “Financing expenses” in the financial statements.
(v)		Our results include charges related to modifications to the income tax legislation. These charges are presented under “Income tax recovery” in the financial statements.
(vi)		Our results include a charge related to a legal settlement. This charge is presented under “Selling, general and administrative” expenses in the financial statements.
(vii)		Our results include refinancing expenses. These refinancing expenses are presented under “Financing expenses” in the financial statements.
(viii)		Our results include an impairment loss on the net book value of property, plant and equipment. This loss is presented under “Impairment loss” in the financial statements.
(ix)		Our results include write-offs of deferred costs. These costs are presented under “Selling, general and administrative” expense in the financial statements.
(x)		Our results include insurance recoveries. These recoveries are presented under “Selling, general and administrative” expenses in the financial statements.

MANAGEMENT’S DISCUSSION & ANALYSIS

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Domtar Inc.
2005
Annual Report

2005 vs 2004 Annual Overview

SALES OF $5 BILLION

Sales in 2005 amounted to $4,966 million, a decrease of $149 million or 3% from sales of $5,115 million in 2004. This decrease was mainly attributable to the negative impact of a 7% rise in the year-over-year average value of the Canadian dollar relative to the U.S. dollar (from $0.769 to $0.826) and, to a lesser extent, to lower shipments for pulp and paper. These factors were partially offset by higher average selling prices for all of our major products and higher shipments for lumber and packaging products.

OPERATING LOSS OF $463 MILLION

Cost of sales decreased by $48 million or 1% in 2005 compared to 2004. This decrease was mainly attributable to the positive impact of a stronger Canadian dollar on our U.S. dollar denominated expenses, lower shipments for pulp and paper, the realization of savings stemming from restructuring activities and lower duties on our softwood lumber exports to the U.S. These factors were partially offset by higher costs for purchased fiber, chemicals, energy and freight, and higher shipments for lumber and packaging products.

     Selling, general and administrative (SG&A) expenses decreased by $14 million or 5% in 2005 compared to 2004. SG&A in 2005 included unrealized mark-to-market losses on financial instruments of $3 million, a charge of $12.5 million related to a legal settlement with regards to an investigation by the Canadian Competition Bureau and insurance recoveries of $3 million, while SG&A in 2004 included unrealized mark-to- market losses of $2 million. When excluding these specified items, SG&A decreased by $25 million or 8% compared to 2004. This decrease was mainly attributable to the realization of savings stemming from restructuring activities.

     Operating loss in 2005 amounted to $463 million compared to an operating profit of $49 million in 2004. Excluding specified items, operating loss totaled $24 million in 2005 compared to an operating profit of $66 million in 2004. The $90 million decrease in operating profit excluding specified items was largely attributable to the $124 million negative impact of a stronger Canadian dollar (net of the positive effect of our hedging program), higher costs for purchased fiber, chemicals, energy and freight, and lower shipments for pulp and paper. These factors were partially offset by higher average selling prices for all of our major products, the realization of savings stemming from restructuring activities, higher shipments for lumber and packaging products, and lower duties on our softwood lumber exports to the U.S.

VARIANCE ANALYSIS — 2005 vs 2004

(IN MILLIONS OF CANADIAN DOLLARS)
2004 operating profit, excluding specified items			66
Selling prices			162
Foreign exchange (net of hedging programs)			(124	)
Purchased fiber and chemical costs			(53	)
Energy costs			(46	)
Freight costs			(39	)
Shipments and mix			(12	)
Softwood lumber duties			15
Other costs			7
2005 operating loss, excluding specified items			(24	)

IN MILLIONS OF CAN$

OPERATING PROFIT (LOSS)

IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS

EBITDA

IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS

NET LOSS

IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS

MANAGEMENT’S DISCUSSION & ANALYSIS

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Domtar Inc.
2005
Annual Report

EBITDA for the fourth quarter of 2005 compared to the fourth quarter of 2004 and 2003, as well as for the year 2005 compared to 2004 and 2003, was as follows:

						THREE MONTHS ENDED DEC. 31												YEARS ENDED DEC. 31
EBITDA		2005				2004				2003				2005				2004				2003
(IN MILLIONS OF CANADIAN DOLLARS)
Net loss			(348	)			(26	)			(231	)			(388	)			(42	)			(193	)
Income tax recovery			(170	)			(20	)			(73	)			(225	)			(52	)			(67	)
Financing expenses			41				35				39				155				148				169
Amortization of deferred gain			(1	)			(1	)			—				(5	)			(5	)			(4	)
Amortization			98				91				96				375				368				385
Impairment loss			—				—				201				—				—				201
Closure and restructuring costs (portion related to fixed asset write-downs)			303				11				23				312				11				23
E(L)BITDA			(77	)			90				55				224				428				514

SPECIFIC COST REDUCTION INITIATIVES

The Corporation has made an ongoing commitment to adjust production to meet its customers’ needs, as well as maintain operational flexibility and a competitive manufacturing base. These efforts have mainly impacted our Papers and Wood segments and have resulted in workforce reductions throughout the organization.

     In 2004, we announced several initiatives aimed at achieving a run-rate of $100 million in annual cost reductions by the end of 2005. These included:

-		The shutdown of one of two paper machines at our Vancouver mill, resulting in the permanent curtailment of 45,000 tons of paper manufacturing capacity and the elimination of approximately 85 permanent positions;
-		The elimination of approximately 730 additional permanent positions throughout Domtar, including approximately 150 management and staff positions;
-		The shutdown, for an indefinite period, of the pulp mill, one paper machine and its sheeter at our Cornwall mill until economic and market conditions allowed these assets to operate profitably. This resulted in a temporary curtailment of 160,000 tons of pulp and 85,000 tons of paper and impacted approximately 390 positions for an indefinite period;
-		The restructuring of our lumber operations in northeastern Ontario, which led to the closure of our Chapleau sawmill and the elimination of 67 permanent positions.

     As at December 31, 2005, we had achieved our goal to deliver $100 million of annualized savings stemming from these initiatives.

     In November 2005, still faced with a number of economic conditions that adversely impacted our business, such as higher energy prices and the rapid rise of the Canadian dollar, we announced a series of additional targeted measures aimed at returning the Company to profitability. The measures included the following initiatives:

-		The permanent closure of our Cornwall mill, effective March 31, 2006, which will eliminate approximately 910 permanent positions (including the 390 positions already affected by the indefinite shutdown of the pulp mill, paper machine and sheeter announced in late 2004). This will result in the permanent curtailment of 265,000 tons of uncoated and coated printing grades, as well as 160,000 tons of pulp (including 85,000 tons of paper and 160,000 tons of pulp impacted by the indefinite shutdown announced in late 2004);
-		The permanent closure of our Ottawa mill, effective March 31, 2006, which will eliminate approximately 185 permanent positions and will result in the permanent curtailment of 65,000 tons of paper;
-		The intention to sell our Vancouver coated paper mill, effective June 30, 2006. If unsold by June 30, 2006, it will be permanently shut down, which will eliminate approximately 285 permanent positions and will result in the permanent curtailment of 120,000 tons of coated paper;
-		The permanent closure of our Grand-Remous and Malartic sawmills, effective in the second quarter of 2006, which will eliminate approximately 200 permanent positions;
-		Further measures to reduce costs, as follows:

	-		Reducing SG&A expenses by permanently eliminating approximately 100 additional corporate and divisional permanent positions, as well as other SG&A expenses;
	-		Implementing further cost reductions at the mill level by eliminating approximately 200 additional operational positions;
	-		Consolidating North American administrative offices in Montreal and Cincinnati.

MANAGEMENT’S DISCUSSION & ANALYSIS

30
Domtar Inc.
2005
Annual Report

The complete implementation of these measures will result in a 25% reduction in our workforce and a 16% reduction in paper production capacity when compared to January 1, 2004.

     In addition to these measures, we intend to improve profitability by implementing supply chain initiatives that are expected to reduce operational costs and improve customer satisfaction. These initiatives are aimed at increasing the efficiency of our converting and distribution centers and the cost effectiveness of transportation for just-in-time deliveries. Furthermore, we plan to transfer some of our paper grades to more profitable papermaking facilities and machines within our network. Above all, we plan to continue to provide our customers with products, services and solutions that meet their needs.

     We believe that these actions, as well as the decision to suspend our common share dividend, will improve our cash flow and help us return to profitability.

CLOSURE AND RESTRUCTURING COSTS

Closure and restructuring costs for the fourth quarter of 2005 compared to the fourth quarter of 2004, as well as for the year 2005 compared to 2004, were as follows:

		THREE MONTHS ENDED DEC. 31								YEARS ENDED DEC. 31
		2005				2004				2005				2004
(IN MILLIONS OF CANADIAN DOLLARS)
Costs related to the permanent closures of our Cornwall, Vancouver and Ottawa paper mills (severance, termination, environment and pension costs, as well as $280 million for write-down of property, plant and equipment)			363				—				363				—
Costs related to the permanent closure of two sawmills at Malartic and Grand-Remous (severance, termination, environment and pension costs, as well as $23 million for the write-down of property, plant and equipment)			30				—				30				—
Costs related to specific cost reduction initiatives (severance, termination, training and outplacement costs)			6				24				17				40
Costs related to the indefinite closure of a paper machine, a sheeter and pulp mill at our Cornwall paper mill			—				2				6				2
Costs related to the permanent closure of our Chapleau sawmill (including $11 million for write-down of property, plant and equipment)			—				14				—				14
Costs related to the permanent closure of our St. Catharines paper mill (reversal of provision following the sale of the paper mill in its existing state)			—				—				—				(8	)
Costs related to the permanent closures of Norampac’s Concord and Montreal corrugated products plants, as well as a paper machine at its Red Rock containerboard plant			3				—				8				—
Write-down of property, plant and equipment related to the permanent closures of Norampac’s Buffalo corrugated products plant, as well as a paper machine at its Red Rock containerboard plant			—				—				9				—
Total closure and restructuring costs			402				40				433				48

MANAGEMENT’S DISCUSSION & ANALYSIS

31
Domtar Inc.
2005
Annual Report

NET LOSS OF $388 MILLION

Net loss amounted to $388 million ($1.69 per common share) in 2005 compared to a net loss of $42 million ($0.19 per common share) in 2004. Excluding specified items, net loss amounted to $86 million ($0.37 per common share) in 2005 compared to a net loss of $33 million ($0.15 per common share) in 2004. The $53 million deterioration in net loss excluding specified items was mainly attributable to the factors mentioned above, partially offset by a higher income tax recovery.

LIQUIDITY AND CAPITAL

Cash flows used for operating activities in 2005 amounted to $10 million compared to cash flows provided from operating activities of $122 million in 2004. Net additions to property, plant and equipment amounted to $147 million in 2005 compared to $163 million in 2004. We posted negative free cash flow¹ of $157 million in 2005 compared to negative free cash flow of $41 million in 2004. This $116 million deterioration mainly reflects a decline in profitability, as well as increased requirements for working capital.

      Our total long-term debt increased by $225 million, largely due to additional net borrowings of $293 million, partially offset by the $68 million positive impact of a stronger Canadian dollar (based on month-end foreign exchange rates) on our U.S. dollar denominated debt. Our net debt-to-total capitalization ratio² as at December 31, 2005 stood at 57.7% compared to 49.5% as at December 31, 2004.

Q4 2005 vs Q4 2004 Quarterly Overview

SALES OF $1.2 BILLION

Sales in the fourth quarter of 2005 amounted to $1,159 million, a decrease of $50 million or 4% from sales of $1,209 million in the fourth quarter of 2004. This decrease was attributable to the negative impact of a 4% rise in the quarter over quarter average value of the Canadian dollar relative to the U.S. dollar (from $0.819 to $0.852), lower shipments for pulp, and lower average selling prices for all of our major products except for pulp. These factors were partially offset by higher shipments for paper, lumber and packaging products, and higher average selling prices for pulp.

OPERATING LOSS OF $478 MILLION

Cost of sales increased by $6 million or 1% in the fourth quarter of 2005 compared to the fourth quarter of 2004. This increase was mainly attributable to higher costs for energy, freight and chemicals, as well as higher shipments for paper, lumber and packaging products. These factors were partially offset by the positive impact of a stronger Canadian dollar on our U.S. dollar denominated operating expenses, the realization of savings stemming from restructuring activities, and lower duties on our softwood lumber exports to the U.S.

     SG&A expenses increased by $11 million or 14% in the fourth quarter of 2005 compared to the fourth quarter of 2004. SG&A in the fourth quarter of 2005 included a charge of $12.5 million for a legal settlement with regards to an investigation by the Canadian Competition Bureau and unrealized mark-to-market losses of $3 million. SG&A in the fourth quarter of 2004 included an unrealized mark-to-market gain of $1 million. Excluding these specified items, SG&A decreased by $6 million or 8% in the fourth quarter of 2005 compared to 2004. This decrease was mainly attributable to the realization of savings stemming from restructuring activities.

     Operating loss in the fourth quarter of 2005 amounted to $478 million, or $60 million when excluding specified items, compared to an operating loss of $12 million, or $2 million when excluding specified items, for the fourth quarter of 2004. The $58 million deterioration in operating loss excluding specified items was principally attributable to higher costs for energy, freight and chemicals, the negative impact of a stronger Canadian dollar, as well as lower average selling prices for all of our major products except for pulp. These factors were partially offset by higher shipments for paper, lumber and packaging products, the realization of savings stemming from restructuring activities, higher average selling prices for pulp, as well as lower duties on our softwood lumber exports to the U.S.

NET LOSS OF $348 MILLION

Net loss amounted to $348 million ($1.51 per common share) in the fourth quarter of 2005 compared to a net loss of $26 million ($0.11 per common share) in the fourth quarter of 2004. Excluding specified items, net loss amounted to $59 million ($0.25 per common share) in the fourth quarter of 2005 compared to a net loss of $20 million ($0.09 per common share) in the fourth quarter of 2004. This $39 million deterioration in net loss excluding specified items was mainly attributable to the factors mentioned above.

MANAGEMENT’S DISCUSSION & ANALYSIS

32
Domtar Inc.
2005
Annual Report

Papers

SELECTED INFORMATION YEARS ENDED DECEMBER 31		2005				2004
(IN MILLIONS OF CANADIAN DOLLARS,
UNLESS OTHERWISE NOTED)
Sales
Total sales			3,000				3,188
Intersegment sales to Paper Merchants			(287	)			(297	)
			2,713				2,891
EBITDA			106				268
Sales of property, plant and equipment 1			(4	)			(33	)
Closure and restructuring costs 1			106				33
Unrealized mark-to-market gains or losses 1			(5	)			3
EBITDA, excluding specified items			203				271
Operating loss			(451	)			(10	)
Sales of property, plant and equipment 1			(4	)			(33	)
Closure and restructuring costs 1			386				33
Unrealized mark-to-market gains or losses 1			(5	)			3
Operating loss, excluding specified items			(74	)			(7	)
Shipments
Paper (in thousands of st)			2,510				2,562
Pulp (in thousands of adst)			633				808
Paper shipments by product offering (%):
Copy and offset grades			56				52
Uncoated commercial printing & publication and premium imaging grades			15				21
Coated commercial printing & publication grades			12				12
Technical and specialty grades			17				15
Total			100				100
Benchmark prices2:
Copy 20 1b sheets (us$/ton)			820				794
Offset 50 1b rolls (us$/ton)			726				676
Coated publication, no. 3, 60 1b rolls (us$/ton)			902				811
Pulp NBSK-U.S. market (us$/admt)			647				640
Pulp NBHK- Japan market3 (us$/admt)			526				490

PAPERS-SALES
in millions of can$

SALES AND OPERATING PROFIT

Sales in our Papers business amounted to $2,713 million in 2005, a decrease of $178 million or 6% fro m sales of $2,891 million in 2004. This decrease in sales was mainly attributable to the negative impact of a 7% rise in the Canadian dollar, as well as lower shipments for pulp and paper in 2005 compared to 2004, partially offset by higher average selling prices for both paper and pulp.

     Operating loss in our Papers business totaled $451 million in 2005 (or $74 million when excluding specified items) compared to an operating loss of $10 million (or $7 million when excluding specified items) for 2004. Excluding specified items, the $67 million deterioration in operating loss is largely the result of the negative impact of a stronger Canadian dollar, higher overall costs for purchased fiber, chemicals, energy and freight, as well as lower shipments for pulp and paper in 2005 compared to 2004. These factors were partially offset by higher average selling prices for paper and pulp and the realization of savings stemming from restructuring activities.

PRICING ENVIRONMENT

In our Papers business, our average transaction prices, denominated in U.S. dollars, increased in 2005 compared to 2004. Our average transaction prices denominated in Canadian dollars decreased in 2005 compared to 2004 as the rise of the Canadian dollar negatively impacted our Canadian dollar denominated prices, which are derived from U.S. dollar denominated prices.

     Our average transaction prices, denominated in U.S. dollars, for our basket of copy and offset grades, increased on average by approximately 7% in 2005 compared to 2004. Within this basket, our average transaction prices for copy 20 lb sheets and offset 50 lb rolls, which represented approximately 31% of our paper sales in 2005, were higher on average by US$24/ton and US$64/ton, respectively, in 2005 compared to 2004. The US$60/ton price increase for cut-size copy and offset rolls announced as of March 15, 2005 initially went through, but as it subsequently eroded, we returned to previous pricing levels. A subsequent US$40/ton price increase announced on cut-size copy paper and offset grades effective mid-September 2005 was postponed. We announced a US$60/ton price increase for

IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS

MANAGEMENT’S DISCUSSION & ANALYSIS

33
Domtar Inc.
2005
Annual Report

SHIPMENTS BY PRODUCT OFFERING
— 2005 —

offset paper grades effective mid-January 2006, followed by a US$60/ton price increase on cut-size copy paper effective mid-February 2006.

     Our average transaction prices for Northern Bleached Softwood Kraft (NBSK) pulp decreased by US$3/tonne and our average transaction prices for Northern Bleached Hardwood Kraft (NBHK) pulp increased by US$49/tonne in 2005 compared to 2004. From January to April 2005, several price increases were implemented for both NBSK and NBHK as pulp markets were experiencing shortages in supply (particularly from the U.S. South) and paper markets were stronger than seasonal norms. From May to August 2005, however, prices for pulp decreased as weakening paper markets impacted pulp demand. The US$20/tonne price increase for softwood pulp and US$10/tonne price increase for hardwood pulp announced in October 2005 were successfully implemented. Effective February 2006, a US$20/tonne price increase was announced for both softwood and hardwood pulp.

Shipments

Our paper shipments to capacity ratio stood at 96.2% in 2005 compared to 95.1% in 2004. Lower shipments on a year-over-year

PAPER-IN THOUSANDS OF ST

basis, primarily due to soft market conditions, were offset by lower capacity due to the closure of a paper machine at our Cornwall mill.

     Our pulp shipments decreased by 175,000 tons in 2005 compared to 2004. In December 2004, we closed the pulp dryer at our Ashdown SBHK (Southern Bleached Hardwood Kraft) and SBSK (Southern Bleached Softwood Kraft) pulp mill due to a wood shortage arising from competitive pressures and wet weather conditions in the south of the U.S. in the fourth quarter of 2004 and early 2005. The mill lost approximately 30,000 tons of market pulp through the end of March 2005 and was forced to seek purchased wood fiber outside its normal fiber basket to supply its machines, which led to higher costs. The pulp dryer resumed production in late February 2005. The indefinite closure of the Cornwall pulp mill also affected pulp market shipments as a portion of the pulp from our Woodland, Windsor and Espanola pulp mills, which previously was sold in the market, was now used internally to supply the Cornwall mill. In addition, pulp market shipments in 2005 were affected by market downtime that was taken at our Lebel-sur-Quévillon pulp mill during the last three quarters of the year, as well as by the temporary shutdown of the mill in November 2005 due to unfavorable economic conditions.

PULP-IN THOUSANDS OF ADST

MANAGEMENT’S DISCUSSION & ANALYSIS

34
Domtar Inc.
2005
Annual Report

Labor

Negotiations are ongoing for the renewal of certain collective agreements that expired in April 2004 for our Lebel-sur-Quévillon mill (affecting approximately 350 employees) and in April 2005 for our Windsor mill (affecting approximately 760 employees). During the second quarter of 2005, certain collective agreements at our Espanola mill (affecting approximately 610 employees) were successfully renegotiated. During the third quarter of 2005, certain collective agreements at our Cornwall mill (affecting approximately 730 employees) and our Ottawa-Hull mill (affecting approximately 380 employees) were successfully renegotiated.

Brightness

In the third quarter of 2005, an initiative was introduced to raise the current North American brightness standard from 84 GE brightness (Technical Association of the Pulp and Paper Industry — TAPPI standard that measures brightness) to 92 GE brightness for regular uncoated freesheet grades and from 92 GE brightness to 96 GE brightness for opaque grades. As of year-end, we have completed the transition to 92 GE brightness in all our paper mills. Inventory of 84 GE brightness uncoated freesheet and 92 GE brightness opaques are being depleted according to plan.

Restructuring

In early 2004, we decided to shut down one of two paper machines at our Vancouver mill, resulting in the permanent curtailment of 45,000 tons of paper manufacturing capacity and the elimination of approximately 85 permanent positions. We also announced the elimination of approximately 330 permanent positions over the course of 2004 – 2006 within our paper operations.

     In the fourth quarter of 2004, we announced the shutdown, for an indefinite period, of the pulp mill, one paper machine and one sheeter at our Cornwall mill, which became effective January 27, 2005, until economic and market conditions allowed these assets to operate profitably. This resulted in a temporary curtailment of 150,000 tons of pulp and 85,000 tons of paper per annum and impacted approximately 390 positions for an indefinite period.

     In November 2005, we announced the permanent shutdown of our Cornwall pulp and paper mill as well as our Ottawa mill, which will be effective March 31, 2006. We also announced our intention to seek a buyer for our Vancouver coated paper mill. If unsold by June 30, 2006, it will be permanently shut down. These closures will result in a reduction of our production capacity of 160,000 tons of pulp and 450,000 tons of paper per annum and will impact approximately 1,380 positions (including 390 positions already affected by the temporary closure of the Cornwall mill announced in the last quarter of 2004). We further announced that approximately 200 permanent positions, mainly related to our paper operations, will be eliminated by the end of 2006. In addition to these measures, we intend to improve profitability by implementing supply chain initiatives that are expected to reduce operational costs and improve customer satisfaction. These initiatives are aimed at increasing the efficiency of our converting and distribution centers and the cost effectiveness of transportation for just-in-time deliveries. Furthermore, we plan to transfer some of our paper grades to more profitable papermaking facilities and machines within our network. Above all, we plan to continue providing our customers with products, services and solutions that meet their needs. We expect these initiatives to result in increased productivity and optimized production in our more efficient operations.

Other

In addition, as part of our capital expenditures program, we continued to invest in 2005 in an Enterprise Resource Planning (ERP) system and a paper logistics management system with the goal of improving the quality and efficiency of our services. As at December 31, 2005, the roll-out of the ERP system was completed across our operations, and we achieved our goal of processing approximately 85% of our transactions with this system.

     During the second quarter of 2005, we sold our facility and land in Senneville, Quebec for proceeds of $6 million and a corresponding gain of $4 million ($3 million net of income taxes). The sale was originally contingent on the city of Montreal rezoning the site to accommodate the needs of the acquirer. The required rezoning took place in January 2005, and the sale was concluded in June 2005. In November 2004, a motion was filed by a third party to have the rezoning declared illegal. Nonetheless, both parties agreed to complete the sale, and in the event that the court declares the rezoning illegal, the sale of the premises shall become null and void without recourse of either party against the other. In such an event, Domtar would reimburse the entire sales proceeds of $6 million without interest and reclaim possession of the property, conditional on the property being restored back to its original state. We believe that the likelihood of such an event occurring is remote.

MANAGEMENT’S DISCUSSION & ANALYSIS

35
Domtar Inc.
2005
Annual Report

Paper Merchants

SELECTED INFORMATION YEARS ENDED DECEMBER 31		2005				2004
(IN MILLIONS OF CANADIAN DOLLARS)
Sales			1,047				1,057
EBITDA			6				23
Legal settlement 1			13				—
Closure and restructuring costs 1			—				1
EBITDA, excluding specified items			19				24
Operating profit			3				20
Legal settlement1			13				—
Closure and restructuring costs 1			—				1
Operating profit, excluding specified items			16				21

SALES AND OPERATING PROFIT

Our Paper Merchants business generated sales of $1,047 million in 2005, a decrease of $10 million compared to 2004. This decrease was attributable to the negative impact of a stronger Canadian dollar, partially offset by higher average paper selling prices and higher shipments.

     Operating profit amounted to $3 million in 2005 compared to $20 million in 2004. In 2005, the operating profit included a charge of $12.5 million related to a legal settlement with regards to an investigation by the Canadian Competition Bureau relating to the sales of carbonless sheet paper in Ontario and Quebec in a one-year period during part of 1999 and 2000. In 2004, the operating profit included closure and restructuring costs of $1 million. When excluding specified items, our operating profit amounted to $16 million (reflecting an operating margin of 1.5%) in 2005 compared to $21 million (reflecting an operating margin of 2.0%) in 2004. The $5 million decrease in operating profit excluding specified items was primarily due to lower operating margins resulting from higher purchased paper costs not being fully reflected in paper selling prices, partially offset by savings stemming from cost reduction initiatives.

PAPER MERCHANTS-SALES

IN MILLION OF CAN$

IN MILLIONS OF CAN$ EXCLUDING SPECIFIED ITEMS

Wood

SELECTED INFORMATION YEARS ENDED DECEMBER 31		2005				2004
(IN MILLIONS OF CANADIAN DOLLARS,
UNLESS OTHERWISE NOTED)
Sales
Lumber sales			521				496
Wood chips and other sales			176				175
Sub-total			697				671
Intersegment sales			(124	)			(130	)
			573				541
EBITDA			34				31
Closure and restructuring costs 1			7				3
EBITDA, excluding specified items			41				34
Operating loss			(33	)			(27	)
Closure and restructuring costs 1			30				14
Operating loss, excluding specified items			(3	)			(13	)
Shipments (millions of fbm)			1,107				1,009
Shipments by product offering (%):
Random lengths			33				36
Studs			35				36
Value-added			27				23
Industrial			5				5
Total			100				100
Benchmark prices2:
Lumber G.L. 2x4x8 stud (us$/mfbm)			418				417
Lumber G.L. 2x4 R/L no. 1 & no. 2 (uss/mfbm)			420				459
Lumber duties (cash deposits)			54				69

IN MILLIONS OF CAN$

MANAGEMENT’S DISCUSSION & ANALYSIS

36
Domtar Inc.
2005
Annual Report

SHIPMENTS BY PRODUCT OFFERING
— 2005 —

SALES AND OPERATING PROFIT

Sales in our Wood business amounted to $573 million in 2005, an increase of $32 million or 6% compared to sales of $541 million in 2004. This increase is largely attributable to higher shipments, partially offset by the negative impact of a stronger Canadian dollar.

     Operating loss in our Wood business totaled $33 million in 2005 (or $3 million when excluding specified items) compared to an operating loss of $27 million (or $13 million when excluding specified items) in 2004. The $10 million improvement in operating loss excluding specified items was mainly attributable to lower duties on our softwood lumber exports to the U.S., higher shipments and the realization of savings stemming from restructuring activities. These factors were partially mitigated by the negative impact of a stronger Canadian dollar, as well as higher freight and energy costs.

     Cash deposits of $54 million were made on our softwood lumber exports to the U.S. in 2005 compared to $69 million in 2004. The $15 million decrease in duties was largely due to the decrease in countervailing and antidumping duties rate (countervailing and antidumping duties rate was decreased gradually from 21.21% to 20.15%, and in December 2005, the rate was lowered to 10.80%) as well as to a decrease in shipments exported to the U.S. Since May 22, 2002, cash deposits of $198 million (US$150 million) for countervailing and antidumping duties have been made and expensed by Domtar.

WOOD-OPERATING LOSS

IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS

PRICING ENVIRONMENT

Our average transaction price for Great Lakes 2x4 stud increased by US$1/MFBM and our average transaction price for Great Lakes 2x4 random length decreased by US$40/MFBM in 2005 compared to 2004.

OPERATIONS

In early 2005, we announced, in conjunction with Tembec Inc. (Tembec), the restructuring of our northeastern Ontario sawmill operations, resulting in the permanent closure of our Chapleau sawmill as of March 6, 2005 and an investment in a new finger-joint plant with Tembec, to be located on the site of Tembec’s Kirkland Lake sawmill, which was slated for closure. This measure impacted 67 permanent positions. This initiative arose from a review of our northeastern Ontario sawmill operations in light of prevailing challenging conditions. This initiative allowed us to add a third shift at our Elk Lake sawmill in April 2005 to process additional fiber resulting from the Chapleau closure and consequent fiber swap with Tembec.

In early March 2005, a fire destroyed our planer at Elk Lake but did not impact either the sawmill or the kiln dryers. Dressing activities were temporarily transferred primarily to our Chapleau mill facility. The Elk Lake planer was rebuilt and it started up in November 2005.

IN MILLIONS OF FBM

MANAGEMENT’S DISCUSSION & ANALYSIS

37
Domtar Inc.
2005
Annual Report

In May 2005, forest fires in Quebec negatively impacted our operations and further resulted in the loss of 25,000 cubic meters of cut wood and 30,000 acres of forest.

     In November 2005, we announced the permanent closure of our Grand-Remous and Malartic sawmills, effective in the second quarter of 2006, due to lower softwood fiber allocations and higher fiber costs in Quebec. These measures will impact approximately 200 permanent positions. Subject to the government’s approval, the wood fiber allocations for Grand-Remous and Malartic will be transferred to Domtar’s other Quebec sawmills. We expect that this will result in more efficient operations by going to three shifts and will offer the possibility for approximately 80 employees from the closed sawmills to transfer to new positions created by the third shift. We are also working with a partner, and in collaboration with the government, on a value-added project using the Grand-Remous and Malartic infrastructures.

     Throughout 2004, certain of our operations were negatively impacted by temporary mill closures. Production at our White River sawmill, which was halted in mid-2003 due to difficult market conditions, reopened only in late February 2004. Operations at our Chapleau sawmill were reduced to one shift, effective April 30, 2004, due to a substantial reduction in fiber supply availability. Labor disruptions at a transportation supplier and particularly cold weather further affected our productivity.

We will continue examining opportunities to further improve the profitability of our Wood business through additional cost reductions and strategic initiatives.

Fiber supply

The Province of Quebec adopted new legislation, which became effective April 1, 2005, that reduced allowable wood-harvesting volumes by an average of 20% on public lands and 25% on territories covered by an agreement between the Government of Quebec and Cree First Nations. As a result, the amount of fiber we are permitted to harvest annually, under our existing licenses from the Quebec government, was reduced by approximately 500,000 cubic meters, or 21%. This affects the supply of fiber for our Northern Quebec softwood sawmill and market pulp operations.

IN MILLIONS OF CAN$

We are currently working on finding solutions such as obtaining alternate sources of fiber. The reduction in harvest volume increases the unit cost of wood delivered to the sawmills. If we are unable to maintain an adequate supply of fiber and mitigate the significant cost increase and wood delivery cost, our Northern Quebec softwood sawmill and market pulp operations would have to operate at a level significantly below capacity, which would have a material adverse impact on these operations and may result in closures or impairment of assets.

Packaging

		2005				2004
SELECTED INFORMATION
(IN MILLIONS OF CANADIAN DOLLARS,
UNLESS OTHERWISE NOTED)
Sales			633				626
EBITDA			55				86
Closure and restructuring costs 1			8				—
Sales of property, plant and equipment 1			(3	)			—
Unrealized mark-to-market gains or losses 1			8				(1	)
EBITDA, excluding specified items			68				85
Operating profit			8				53
Closure and restructuring costs 1			17				—
Sales of property, plant and equipment 1			(3	)			—
Unrealized mark-to-market gains or losses 1			8				(1	)
Operating profit, excluding specified items			30				52
Shipments 2:
Containerboard (in thousands of st)			322				300
Corrugated containers(IN MILLIONS OF SQUARE FEET)			6,868				6,802
Benchmark prices 3:
Unbleached kraft linerboard, 42 1b East (us$/ton)			478				468

IN MILLIONS OF CAN$ EXCLUDING SPECIFIED ITEMS

MANAGEMENT’S DISCUSSION & ANALYSIS

38
Domtar Inc.
2005
Annual Report

PACKAGING – SHIPMENTS

CONTAINERBOARD — IN THOUSANDS OF ST

SALES AND OPERATING PROFIT

Our 50% share of Norampac’s sales amounted to $633 million in 2005, an increase of $7 million or 1% compared to 2004. This increase was mainly attributable to higher average selling prices for containerboard and corrugated containers, as well as higher shipments for corrugated containers and containerboard, partially offset by the negative impact of a stronger Canadian dollar.

     Our 50% share of Norampac’s operating profit amounted to $8 million (or an operating profit of $30 million when excluding specified items) in 2005 compared to an operating profit of $53 million (or $52 million when excluding specified items) in 2004. The $22 million decrease in operating profit excluding specified items was mainly attributable to the negative impact of a stronger Canadian dollar, as well as higher overall costs, particularly energy and freight, partially offset by higher average selling prices and shipments.

PRICING ENVIRONMENT

Norampac’s average transaction prices for both containerboard and corrugated containers, denominated in U.S. dollars, increased in 2005 compared to 2004. Its average transaction prices, denominated in Canadian dollars, for containerboard decreased in 2005 compared to 2004 and remained stable for corrugated containers as the rise of the Canadian dollar negatively impacted its Canadian dollar denominated prices, which are derived from U.S. dollar denominated prices.

OPERATIONS

Norampac’s North American integration level, the percentage of containerboard produced by Norampac that is consumed by its own box plants, decreased to 61% in 2005, down from 64% in 2004.

     During the first quarter of 2005, Norampac closed its Concord, Ontario corrugated products plant with the goal of improving efficiency and profitability at its other plants. This led to the disposal of Concord-related property, plant and equipment for a total net gain realized of $7 million (our 50% share amounting to $3 million).

     In the second quarter of 2005, as part of its reorganization plan of its Quebec operations, Norampac announced the closure of its Montreal corrugated products plant, slated for the second quarter of 2006, as well as an investment plan totaling close to $30 million for its other Quebec facilities. The closure of the Montreal plant is expected to impact approximately 215 employees. In addition, in the second quarter of 2005, Norampac announced the transfer of its Buffalo, New York corrugated products plant to its Lancaster, New York facility, which occured in August 2005.

     In the third quarter of 2005, Norampac announced the permanent closure of a paper machine at its Red Rock containerboard mill, impacting approximately 125 to 175 positions, due to the impact of a stronger Canadian dollar and increases in energy and wood fiber costs in Northern Ontario. In addition, in October 2005, Norampac announced the acquisition of three corrugated products converting plants, with a combined annual production capacity of approximately 2 billion square feet, from Standard Paper Box Canada Inc. The announced Vaudreuil-Dorion expansion, under the reorganization of its Quebec operations, will be downsized due to these recent acquisitions.

CORRUGATED CONTAINERS — IN MILLIONS OF SQUARE FEET

Financing Expenses
and Income Taxes

FINANCING EXPENSES

In 2005, financing expenses amounted to $155 million (or $154 million when excluding specified items of $7 million relating to early redemption expenses arising from the refinancing of a portion of our long-term debt and $6 million relating to a foreign exchange gain on the translation of a portion of our long-term debt) compared to $148 million (or $153 million when excluding specified items of $5 million relating to a foreign exchange gain on the translation of a portion of our long-term debt) in 2004. The $1 million increase in financing expenses when excluding specified items was largely due to higher interest rates and borrowings on a year-over-year basis, offset by the positive impact of a stronger Canadian dollar on our U.S. dollar interest expense.

INCOME TAXES

In 2005, our income tax recovery totaled $225 million compared to an income tax recovery of $52 million in 2004. This variation is primarily due to the greater losses incurred year over- year. To a lesser extent, the variation in our income tax

MANAGEMENT’S DISCUSSION & ANALYSIS

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Domtar Inc.
2005
Annual Report

recovery results from a combination of other factors, including tax recovery adjustments of $10 million ($6 million recorded in the first quarter of 2005 and $4 million recorded in the third quarter of 2005) following the income tax reassessment of prior years by tax authorities, an increase in statutory enacted income tax rates that resulted in a reduction in income tax recovery of $9 million, the relative effect of permanent differences in a minimal profit/loss situation, the mix and level of earnings subject to different tax jurisdictions and differences in tax rates applicable to our foreign subsidiaries.

Balance Sheet

Our total consolidated assets were $5,192 million as at December 31, 2005 compared to $5,681 million as at December 31, 2004. Receivables amounted to $294 million as at December 31, 2005, an increase of $68 million when compared to $226 million as at December 31, 2004. This increase is mostly due to the termination of the off balance sheet Canadian securitization program, as well as higher average selling prices for all of our products. Inventories as at December 31, 2005 totaled $715 million, a decrease of $8 million when compared to $723 million as at December 31, 2004. This decrease is mostly attributable to the write-offs of operating and maintenance supplies inventory resulting from the restructuring plan announced in November 2005, as well as lower levels of finished goods inventory due to higher shipment levels compared to production. This decrease was partially offset by higher levels of raw materials inventory held at the paper mills in anticipation of wet weather conditions in the winter months. Property, plant and equipment as at December 31, 2005 amounted to $3,634 million compared to $4,215 million as at December 31, 2004. This $581 million decrease was mainly attributable to the write-offs related to the restructuring plan announced in November 2005, as well as a greater level of amortization expense compared to capital expenditures and the impact of a stronger Canadian dollar (based on month-end exchange rates) on our U.S. mill assets. Other assets stood at $309 million as at December 31, 2005 compared to $265 million as at December 31, 2004. This $44 million increase was attributable to, among others, higher funding of our pension assets compared to pension expense.

     Trade and other payables stood at $651 million as at December 31, 2005, an increase of $4 million compared to $647 million as at December 31, 2004. This increase is mainly attributable to provisions for restructuring costs and the timing of payments and expenses in December 2005 versus December 2004, partially offset by a decrease in dividends payable following the suspension of the common share dividend. Long-term debt (including the portion due within one year) stood at $2,259 million as at December 31, 2005, an increase of $225 million compared to $2,034 million as at December 31, 2004. This increase reflects additional net borrowings of $293 million, partially offset by the $68 million positive impact of a stronger Canadian dollar (based on month-end exchange rates) on our U.S. dollar denominated debt. Future income taxes stood at $292 million as at December 31, 2005, a $265 million decrease compared to $557 million as at December 31, 2004. This decrease is primarily due to the tax effect of the property, plant and equipment write-downs resulting from the restructuring plan, as well as to the increase in operating loss carryforwards. Accumulated foreign currency translation adjustments were negative $205 million as at December 31, 2005 compared to negative $190 million as at December 31, 2004. This variation reflects the net impact of a stronger Canadian dollar on the net assets of our self-sustaining U.S. subsidiaries, or $69 million, net of the impact of a stronger Canadian dollar on the longterm debt designated as a hedge of the above-mentioned net assets, or $65 million, and its corresponding income tax effect of $11 million.

Liquidity & Capital Resources

FREE CASH FLOW
YEARS ENDED DECEMBER 31		2005				2004				2003
(IN MILLIONS OF CANADIAN DOLLARS)
Cash flows provided from operating activities before changes in working capital and other items			179				249				349
Changes in working capital and other items			(189	)			(127	)			(1	)
Cash flows provided from (used for) operating activities			(10	)			122				348
Net additions to property, plant and equipment			(147	)			(163	)			(225	)
Free cash flow 1			(157	)			(41	)			123

MANAGEMENT’S DISCUSSION & ANALYSIS

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Domtar Inc.
2005
Annual Report

CASH FLOWS PROVIDED FROM (USED FOR) OPERATING ACTIVITIES

IN MILLIONS OF CAN$

FREE CASH FLOW

IN MILLIONS OF CAN$

Our principal cash requirements are for working capital, capital expenditures, principal and interest payments on our debt and dividend payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our revolving credit facility. We also have the ability to fund liquidity requirements through the sale of assets or through new financings, subject to satisfactory market conditions and/or credit ratings.

OPERATING ACTIVITIES

Cash flows used for operating activities totaled $10 million in 2005 compared to cash flows provided from operating activities of $122 million in 2004. This $132 million decline in cash flows generated from operations mainly reflects a decline in profitability, as well as increased requirements for working capital. Our operating cash flow requirements are primarily for salaries and benefits, the purchase of fiber, energy and raw materials and other expenses such as property taxes.

     In the first quarter of 2004, we terminated, prior to maturity, interest rate swap contracts for net cash proceeds of $20 million (US$15 million). The resulting gain of $17 million recorded under “Other liabilities and deferred credits” is being amortized over the original designated hedging period of the underlying 5.375% notes due in November 2013.

NET ADDITIONS OF PROPERTY, PLANT AND EQUIPMENT

IN MILLIONS OF CAN$

NET DEBT-TO-TOTAL CAPITALIZATION RATIO
IN %

INVESTING ACTIVITIES

Cash flows used for investing activities totaled $187 million in 2005 compared to $183 million in 2004. The $4 million increase in cash flows used for investing activities was mainly attributable to more business acquisitions in 2005 compared to 2004, partially offset by fewer additions to property, plant and equipment. We intend to limit our annual capital expenditures to below 75% of amortization. Capital expenditures required to maintain existing operations are approximately $120 million annually.

     Free cash flow in 2005 was negative $157 million compared to negative $41 million in 2004. The $116 million decrease in free cash flow generated primarily reflects a decrease in profitability, as well as increased requirements for working capital.

FINANCING ACTIVITIES

In 2005, cash flows provided from financing activities amounted to $226 million compared to $64 million in 2004. This $162 million increase in cash flows provided from financing activities is largely attributable to an increase in issuance of long-term debt, partially offset by higher net repayments of our long-term debt and revolving credit facility.

     On October 27, 2005, as part of its plan to improve its free cash flow availability, Domtar announced that it was suspending its $0.24 per common share dividend. This decision will result in annual cash savings of approximately $55 million.

1		Net debt-to-total capitalization ratio is a non-GAAP measure. We track this ratio on a regular basis in order to assess our debt position. We therefore believe it would be useful for investors and other users to be aware of this measure so they can better assess our performance. Net debt-to-total capitalization ratio has no standardized meaning prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation.

As at December 31, 2005, our net debt-to-total capitalization ratio stood at 57.7% compared to 49.5% as at December 31, 2004. Net indebtedness, including $200 million representing our 50% share of the net indebtedness of Norampac, was $2,197 million as at December 31, 2005. This compares to $2,004 million as at December 31, 2004, including $174 million for our 50% share of the net indebtedness of Norampac. The $193 million increase in net indebtedness was largely due to additional net borrowings, partially offset by the positive impact of a stronger Canadian dollar (based on month-end exchange rates).

     On August 5, 2005, the Corporation issued $487 million (US$400 million) 7.125% notes due in 2015 at an issue price of $482 million (US$396 million). The gross proceeds from the sale of notes was used to redeem the 8.75% notes due in August 2006 for an amount of approximately $176 million (US$150 million) and to repay a substantial portion of our unsecured revolving credit facility. Issuance expenses for the new notes of $5 million (US$4 million) were deferred and will be amortized over the duration of the notes. The Corporation recorded under “Financing expenses” an amount of $7 million (US$6 million) for the premium required to redeem the 8.75% notes.

     On March 3, 2005, the Corporation entered into a new five-year unsecured revolving credit facility of US$700 million. This new facility replaced the prior credit facility, which consisted of a US$500 million unsecured revolving credit facility and a US$70 million unsecured term loan that was scheduled to mature in July 2006.

     Borrowings under this new unsecured revolving credit facility bear interest at a rate based on the Canadian dollar bankers’ acceptance or U.S. dollar LIBOR rate, each with an added spread that varies with our credit rating, or on the Canadian or US prime rate. This new credit facility also requires commitment fees that vary with our credit rating.

     On November 23, 2005, Domtar amended its credit facility maturing in 2010 in order to improve financial flexibility. This amendment contains certain financial covenants which require Domtar, excluding the proportionate consolidation of Norampac, on a rolling four quarter basis, to maintain (a) a minimum EBITDA to interest ratio of 1.05 : 1.0 in early 2006, increasing gradually over time to 1.5 : 1.0 by the end of 2006 and 2.5 : 1.0 at the beginning of 2008, excluding from the calculation most of the charges related to our restructuring plans, and (b) a minimum EBITDA of $225 million in 2006, increasing to $325 million in 2007, excluding from the calculation most of the charges related to our restructuring plans. Domtar, including the proportionate consolidation of Norampac, on a quarterly basis, is required not to exceed a maximum debt-to-total capitalization ratio of 60%, excluding from the calculation most of the impact of the restructuring plans. The amendment also included a reduction in the size of the facility from US$700 million to US$600 million, and provided for guarantees by Domtar’s subsidiaries.

     As at December 31, 2005, this credit facility had drawings totaling US$137 million ($160 million), US$18 million ($21 million) of letters of credit outstanding and US$13 million

MANAGEMENT’S DISCUSSION & ANALYSIS

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Domtar Inc.
2005
Annual Report

($15 million) drawn in the form of bank overdraft and included in “Bank indebtedness”, resulting in US$432 million ($503 million) of availability for future drawings under this facility. As of December 31, 2004, under the prior facility, we had drawings of US$112 million ($135 million), US$9 million ($10 million) letters of credit outstanding, no amounts drawn in the form of bank overdraft and included in “Bank indebtedness” and US$71 million ($86 million) outstanding under the term loan.

     As at December 31, 2005, we had a provision of $4 million related to these letters of credit ($5 million as at December 31, 2004).

     In addition, as at December 31, 2005, separate letters of credit of $5 million were outstanding. No provisions relating to these letters of credit were recorded.

     Our borrowing agreements contain restrictive covenants. See the discussion above for covenants related to our unsecured bank credit facility. The indentures related to the 10% and 10.85% debentures limit the amount of dividends that may be paid and the amount of shares that may be repurchased for cancellation. These indentures also require that no new long-term debt be incurred, unless total long-term debt is less than 50% of consolidated net tangible assets, excluding the proportionate consolidation of Norampac, but does not restrict the incurrence of new long-term debt related to the purchase of property or the replacement of existing long-term debt or the issuance of short-term debt. We believe that new long-term borrowings for the remainder of 2006 will be used to finance the purchase of property, with any remaining cash requirements, if any, financed by short-term borrowings. All our borrowing agreements contain restrictions on the amount of secured borrowings we can incur with other lenders.

CREDIT RATINGS
RATING AGENCY		SECURITY		RATING
Dominion Bond Rating Service		Unsecured Notes and Debentures		BB (high)
		Preferred Shares		Pfd-4
Moody’s Investors Services		Unsecured Notes and Debentures		Bl
Standard & Poor’s		Unsecured Notes and Debentures		B+

The above ratings represent a risk assessment of our public unsecured debt securities. The rating by Dominion Bond Rating Service (DBRS) is the fifth best rating in terms of quality within ten rating gradations, with the “high” indicating a ranking in the higher end of this rating category. The rating by Moody’s Investors Services (Moody’s) is the sixth best rating in terms of quality within nine rating gradations, with the numerical modifier 1 indicating a ranking at the higher end of this rating category. The rating by Standard & Poor’s (S&P) is the sixth best rating in terms of quality within ten rating gradations, with the “plus” indicating a ranking at the higher end of this category. DBRS, Moody’s and S&P, have a “negative outlook” with respect to our credit ratings.

     During the past year, our rating with DBRS fell from BBB (low) to BB (high). Our rating with Moody’s fell from Baa3 to B1, and our rating with S&P fell from BBB- to B+. These reductions in our credit ratings have significantly impacted our access to and cost of capital and financial flexibility. Further reductions in our credit ratings would have an added negative impact on our financial flexibility. The above ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the above rating agencies.

In 2005, common shares amounting to $7 million were issued, net of expenses, pursuant to our stock option and share purchase plans versus $19 million in 2004.

     As at January 31, 2005, we had 231,027,097 common shares, 68,176 Series A Preferred Shares and 1,350,000 Series B Preferred Shares issued and outstanding.

     As at January 31, 2005, we had 4,640,564 common share purchase options issued and outstanding under the Executive stock option and share purchase plan.

In the normal course of business, we finance certain of our activities off balance sheet through leases and securitization.

LEASES

On an ongoing basis, we enter into operating leases for property, plant and equipment. Minimum future rental payments under these operating leases, determined as at December 31, 2005, amounted to $110 million, of which $25 million related to our proportionate 50% share of Norampac,

The Corporation sells a portion of its trade receivables through securitization programs. The Corporation uses securitization of its receivables as a source of financing by reducing its working capital requirements. This securitization consists of the sale of receivables, or the sale of senior beneficial interest in them, to special purpose trusts managed by financial institutions

MANAGEMENT’S DISCUSSION & ANALYSIS

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Domtar Inc.
2005
Annual Report

for multiple sellers of receivables. The agreements normally allow the daily sale of new receivables to replace those that have been collected. They also limit the cash that can be received from the sale of the senior beneficial interest. The subordinate interest retained by the Corporation is included in “Receivables” and will be collected only after the senior beneficial interest has been settled.

     On December 15, 2005, Domtar decided not to renew its agreement for the securitization of Canadian receivables, which was set to expire in December 2005. As such, Domtar repurchased the receivables previously sold.

     As at December 31, 2005 and December 31, 2004, the value of securitized receivables amounted to $163 million and $236 million, respectively. The Corporation expects to continue selling receivables on an ongoing basis, given the attractive discount rates. Should these programs be discontinued either by management’s decision or due to termination of the programs by the providers, the Corporation’s working capital and bank debt requirements would increase. Such sales of receivables are contingent upon annual renewals and retaining specified credit ratings.

     Domtar’s agreement for the securitization of its U.S. receivables, which was to expire in December 2005, has been extended by the administrator of the program pending its renewal. In addition, the condition to maintain certain required credit ratings was waived. As at February 22, 2006, we expect to finalize a new three-year agreement that would include both U.S. and Canadian receivables in the near future.

Guarantees

INDEMNIFICATIONS

In the normal course of business, the Corporation offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. As at December 31, 2005, the Corporation is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provisions have been recorded in the financial statements. These indemnifications have not yielded significant expenses in the past.

PENSION PLANS

We have indemnified and held harmless the trustees of Domtar’s pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions of Domtar or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. As at December 31, 2005, we had not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.

E.B. EDDY ACQUISITION

On July 31, 1998, the Corporation acquired all of the issued and outstanding shares of E.B. Eddy Limited and E.B. Eddy Paper, Inc. (E.B. Eddy), an integrated producer of specialty paper and wood products. The purchase agreement includes a purchase price adjustment whereby, in the event of the acquisition by a third party of more than 50% of the shares of the Corporation in specified circumstances, the Corporation may have to pay up to a maximum of $120 million, an amount which is gradually declining over a 25-year period. As at December 31, 2005, the maximum amount of the purchase price adjustment was $110 million. No provision was recorded related to this potential purchase price adjustment, as the Corporation does not expect to make any payments pertaining to this purchase price adjustment.

DEBT AGREEMENTS

Certain debt agreements require the Corporation to indemnify the parties in the event of changes in elements such as withholding tax regulations. As the nature and scope of such indemnifications are contingent on future events, none of which can be foreseen as at December 31, 2005, and the structure of such transactions make these events unlikely, no provisions have been recorded in the financial statements.

LEASES

The Corporation has guaranteed to various lessors $8 million of the residual value of its assets under operating leases with expiry dates in 2006. If the fair values of the assets at the end of the lease terms are lower than the residual values guaranteed, the Corporation would be held liable for the shortfall. The Corporation reviews its guarantees relative to the residual value and records anticipated losses as a charge to earnings. As at December 31, 2005, the Corporation recorded approximately $1 million of provision relating to anticipated shortfall in the fair values of the assets, based on the likelihood that the guarantees will be exercised.

MANAGEMENT’S DISCUSSION & ANALYSIS

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Domtar Inc.
2005
Annual Report

Contractual Obligations &
Commercial Commitments

In the normal course of business, we enter into certain contractual obligations and commercial commitments. The following tables provide our obligations and commitments as at December 31, 2005:

CONTRACTUAL OBLIGATIONS
CONTRACT TYPE
		2006				2007				2008				2009				2010				THEREAFTER				TOTAL
(IN MILLIONS OF CANADIAN DOLLARS)
Debentures and notes			—				—				—				—				—				1,877				1,877
Other			2				2				59				3				160				156				382
Long-term debt			2				2				59				3				160				2,033				2,259
Operating leases			30				21				15				11				9				24				110
Total obligations			32				23				74				14				169				2,057				2,369

COMMERCIAL OBLIGATIONS
CONTRACT TYPE
		2006				2007				2008				2009				2010				THEREAFTER				TOTAL
(IN MILLIONS OF CANADIAN DOLLARS)
Letters of credit			20				1				—				—				—				—				21
Other commercial commitments*			125				65				56				39				21				72				378
Total commitments			145				66				56				39				21				72				399

*

Includes commitments to purchase roundwood, wood, chips, gas, electricity and certain chemicals.

For 2006 and the foreseeable future, we expect cash flows from operations and from our various sources of financing to be sufficient to meet our contractual obligations and commercial commitments.