Annual Report

10-K 1 d10k.htm ANNUAL REPORT Annual Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-4825

WEYERHAEUSER COMPANY

A WASHINGTON CORPORATION

91-0470860

(IRS EMPLOYER IDENTIFICATION NO.)

FEDERAL WAY, WASHINGTON 98063-9777 TELEPHONE (253) 924-2345

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS

NAME OF EACH EXCHANGE ON WHICH REGISTERED:

Common Shares ($1.25 par value)

Exchangeable Shares (no par value)

Chicago Stock Exchange

New York Stock Exchange

Toronto Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [X] Yes [ ] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No

As of June 23, 2006, 246,233,480 shares of the registrant’s common stock ($1.25 par value) were outstanding and the aggregate market value of the registrant’s voting shares held by non-affiliates was approximately $14,531,562,772

As of February 2, 2007, 236,699,228 shares of the registrant’s common stock ($1.25 par value) were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Notice of 2007 Annual Meeting of Shareholders and Proxy Statement for the company’s Annual Meeting of Shareholders to be held April 19, 2007, are incorporated by reference into Part II and III.

TABLE OF CONTENTS


PART I
ITEM 1.	OUR BUSINESS	1
	WE CAN TELL YOU MORE	1
	WHO WE ARE	1
	• OUR BUSINESS SEGMENTS	1
	• OUR HISTORY	1
	• COMPETITION IN OUR MARKETS	1
	• SALES OUTSIDE THE UNITED STATES	2
	• SHAPING OUR BUSINESS	2
	• OUR EMPLOYEES	2
	WHAT WE DO	2
	• TIMBERLANDS	2
	• WOOD PRODUCTS	5
	• CELLULOSE FIBER & WHITE PAPERS	7
	• CONTAINERBOARD, PACKAGING & RECYCLING	9
	• REAL ESTATE AND RELATED ASSETS	11
	• CORPORATE AND OTHER	12
	NATURAL RESOURCES AND ENVIRONMENTAL MATTERS	13
	• ENDANGERED SPECIES PROTECTIONS	13
	• REGULATIONS AFFECTING FORESTRY PRACTICES	13
	• FOREST CERTIFICATION STANDARDS	13
	• WHAT THESE REGULATIONS & CERTIFICATION PROGRAMS MEAN TO US	13
	• REGULATIONS AND FOREST CERTIFICATION IN CANADA	14
	• CANADIAN ABORIGINAL RIGHTS	14
	• POLLUTION CONTROL REGULATIONS	14
	• ENVIRONMENTAL CLEANUP	14
	• REGULATION OF AIR EMISSIONS IN THE UNITED STATES	14
	• REGULATION OF AIR EMISSIONS IN CANADA	15
	• POTENTIAL CHANGES IN POLLUTION REGULATION	15
	FORWARD LOOKING STATEMENTS	16
ITEM 1A.	RISK FACTORS	17
	RISKS RELATED TO OUR INDUSTRIES AND BUSINESS	17
	• CYCLICAL INDUSTRIES	17
	• LONG-TERM DECLINE IN PAPER DEMAND	17
	• CHANGES IN PRODUCT MIX OR PRICING	18
	• INTENSE COMPETITION	18
	• AVAILABILITY OF RAW MATERIALS AND ENERGY	18
	• TRANSPORTATION	18
	• MATERIAL DISRUPTION OF MANUFACTURING	18
	• CAPITAL REQUIREMENTS	18
	• ENVIRONMENTAL LAWS AND REGULATIONS	19
	• LEGAL PROCEEDINGS	19
	• CURRENCY EXCHANGE RATES	19
	• LUMBER EXPORT TAXES	20
	• CHANGES IN CREDIT RATINGS	20
	• NATURAL DISASTERS	20
	RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK	20
	• STOCK PRICE VOLATILITY	20
ITEM 1B.	UNRESOLVED STAFF COMMENTS	21
ITEM 2.	PROPERTIES	21
	TIMBERLANDS	21
	WOOD PRODUCTS	22
	CELLULOSE FIBER & WHITE PAPERS	23
	CONTAINERBOARD, PACKAGING & RECYCLING	24
	REAL ESTATE AND RELATED ASSETS	24
ITEM 3.	LEGAL PROCEEDINGS	24
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	24
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	25
ITEM 6.	SELECTED FINANCIAL DATA	28


ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
	WHAT YOU WILL FIND IN THIS MD&A	31
	FINANCIAL PERFORMANCE SUMMARY	31
	ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS	32
	HOW ECONOMIC AND MARKET CONDITIONS AFFECTED OUR OPERATIONS	32
	RESULTS OF OPERATIONS	33
	• CONSOLIDATED RESULTS	33
	• TIMBERLANDS	34
	• WOOD PRODUCTS	36
	• CELLULOSE FIBER & WHITE PAPERS	38
	• CONTAINERBOARD, PACKAGING & RECYCLING	40
	• REAL ESTATE AND RELATED ASSETS	41
	• CORPORATE AND OTHER	43
	• INTEREST EXPENSE	44
	• INCOME TAXES	44
	LIQUIDITY AND CAPITAL RESOURCES	45
	• WHERE WE GET CASH	45
	• HOW WE USE CASH	47
	OFF-BALANCE SHEET ARRANGEMENTS	48
	ENVIRONMENTAL MATTERS, LEGAL PROCEEDINGS AND OTHER CONTINGENCIES	48
	ACCOUNTING MATTERS	49
	• CRITICAL ACCOUNTING POLICIES	49
	• PROSPECTIVE ACCOUNTING PRONOUNCEMENTS	50
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	51
	LONG-TERM DEBT OBLIGATIONS	51
	OUR USE OF DERIVATIVES	51
	COMMODITY FUTURES, SWAPS AND COLLARS	51
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	52
	REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	52
	CONSOLIDATED STATEMENT OF EARNINGS	53
	CONSOLIDATED BALANCE SHEET	54
	CONSOLIDATED STATEMENT OF CASH FLOWS	56
	CONSOLIDATED STATEMENT OF SHAREHOLDERS’ INTEREST AND COMPREHENSIVE INCOME	58
	INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	59
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	60
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	98
ITEM 9A.	CONTROLS AND PROCEDURES	98
	EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES	98
	CHANGES IN INTERNAL CONTROLS	98
	MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING	98
	REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	99
ITEM 9B.	OTHER INFORMATION – NOT APPLICABLE	N/A

PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS	100
ITEM 11.	EXECUTIVE COMPENSATION	102
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	102
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	102
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	102

PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	103
	EXHIBITS	103
	SIGNATURES	104
	REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE	105
	FINANCIAL STATEMENT SCHEDULE	106

PART I

OUR BUSINESS

We are an integrated forest products company. We grow and harvest trees, build homes and make wood and paper products essential to everyday lives. Our goal is to do this safely, profitably and responsibly.

Our business has offices or operations in 18 countries and has customers worldwide. We manage 33 million acres of forests, and in 2006, we generated $21.9 billion in annual net sales and revenues.

This portion of our Annual Report and Form 10-K provides detailed information about how we do those things. It explains who we are, what we do and where we are headed.

We break out financial information such as revenues, earnings and assets by the business segments that form our company. We also discuss the development of our company and the geographic areas where we do business.

WE CAN TELL YOU MORE

AVAILABLE INFORMATION

We meet the information reporting requirements of the Securities Exchange Act of 1934 by filing periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). These reports and statements – information about our company’s business, financial results and other matters – are available at:

•

the SEC internet site – www.sec.gov;

•

the SEC’s Public Conference Room, 100 F Street NE, Washington, D.C. 20549, 1-800-SEC-0330; and

•

our internet site – www.weyerhaeuser.com.

When we file the information electronically with the SEC, it is also added to our internet site.

WHO WE ARE

OUR BUSINESS SEGMENTS

In the Consolidated Results section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” you will find our overall performance results for our business segments:

•

Timberlands;

•

Wood Products;

•

Cellulose Fiber and White Papers;

•

Containerboard, Packaging and Recycling;

•

Real Estate and Related Assets; and

•

Corporate and Other.

Detailed financial information about our business segments and our geographic locations is in Notes 24 and 25 of “Financial Statements and Supplementary Data” as well as further in this section and in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

OUR HISTORY

We started out as Weyerhaeuser Timber Company, incorporated in the state of Washington in January 1900 when Frederick Weyerhaeuser and 15 partners bought 900,000 acres of timberland. In the 106 years since then, we have worked to be the best forest products company in the world.

Our many innovations and accomplishments through the years include:

•

establishing the nation’s first certified tree farm in 1941;

•

hand-planting 18.4 million seedlings through a foot or more of ash to transform 68,000 acres of devastated, heat-blasted landscape – left from the Mount St. Helens eruption in 1980 – into new forests that will be ready for harvesting in 2020; and

•

making our forests among the most productive in the world by using our High Yield Forestry program – an approach that combines economic benefits with a concern for habitat, wildlife, water quality and other forest values.

COMPETITION IN OUR MARKETS

Our major markets – both domestic and foreign – are highly competitive, with numerous companies selling similar products. Many of our products also compete against substitutes for wood and wood-fiber products. In real estate development and other related activities, we compete against numerous regional and national firms. We compete in our markets primarily through price, product quality and service levels.

» 1

Our business segments compete based on the following strategies:

•

Timberlands is extracting maximum value for each acre.

•

Wood Products is delivering integrated solutions to the residential construction and industrial markets.

•

Cellulose Fiber and White Papers is focusing primarily on value-added pulp products and is combining its fine paper product lines with Domtar Inc.

•

Containerboard, Packaging and Recycling is growing its packaging products and services in selected market segments where we meet customer requirements at the lowest cost for our supply chain.

•

Weyerhaeuser Real Estate Company is growing in target markets.

•

International operations, in the Corporate and Other segment, use joint ventures to expand our position as a low cost softwood and hardwood timber grower.

SALES OUTSIDE THE UNITED STATES

In 2006, 17 percent – or $3.6 billion – of our total consolidated sales and revenues were to customers outside the United States. That included:

•

$1.6 billion of exports from the United States,

•

$1.3 billion of Canadian export and domestic sales and

•

$0.7 billion of other foreign sales.

In 2005, 16 percent – or $3.5 billion – of our total consolidated sales and revenues were to customers outside the United States. That included:

•

$1.7 billion of exports from the United States,

•

$1.2 billion of Canadian export and domestic sales and

•

$0.6 billion of other foreign sales.

SHAPING OUR BUSINESS

Executing our strategies and building scale has meant adding to our business through key acquisitions. It also has meant strategically selling or closing businesses and assets. In recent years, we have grown substantially through acquisitions that have included:

•

Willamette Industries in 2002, and

•

Maracay Homes in 2006.

Our recent dispositions have included:

•

Coastal British Columbia operations and timberlands (“B.C. Coastal”) in 2005,

•

French composite panel operations in 2005,

•

North American and Irish composite panel operations in 2006 and

•

the closure or sale of a number of individual facilities that were no longer competitive or did not align to our business strategy.

In August 2006, we announced an agreement to combine our Fine Paper business and related assets with Domtar Inc. (“the Domtar Transaction”). Our Fine Paper business – part of our Cellulose Fiber and White Papers segment – in combination with Domtar, Inc. will create a leading producer of fine paper in North America based on the production capacity of the combined assets. See Note 22: Discontinued Operations in “Financial Statements and Supplementary Data” for further details of the transaction.

We continue to reinvest in our businesses through a variety of capital projects. In 2006 our capital expenditures – excluding acquisitions and our Real Estate and Related Assets business segment – totaled $849 million. We expect these investments will:

•

optimize our existing operations,

•

allow us to use energy more efficiently and

•

increase our competitiveness.

OUR EMPLOYEES

We have approximately 46,700 employees. This number includes:

•

45,000 employed by our corporate operations and business segments, not including our Real Estate and Related Assets segment; and

•

1,700 employed by our Real Estate and Related Assets segment.

Of these employees, approximately 16,150 are members of unions covered by multi-year collective bargaining agreements.

WHAT WE DO

This section provides information about how we grow and harvest trees, manufacture and sell products made from them, and build and sell homes. For each of our business segments, we provide details about what we do, where we do it, how much we sell and where we are headed.

TIMBERLANDS

Our Timberlands business segment manages 6.4 million acres of private commercial forestland in the United States. We own 5.7 million of those acres and lease the other 700,000 acres. In addition, we have renewable, long-term licenses on 26.8 million acres of forestland located in five Canadian provinces. A portion of the related assets that are part of the Domtar Transaction we announced in August include 12.2 million acres of long-term forestland licenses of which 4.4 million acres are located in Ontario and 7.8 million acres located in Saskatchewan. Financial information in the tables below includes data from all of the segment’s business units as of the end of 2006, including the assets expected to be a part of the Domtar Transaction.

What We Do

We grow and harvest trees for use as lumber and other wood and building products. We also export logs to other countries

2 «

where they are made into products. After harvest, we typically plant seedlings to reforest the harvested areas using the most effective regeneration method for the site and species. We monitor and care for the new trees as they grow to maturity. We seek to sustain and maximize the timber supply from our forestlands, while keeping the health of our environment a key priority. We are recognized as a leading forest manager.

The goal of our timberlands businesses is to maximize returns by selling logs and stumpage to internal and external customers. We focus on solid softwood and use intensive silviculture to improve forest productivity and returns, while managing the forests on a sustainable basis to meet both customer and public expectations. We capture additional value from our land and timber through the lease or sale of minerals, oil, gas, recreation and communications sites; sales of higher-and-better-use property; and the sale of other non-timber products. We realize additional value by integrating our timberlands with our manufacturing operations.

Where We Do It

We own or lease:

•

4.2 million acres in the southern United States and

•

2.2 million acres in the Pacific Northwest.

In addition, we have renewable, long-term licenses on 26.8 million acres of forestland located in five Canadian provinces. In Canada, forests generally are owned and administered by provincial governments.

We also co-own and manage forestlands in the Southern Hemisphere. The results of these international operations are reported in the Corporate and Other segment.

Our worldwide timber inventory is approximately 366 million cunits. One cunit equals 100 cubic feet of solid wood. The amount of timber inventory does not translate into an amount of lumber or panel products because the quantity of end products:

•

varies according to the species, size and quality of the timber and

•

will change through time as the mix of these variables adjusts.

As a result, there is no standard for converting cubic feet of solid wood into board feet of lumber or square feet of panel products.

How Much We Sell

Our net sales to unaffiliated customers declined 3 percent in 2006 with both 2006 and 2005 slightly exceeding $1 billion.

Our sales volume of logs to unaffiliated customers in 2006 declined 116,000 cunits, or 3 percent, from 2005. This reduction in volume was due primarily to the sale of the B.C. Coastal operations in 2005. Sales volumes for 2005 included 125,000 cunits from these operations. Other factors that may affect our log sales volume include the following:

•

Domestic grade log sales depend on lumber usage, which is influenced by and depends on housing starts and repair and remodel activity. In addition, sales to unaffiliated customers can fluctuate based on the needs of our own mills, and the availability of logs from outside markets and our own timberlands.

•

Domestic fiber log sales fluctuate as a result of the demand for chips by pulp and containerboard mills.

•

Export log sales depend on the level of housing starts in Japan, as that is where most of our North American export logs are sold.

•

All of our domestic and export logs are sold to unaffiliated customers or transferred at market prices to our internal mills by sales and marketing staffs within our timberlands business units.

Average log price realizations in 2006 were up slightly as compared to 2005, primarily due to higher export log prices. Our log prices are affected by the supply of and demand for grade and fiber logs, which are influenced by all of the factors described above.

Sales of nonstrategic timberlands decreased slightly in 2006 as compared to 2005, in part due to the sale of the B.C. Coastal operations in 2005 as well as the 2005 sale of leased lands in Georgia that was not repeated in 2006. The leased lands in Georgia represented the last parcel remaining from the 2004 sale of timberlands in Georgia.

Where We’re Headed

Our strategies for achieving continued success include:

•

managing forests on a sustainable basis to meet customer and public expectations;

•

reducing the time it takes to realize returns by practicing intensive forest management and focusing on the most advantageous markets;

•

efficiently delivering fiber to internal supply chains;

•

building long-term relationships with external customers who rely on a consistent supply of high-quality raw material; and

•

continuously reviewing our portfolio to create the greatest value for the company.

» 3

TIMBERLANDS PRODUCTS


MAIN PRODUCTS		HOW THEY’RE USED
logs		made into lumber and other wood and building products
minerals, oil and gas		sold into the energy markets
higher and better use property		sold into real estate development markets for residential use

SUMMARY OF 2006 TIMBER INVENTORY AND TIMBERLAND LOCATIONS


GEOGRAPHIC AREA
	MILLIONS OF CUNITS	THOUSANDS OF ACRES AT DECEMBER 31, 2006
	INVENTORY	FEE OWNERSHIP	LONG-TERM LEASES	LICENSE ARRANGEMENTS	TOTAL
United States
West	62	2,233	—	—	2,233
South	51	3,410	731	—	4,141


Total United States	113	5,643	731	—	6,374


Canada
Alberta	104	—	—	5,225	5,225
British Columbia	9	—	—	2,360	2,360
New Brunswick	2	—	—	177	177
Ontario⁽³⁾	52	—	—	6,821	6,821
Saskatchewan⁽³⁾	82	—	—	12,214	12,214


Total Canada	249	—	—	26,797	26,797


Subtotal North America	362	5,643	731	26,797	33,171
International⁽¹⁾⁽²⁾	4	291	10	76	377


Total	366	5,934	741	26,873	33,548

(1)	International represents timberlands outside of North America, the results of which are reported in the Corporate and Other segment.

(2)	Includes Weyerhaeuser percentage ownership of timberlands owned and managed through joint ventures

(3)	License arrangements on 4.4 million acres in Ontario and 7.8 million acres in Saskatchewan are expected to be included in the Domtar Transaction.

FIVE-YEAR SUMMARY OF NET SALES FOR TIMBERLANDS


SALES VOLUMES⁽¹⁾⁽²⁾: IN MILLIONS OF DOLLARS
	2006		2005		2004		2003		2002
To unaffiliated customers:
Logs	$	781	$	761	$	822	$	730	$	657
Other products		235		286		280		264		273


	$	1,016	$	1,047	$	1,102	$	994	$	930


Intersegment sales	$	1,675	$	1,794	$	1,622	$	1,605	$	1,545

(1)	Reflects the divestiture of the company’s B.C. Coastal operations in May 2005.

(2)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

FIVE-YEAR SUMMARY OF LOG SALES VOLUMES TO UNAFFILIATED CUSTOMERS FOR TIMBERLANDS


SALES VOLUMES⁽¹⁾⁽²⁾: IN THOUSANDS
	2006	2005	2004	2003	2002
Logs – cunits	3,436	3,552	3,920	4,125	3,600

(1)	Reflects the divestiture of the company’s B.C. Coastal operations in May 2005.

(2)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

FIVE-YEAR SUMMARY OF SELECTED PUBLISHED EXPORT LOG PRICES


SELECTED PUBLISHED PRODUCT PRICES:
	2006		2005		2004		2003		2002
Export logs (#2 sawlog-bark on) – $/MBF
Coastal – Douglas fir – Longview	$	833	$	780	$	780	$	707	$	697
Coastal – Hemlock	$	442	$	439	$	386	$	354	$	416

4 «

WOOD PRODUCTS

We are one of the largest manufacturers and distributors of wood products in North America.

The related assets that are part of the Domtar Transaction we announced in August include three sawmills in Canada, including one mill in which we have an equity interest.

What We Do

•

We provide the residential structural frame market with access to a family of high-quality softwood lumber, engineered lumber, structural panels and other specialty products.

•

We deliver innovative homebuilding solutions to help our customers quickly and efficiently meet their customers’ needs.

•

We sell our products and services through our own sales organizations and distribution facilities, and we supplement our product offerings with building materials that we purchase from other manufacturers.

•

We sell certain of our products into the repair and remodel market through the wood preserving and home improvement warehouse channels.

•

We export our engineered building materials and industrial hardwood products to Europe and Asia.

•

We make and sell hardwood and softwood lumber and panels to manufacturers of furniture and cabinetry in over 40 countries.

•

We acquire our raw materials at market price from our Timberlands business segment and from third parties.

Where We Do It

We have 32 softwood lumber facilities, 18 engineered lumber facilities, 8 veneer facilities, 12 structural panel facilities, and 8 hardwood lumber facilities, as well as 85 distribution locations in the U.S. and Canada. On February 16, 2007, we announced our intent to sell our Canadian and select U.S. building materials distribution centers. See Note 22 in “Financial Statements and Supplementary Data.”

How Much We Sell

Revenues of our Wood Products business segment come from sales to wood products dealers, do-it-yourself retailers, builders, and industrial users. During 2006, we completed the transition from five legacy businesses into one business that is better positioned to provide products and services to the residential construction market, and we launched the new iLevel^™ brand. In 2006 our net sales were $7.9 billion compared to $9.3 billion in 2005.

Our sales volume of wood products in 2006 declined from 2005 primarily because of the reduction in production capacity through sale or closure of a number of facilities in 2005 and 2006. These include:

•

sale of our B.C. Coastal operations, which included 5 sawmills and 2 remanufacturing plants;

•

sale of our North American composite products business; and

•

closure of our Big River, Saskatchewan lumber mill and our Aberdeen, Washington large log sawmill.

Prices for wood products in 2006 also declined from 2005. The following factors influence prices for wood products:

•

Overall demand for structural wood products used in new residential construction and the repair and remodel of existing homes affects prices. Residential construction is affected by the rate of household formation and other demographic factors, mortgage interest rates, the need for replacement of existing housing stock, and the demand for secondary or vacation homes. Repair and remodel activity is affected by the size and age of existing housing inventory.

•

Seasonality can affect prices, as residential construction slows during winter months and increases during spring and summer.

•

The availability of supply of commodity building products such as lumber and plywood affect prices. A number of factors can affect supply, including weather, raw material quality and availability, and availability of rail and truck transportation.

•

Proprietary grade products and services can command higher prices. Our ability to differentiate our products and services from other manufacturers and create demand for them in the marketplace tends to generate higher prices.

Where We’re Headed

Our strategies for achieving continued success vary by business.

•

During 2006, we completed the transition from five legacy Residential Wood Products businesses into one business that is better positioned to provide products and services to the residential construction market and we launched the new iLevel^™ brand. Our strategies for continued success include:

–

delivering innovative home-building solutions to dealers so they can quickly and efficiently meet their customers’ needs;

–

leveraging technology to improve our processes and systems to provide our customers with performance-based proprietary products;

–

achieving operating excellence throughout the delivery chain; and

–

taking advantage of our size, scale, expertise, and breadth of products that make us unique in serving the structural-frame marketplace.

•

In our Hardwood and Industrial Products business our strategy is to meet the growing international demands of customers by aligning our global supply chain and strengthening our industrial wood products sales capability.

•

In all businesses within our Wood Products segment we continue to improve or remove underperforming and non-strategic assets from our system and focus investments on strategic goals.

» 5

WOOD PRODUCTS


MAIN PRODUCTS		HOW THEY’RE USED
RESIDENTIAL WOOD PRODUCTS
softwood lumber		residential and commercial structures – homes, offices and stores
engineered lumber – solid section – I-Joists		factory-built structures, floor and roof joists, headers and beams used in residential, commercial and industrial facilities and structures
structural panels – oriented strand board (OSB) – plywood – veneer		structural sheathing, sub-flooring, I-beam floor joists, recreational vehicle flooring, stepping, appearance panels, and construction material
other products		complementary building products such as cedar and composite decking, siding and insulation
HARDWOOD AND INDUSTRIAL PRODUCTS
hardwood lumber and plywood		furniture, pallet cants, ties, mouldings, panels, cabinets, architectural millwork, components, and retail boards.

FIVE-YEAR SUMMARY OF NET SALES FOR WOOD PRODUCTS


NET SALES^{(1) (2)}: IN MILLIONS OF DOLLARS
	2006		2005		2004		2003		2002
Softwood lumber	$	2,997	$	3,624	$	3,915	$	3,281	$	3,186
Plywood		529		735		929		784		700
Veneer		42		44		44		39		34
Composite panels		357		497		501		393		379
Oriented strand board		939		1,164		1,390		1,109		649
Hardwood lumber		398		390		365		350		333
Engineered I-Joists		670		704		645		517		469
Engineered solid section		794		833		701		542		485
Logs		23		62		125		105		253
Other products		1,153		1,225		1,160		1,020		1,027


	$	7,902	$	9,278	$	9,775	$	8,140	$	7,515

(1)	Reflects the divestitures of the company’s B.C. coastal operations in May 2005 and North American composite panel operations in July 2006.

(2)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

FIVE-YEAR SUMMARY OF SALES VOLUME FOR WOOD PRODUCTS


SALES VOLUMES⁽¹⁾⁽²⁾: IN MILLIONS
	2006	2005	2004	2003	2002
Softwood lumber – board feet	7,871	8,650	8,890	8,981	8,623
Plywood – square feet (3/8”)	1,663	2,180	2,629	2,665	2,685
Veneer – square feet (3/8”)	215	231	225	239	218
Composite panels – square feet (3/4”)	802	1,229	1,234	1,162	1,092
Oriented strand board – square feet (3/8”)	4,096	3,948	4,213	4,361	4,205
Hardwood lumber – board feet	412	427	417	435	435
Engineered I-Joists – lineal feet	456	484	496	447	400
Engineered solid section – cubic feet	36	38	37	32	28
Logs – cunits (in thousands)	169	451	934	799	1,657

(1)	Reflects the divestiture of the company’s B.C. coastal operations in May 2005 and North American composite panel operations in July 2006.

(2)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

6 «

FIVE-YEAR SUMMARY OF SELECTED PUBLISHED WOOD PRODUCT PRICES


SELECTED PUBLISHED PRODUCT PRICES:
	2006		2005		2004		2003		2002
Lumber (common) – $/MBF
2x4 Douglas fir (kiln dried)	$	351	$	406	$	459	$	347	$	328
2x4 Douglas fir (green)	$	284	$	355	$	406	$	307	$	289
2x4 Southern yellow pine (kiln dried)	$	329	$	421	$	387	$	330	$	302
2x4 Spruce-pine-fir (kiln dried)	$	265	$	322	$	361	$	242	$	236
Plywood (1/2” CDX) – $/MSF
West	$	341	$	386	$	448	$	367	$	287
South	$	279	$	353	$	403	$	335	$	248
Oriented strand board (7/16”-24/16”)
North Central price – $/MSF	$	218	$	323	$	374	$	295	$	160

CELLULOSE FIBER AND WHITE PAPERS

The Cellulose Fiber and White Papers businesses produce a wide range of fine paper products, which are sold to customers through a network of distribution centers in the United States. Our cellulose fiber products are distributed through a global direct sales network, and liquid packaging products are sold directly to carton and food product packaging converters in North America and internationally. Our newsprint business, North Pacific Paper Corporation (“NORPAC”), is a joint venture with Nippon Paper Industries. The newsprint produced at this facility primarily is sold directly to newspapers and publishers in the western United States and Japan.

In August 2006, we announced the Domtar Transaction. White Paper assets that will be included in the Domtar Transaction are six uncoated freesheet mills in the United States and two in Canada (one of which is not currently in operation), and one coated groundwood mill in the United States. Cellulose Fiber assets that will be included are the pulp production facilities at the uncoated freesheet mills, and one pulp mill in Canada. Financial information in the tables below includes data from all of the segment’s businesses as of the end of 2006, including the assets and operations expected to be included in the Domtar Transaction.

What We Do

•

We are one of the world’s largest softwood market pulp producers.

•

We provide cellulose fibers (pulp) for targeted specialty markets, working closely with our customers to develop unique or specialized applications for cellulose fiber.

•

We produce uncoated freesheet and coated groundwood papers used in various printing and publishing applications.

•

We manufacture liquid packaging board used primarily for the production of containers for liquid products.

•

Our joint venture, NORPAC, makes high-quality newsprint and uncoated groundwood products.

Where We Do It

We have 10 pulp mills and 8 paper mills in strategic locations throughout the United States and Canada. Our liquid packaging mill and our NORPAC joint venture newsprint manufacturing facility are located in Washington State.

How Much We Sell

Revenues of our Cellulose Fiber and White Papers business segment come from sales to customers who use the products for further manufacturing or distribution, and for direct use. In 2006, our net sales were approximately $4.6 billion compared to $4.3 billion in 2005.

Our sales volume of cellulose fiber products in 2006 was 2.6 million tons – an increase of 5 percent compared to 2005 –despite the closures of two production facilities during the year.

Factors that affect sales volumes for cellulose fiber products include:

•

world gross domestic product growth and

•

paper production and diaper demand.

Our pulp prices in 2006 increased compared to 2005 due to improving balance between supply and demand, higher fiber costs in Europe and a weaker U.S. dollar.

Factors that affect the prices of our cellulose fiber products include:

•

world economic environment;

•

industry operating rate, which is based on the balance of supply and demand; and

•

relative strength of the U.S. dollar.

Our sales volumes of fine paper products, including both freesheet and coated groundwood was 3.0 million tons in 2006, which was a decline of 8 percent compared to 2005. This decline was due to the closure of the Prince Albert, Saskatchewan paper operations in January 2006 and the closure of a paper machine at our Dryden, Ontario facility in April 2006.

» 7

Factors that affect sales volume for fine paper products include:

•

North American economic environment,

•

displacement of paper needs due to electronic applications and

•

competition from other paper grades.

Our fine paper prices improved in 2006 compared to 2005 due to an improving balance between product supply and market demand.

Factors that affect the prices of our fine paper products include:

•

industry operating rate, which is based on the balance of supply and demand; and

•

North American and world economic environments.

Our liquid packaging business unit experienced volume growth and price improvement in 2006 compared to 2005. Demand for this product is influenced by the seasonal demand patterns in the Pacific Rim countries.

Where We’re Headed

Our strategies for achieving continued success include:

•

successfully completing the combination of our fine paper business and related assets with Domtar Inc.;

•

focusing our remaining cellulose fiber businesses on value-added pulp products;

•

focusing research and development resources on new ways to expand and improve the range of applications for cellulose fiber, including chemically modified fibers to enhance performance; and on new product opportunities for liquid packaging and newsprint;

•

providing our customers with access to our technical expertise;

•

improving our cost competitiveness; and

•

focusing capital investments on new and improved product capabilities and cost reduction opportunities.

CELLULOSE FIBER AND WHITE PAPERS PRODUCTS


MAIN PRODUCTS		HOW THEY’RE USED
CELLULOSE FIBER
fluff fiber (Southern softwood kraft fiber)		used in sanitary disposable products that require bulk, softness and absorbency
papergrade fiber (Northern softwood kraft fiber)		used in papergrade products that include printing papers, writing papers and tissue
specialty chemical cellulose fiber		used in textiles, absorbent products, pet care, ethers, thickening agents, specialty packaging, technical specialty applications and proprietary high-bulking fibers
FINE PAPERS
cut-size papers		copier and electronic imaging papers for use with ink jet and laser printers, photocopiers and plain-paper fax machines
printing and publishing papers		papers sold in sheets and rolls for commercial printing and publishing applications
converting papers		base paper used to convert into finished products such as business forms, envelopes and engineering rolls
LIQUID PACKAGING
liquid packaging board		converted into cartons to hold liquid materials such as milk, juice and tea
food container board		converted into cups to hold hot liquids such as coffee

FIVE-YEAR SUMMARY OF NET SALES FOR CELLULOSE FIBER AND WHITE PAPERS


NET SALES⁽¹⁾: IN MILLIONS OF DOLLARS
	2006		2005		2004		2003		2002
Pulp	$	1,657	$	1,482	$	1,471	$	1,305	$	1,196
Paper		2,470		2,417		2,226		2,182		2,163
Coated groundwood		171		180		156		140		126
Liquid packaging board		229		203		208		198		179
Other products		74		54		54		26		19


	$	4,601	$	4,336	$	4,115	$	3,851	$	3,683

(1)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

8 «

FIVE-YEAR SUMMARY OF SALES VOLUME FOR CELLULOSE FIBER AND WHITE PAPERS


SALES VOLUMES⁽¹⁾: IN THOUSANDS
	2006	2005	2004	2003	2002
Pulp – air-dry metric tons	2,621	2,502	2,558	2,479	2,378
Paper – tons⁽²⁾	2,749	2,996	2,876	2,822	2,742
Coated groundwood – tons	234	232	243	234	210
Liquid packaging board – tons	275	258	276	256	229
Paper converting – tons	1,932	1,964	1,839	1,847	1,823

(1)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

(2)	Paper sales include unprocessed rolls and converted paper volumes.

FIVE-YEAR SUMMARY OF SELECTED PUBLISHED PULP AND PAPER PRICES


SELECTED PUBLISHED PRODUCT PRICES: PER TON
	2006		2005		2004		2003		2002
Pulp – Northern bleached kraft pulp-air-dry metric-U.S.	$	721	$	646	$	640	$	553	$	488
Paper – uncoated free sheet-U.S.	$	815	$	709	$	658	$	622	$	658

CONTAINERBOARD, PACKAGING AND RECYCLING

Our Containerboard, Packaging and Recycling business segment manufactures the following products:

•

linerboard, corrugating medium and kraft paper;

•

corrugated industrial and agricultural packaging;

•

inks and printing plates for corrugated packaging;

•

graphics packaging;

•

pre-print linerboard;

•

recyclable wax replacement products;

•

retail packaging displays; and

•

paper bags and sacks.

We also operate an extensive wastepaper collection system through which we collect and broker recovered paper (recycled fiber) to company mills and worldwide customers.

What We Do

We use a vertically integrated, full fiber-cycle strategy in delivering packaging products and services. This means we:

•

produce the material – linerboard and medium – used to manufacture boxes and other packaging,

•

manufacture boxes and other packaging and

•

recycle used packaging and paper in combination with other resource material to create new linerboard and medium.

Our business is seasonal as a result of participation in the fresh produce markets. Our research and development activity in this segment is focused in two primary areas: recyclable products that would replace waxed corrugated package products and radio-frequency identification (“RFID”) for corrugated packages. We are in the process of commercializing our line of recyclable wax-replacement products called Clima Series^™ and have demonstrated success in applying RFID tags to corrugated boxes.

Where We Do It

Our plants and facilities are located throughout the United States and Mexico near major customer locations. We sell products globally. Our operations include:

•

Containerboard – 9 mills in the United States and Mexico;

•

Corrugated packaging and other operations – 75 packaging and 10 specialty packaging plants in the United States and Mexico; and

•

Recycling – 19 major facilities across the United States.

How Much We Sell

Our capability, expertise and performance have made us one of the world’s largest developers, producers and suppliers of packaging products and services. In 2006, our net sales were $4.9 billion compared to $4.7 billion in 2005.

We are the second largest producer of corrugated packaging products in North America.

•

We produce approximately 6.2 million short tons of containerboard per year, and convert the majority to packaging in our manufacturing facilities.

•

Our manufacturing facilities can produce 98 billion square feet of corrugated packaging annually.

•

Our recycling operation annually collects nearly 7 million tons of used corrugated boxes and paper, and we consume a majority in our manufacturing operations.

Factors that affect sales volumes of containerboard, packaging and recycling products and services include:

•

the level of industrial activity in North America;

•

growth in retail segments and markets, which is affected by changes in consumer spending;

•

the level of production of durable and non-durable goods, including fresh produce, fresh protein and processed foods;

» 9

•

growth in demand for high-strength containerboard and packaging in industrial countries; and

•

growth in demand for high-quality recovered fiber – particularly in China – for use in the manufacture of paper and containerboard.

Our volume of containerboard sales declined in 2006 as the result of our closure of a linerboard machine in Plymouth, North Carolina and an increase in the amount of containerboard we consumed internally to meet the needs of our packaging customers. Our packaging volume increased in 2006, primarily due to the extra week of sales activity in our 53-week fiscal year. We achieved higher packaging sales volumes in 2006 despite the sale or closure of production at 11 packaging plants during the year. We maintained our sales volume in the kraft bag market despite closing one bag facility in 2006.

The factors that affect selling prices for our containerboard, packaging and recycling products and services vary.

•

Containerboard and recycled fiber prices reflect the relative level of supply and demand for these materials in local and international markets. Supply is affected by capacity in the industry and demand is a direct result of economic activity.

•

Packaging prices are negotiated between buyers and sellers, as each box is generally designed to meet a particular customer’s need.

•

Packaging prices are also affected by changes in prices for paper and other production raw materials.

Where We’re Headed

During 2006, this segment made significant changes to its business model, including changing from a plant-focused management model to a customer-focused, integrated supply chain model. Our strategies for achieving continued success include:

•

providing value and reliability for customers through our sate-of-the-art technology and our extensive plant system in the United States and Mexico;

•

developing and producing innovative, cost-effective solutions to meet our customers’ needs for packaging that both protects their products through the distribution channel and communicates to the people who buy these products;

•

providing both centralized and local services through our marketing and sales departments;

•

delivering products and services to selected market segments where we can achieve target returns;

•

reducing supply chain costs by focusing on improving productivity and asset utilization as well as reducing our consumption of chemicals and energy; and encouraging an increased level of recycling through industry promotion and education supported by our collection and distribution system as well as through our own significant consumption of recycled fiber.

CONTAINERBOARD, PACKAGING AND RECYCLING PRODUCTS


MAIN PRODUCTS		HOW THEY’RE USED
containerboard – linerboard – medium		used to produce corrugated packaging
corrugated packaging – boxes, – Tri-Wall^™ – laminated bins – sheets		corrugated packaging for the transport of products and a wide variety of other uses
recycling – used packaging – used paper – other recyclable materials		used in the manufacture of paper and other products
kraft bags and sacks		sacks used for groceries in retail, bags used for fast food
SpaceKraft^™ and bulk packaging		used primarily to transport high density products such as liquids, chemicals and bulk foods
retail centers		design and project services for display, point-of-purchase and retail needs

FIVE-YEAR SUMMARY OF NET SALES FOR CONTAINERBOARD, PACKAGING AND RECYCLING


NET SALES⁽¹⁾: IN MILLIONS OF DOLLARS
	2006		2005		2004		2003		2002
Containerboard	$	377	$	395	$	368	$	304	$	350
Packaging		3,931		3,710		3,584		3,544		3,466
Recycling		345		352		347		247		229
Kraft bags and sacks		88		83		80		80		75
Other products		171		167		156		147		92


	$	4,912	$	4,707	$	4,535	$	4,322	$	4,212

(1)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

10 «

FIVE-YEAR SUMMARY OF SALES VOLUME FOR CONTAINERBOARD, PACKAGING AND RECYCLING


SALES VOLUMES⁽¹⁾: IN THOUSANDS
	2006	2005	2004	2003	2002
Containerboard – tons	856	1,046	1,001	890	983
Packaging – MSF	74,867	73,631	72,885	72,741	70,330
Recycling – tons	2,875	2,728	2,694	2,290	2,292
Kraft bags and sacks – tons	89	89	95	100	93

(1)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

FIVE-YEAR SUMMARY OF SELECTED PUBLISHED PRICES FOR CONTAINERBOARD, PACKAGING AND RECYCLING


SELECTED PUBLISHED PRODUCT PRICES: PER TON
	2006		2005		2004		2003		2002
Linerboard – 42 lb.-Eastern U.S.	$	488	$	414	$	411	$	366	$	383
Recycling – old corrugated containers (“OCC”)	$	63	$	70	$	80	$	61	$	60
Recycling – old newsprint	$	48	$	55	$	57	$	40	$	36

REAL ESTATE AND RELATED ASSETS

Our Real Estate and Related Assets business segment includes our wholly-owned subsidiary, Weyerhaeuser Real Estate Company (“WRECO”), and other real estate related activities. WRECO’s operations are concentrated in select, high-growth metropolitan areas in the United States.

What We Do

The Real Estate and Related Assets segment is focused on:

•

constructing single-family housing and residential lots for sale and

•

developing master-planned communities.

A subsidiary in the Real Estate and Related Assets segment also manages residential real estate investments for institutional investors.

Where We Do It

Our operations are concentrated mainly in high-growth areas in the United States, including select, metropolitan areas in Arizona, California, Maryland, Nevada, Oregon, Texas, Virginia and Washington.

How Much We Sell

We are one of the top 20 homebuilding companies in the United States as measured by annual single-family home closings.

Our revenues increased from $2.9 billion in 2005 to $3.3 billion in 2006, primarily as a result of a 6 percent improvement in the average price of single-family homes closed, an increase in land and lot sales and the sale of an apartment building.

The following factors affect revenues from our Real Estate and Related Assets business segment:

•

Market prices of the homes that we construct for sale may vary.

•

We build in a variety of geographic locations. Market conditions vary by geography so geographic mix affects total revenues.

•

We provide homes at a range of price points to meet our target customers’ needs, from entry-level products in Washington to ocean view homes in southern California and waterfront homes in Maryland. The mix of these sales affects total revenues.

•

We build both traditional single-family, detached homes, as well as attached products, such as town-homes. The mix of price points at which these products sell create variability in our revenue from period to period.

•

Land and lot sales are a component of our master planned development activities. These sales do not occur evenly from year to year.

•

From time to time, we sell apartment buildings that we have constructed as part of a master-planned community.

Where We’re Headed

Our strategies for achieving continued success include:

•

delivering quality homes to satisfied customers – a principle we measure through “willingness to refer” rates from homebuyer surveys;

•

focusing on new market areas where demand for new single-family housing and master-planned communities is high;

•

creating different and distinct value propositions that target a specific market niche in each of our chosen geographies;

•

expanding into adjacent markets where the local value proposition fits;

•

replicating best practices developed in each geographic area; and

•

leveraging our size to improve supply agreements, and attract and retain a highly-talented work force.

» 11

REAL ESTATE AND RELATED ASSETS


MAIN PRODUCTS AND SERVICES		HOW THEY’RE USED
single-family housing		residential living
master-planned communities		new communities for residential living, commercial and public services

FIVE-YEAR SUMMARY OF REVENUE FOR REAL ESTATE AND RELATED ASSETS


REVENUE⁽¹⁾⁽²⁾: IN MILLIONS OF DOLLARS
	2006		2005		2004		2003		2002
Total revenue	$	3,335	$	2,915	$	2,495	$	2,029	$	1,750
Single-family revenue	$	2,951	$	2,686	$	2,193	$	1,730	$	1,455

(1)	Reflects the acquisition of Maracay Homes in February 2006.

(2)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

FIVE-YEAR SUMMARY OF SINGLE-FAMILY UNIT STATISTICS


Single-family Unit Statistics⁽¹⁾⁽²⁾:
	2006		2005		2004		2003		2002
Homes sold	4,541		5,685		5,375		5,005		4,374
Homes closed	5,836		5,647		5,264		4,626		4,280
Homes sold but not closed	1,499		2,410		2,372		2,261		1,882
Single-family gross margin (%)	26.5	%	32.8	%	29.7	%	25.7	%	24.2	%

(1)	Reflects the acquisition of Maracay Homes in February 2006.

(2)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

CORPORATE AND OTHER

Our Corporate and Other segment includes:

•

our international operations, which include distribution and converting facilities located outside North America; and

•

general corporate support activities, including Westwood Shipping Lines, which provides marine transportation services between North America and Asia for Weyerhaeuser and other companies.

What We Do

International operations in this segment generally are conducted by joint ventures for which Weyerhaeuser is the managing partner. Joint venture assets consist principally of forest plantations, forest licenses and some converting assets in the following countries:

•

New Zealand,

•

Australia,

•

Uruguay and

•

Brazil

See Note 7: Equity Affiliates in “Financial Statements and Supplementary Data” for additional information related to our joint ventures.

International operations included the following wood products converting operations:

•

Irish composite panels – sold in November 2006 and

•

French composite panels – sold in December 2005.

Where We Do It

Our international operations include our operations outside North America and are primarily located in the Southern Hemisphere.

How Much We Sell

Sales and revenues for our Corporate and Other segment comes from our marine transportation and international operations. In 2006, our net sales were $484 million compared to $600 million in 2005. The decline in revenues is primarily due to the sale of the French composite panel operations in December 2005.

Factors that affect revenues in our international operations include:

•

overall demand for wood products used in residential construction and remodeling of existing homes in Australia, Europe, Japan and China: and

•

environmental concerns, particularly in Europe, related to endangered tropical hardwoods, which increases demand for the type of sustainable plantation wood we grow in South America.

Where We’re Headed

Our strategies for achieving continued success in our international operations include:

•

establishing a position as one of the largest, lowest-cost, global softwood and hardwood timber growers, and

•

producing plantation softwood and hardwood raw materials and finished products for structural and appearance uses for the Northern Hemisphere, Australasian and Mercosur markets.

12 «

FIVE-YEAR SUMMARY OF NET SALES FOR CORPORATE AND OTHER


IN MILLIONS OF DOLLARS
	2006		2005		2004		2003		2002
Net Sales⁽¹⁾⁽²⁾	$	484	$	600	$	575	$	492	$	399

(1)	Reflects the divestitures of the French composite panel operations in December 2005 and the Irish composite panel operations in November 2006.

(2)	Fiscal year 2006 includes 53 weeks of operations compared to 52 weeks in fiscal years 2002 through 2005.

NATURAL RESOURCE AND ENVIRONMENTAL MATTERS

Growing and harvesting timber is subject to numerous laws and government policies to protect the environment, non-timber resources such as wildlife and water, and other social values. Changes in those laws and policies can significantly affect local or regional timber harvest levels and market values of timber-based raw materials.

ENDANGERED SPECIES PROTECTIONS

In the United States, a number of fish and wildlife species that inhabit geographic areas near or within our timberlands have been listed as threatened or endangered under the federal Endangered Species Act (“ESA”) or similar state laws. Some of these listed species include the northern spotted owl, marbled murrelet, a number of salmon species, bull trout and steelhead trout in the Pacific Northwest and the red-cockaded woodpecker, gopher tortoise and American burying beetle in the Southeast. Additional species or populations may be listed as a result of pending or future citizen petitions or may be initiated by federal or state agencies.

Federal and state requirements to protect habitat for threatened and endangered species have resulted in restrictions on timber harvest on some timberlands, including some of our timberlands. Additional listings of fish and wildlife species as endangered, threatened or sensitive under the ESA and similar state laws as well as regulatory actions taken by federal or state agencies to protect habitat for these species may, in the future, result in additional restrictions on our timber harvests and other forest management practices. They also could increase our operating costs and affect timber supply and prices in general.

REGULATIONS AFFECTING FORESTRY PRACTICES

In the United States, regulations established by the federal, state and local governments or agencies to protect water quality and wetlands could affect our future harvests and forest management practices on some of our timberlands. Forest practice acts in some states in the United States increasingly affect present or future harvest and forest management activities. For example, in some states, these acts limit the size of clear-cuts, require some timber to be left unharvested to protect water quality and fish and wildlife habitat, regulate construction and maintenance of forest roads, require reforestation following timber harvest and contain procedures for state agencies to review and approve proposed forest practice activities. Some states and some local governments regulate certain forest practices through various permit programs. Each state in which we own timberlands has developed best management practices to reduce the effects of forest practices on water quality and aquatic habitats. Additional and more stringent regulations may be adopted by various state and local governments to achieve water-quality standards under the federal Clean Water Act, protect fish and wildlife habitats or achieve other public policy objectives.

FOREST CER TIFICATION STANDARDS

We operate in the United States under the Sustainable Forestry Initiative^®. This is a certification standard designed to supplement government regulatory programs with voluntary landowner initiatives to further protect certain public resources and values. The Sustainable Forestry Initiative^® is an independent standard, overseen by a governing board consisting of conservation organizations, academia, the forest industry, and large and small forest landowners. Compliance with the Sustainable Forestry Initiative^® may result in some increases in our operating costs and curtailment of our timber harvests in some areas.

WHAT THESE REGULATIONS AND CERTIFICATION PROGRAMS MEAN TO US

The regulatory and non-regulatory forest management programs described above have increased our operating costs, resulted in changes in the value of timber and logs from the our timberlands, and contributed to increases in the prices paid for wood products and wood chips during periods of high demand. These kinds of programs also can make it more difficult for us to respond to rapid changes in markets, extreme weather or other unexpected circumstances. One additional effect may be further reductions in the usage of or substitution of other products for lumber and plywood. We believe that these kinds of programs have not had, and in 2007 will not have, a significant effect on the total harvest of timber in the United States or any major U.S. region. However, these kinds of programs may have such an effect in the future. We expect we will not be disproportionately affected by these programs as compared with typical owners of comparable timberlands. We also expect that these programs will not significantly disrupt our planned operations over large areas or for extended periods.

» 13

REGULATIONS AND FOREST CERTIFICATION IN CANADA

Our forest operations in Canada are carried out on public forestlands under forest licenses. All forest operations are subject to forest practices and environmental regulations, and operations under licenses also are subject to contractual requirements between us and the relevant province designed to protect environmental and other social values. In Canada, the federal Species at Risk Act (“SARA”) was enacted in 2002. SARA enacted protective measures for species identified as being at risk and for critical habitat. To date, SARA has not had a significant effect on our operations; however, it is anticipated that SARA will, over time, result in some additional restrictions on timber harvests and other forest management practices and increase some operating costs for operators of forestlands in Canada. For these reasons, SARA is expected to affect timber supply and prices in the future.

In Canada, we participate in the Canadian Standards Association Sustainable Forest Management System standard, a voluntary certification system that further protects certain public resources and values. Compliance with this standard will result in some increases in our operating costs and curtailment of our timber harvests in some areas in Canada.

CANADIAN ABORIGINAL RIGHTS

Many of the Canadian forestlands also are subject to the constitutionally protected treaty or common-law rights of the aboriginal peoples of Canada. Most of British Columbia (“B.C.”) is not covered by treaties and, as a result, the claims of B.C.’s aboriginal peoples relating to forest resources are largely unresolved, although many aboriginal groups are actively engaged in treaty discussions with the governments of B.C. and Canada. Final or interim resolution of claims brought by aboriginal groups is expected to result in additional restrictions on the sale or harvest of timber and may increase operating costs and affect timber supply and prices in Canada. We believe that such claims will not have a significant effect on our total harvest of timber or production of forest products in 2007, although they may have such an effect in the future.

POLLUTION CONTROL REGULATIONS

Our operations also are subject to federal, state and provincial, and local pollution controls with regard to air, water and land; solid and hazardous waste management; disposal and remediation laws; and regulations in all areas in which we have operations. We also are subject to market demands with respect to chemical content of some of our products and our use of recycled fiber. Compliance with these laws, regulations and demands usually involves capital expenditures as well as additional operating costs. We cannot easily quantify the future amounts of capital expenditures we might have to make to comply with these laws, regulations and demands, or the effects on our operating costs, because in some instances, compliance standards have not been developed or have not become final or definitive. In addition, when we make changes in operations to comply with regulatory standards, we frequently are making changes for other purposes as well. These purposes might include the extension of facility life, increase in capacity, changes in raw material requirements, or increase in economic value of assets or products.

It is difficult to isolate the environmental component of most manufacturing capital projects, but we estimate that our capital expenditures for environmental compliance were approximately $21 million in 2006 (approximately 2 percent of total capital expenditures, excluding acquisitions and Real Estate and Related Assets). Based on our understanding of current regulatory requirements in the United States and Canada, we expect that capital expenditures for environmental compliance will be approximately $10 million in 2007 (approximately 1 percent of expected total capital expenditures, excluding acquisitions and Real Estate and Related Assets).

ENVIRONMENTAL CLEANUP

We are involved in the environmental investigation or remediation of numerous sites. Some of the sites are on property we presently or formerly owned. On these properties, we may have the sole obligation to remediate the site or may share that obligation with one or more parties. Other properties are owned by an unrelated party where several parties have joint and several obligations to remediate the site. Still other sites are superfund sites where we have been named as a potentially responsible party. Our liability with respect to these various sites ranges from insignificant at some sites to substantial at others. The amount of liability depends on the quantity, toxicity and nature of materials we deposited at the site and, for some sites, depends on the number and economic viability of the other responsible parties.

We spent approximately $12 million in 2006, and expect to spend approximately $10 million in 2007, on environmental remediation of these sites. It is our policy to accrue for environmental remediation costs when we determine that it is probable that such an obligation exists and we can reasonably estimate the amount of the obligation. We currently believe that it is reasonably possible that our costs to remediate all the identified sites may exceed our current accruals of $28 million. The excess amounts required may be insignificant or could range, in the aggregate, up to approximately $64 million over several years. This estimate of the upper end of the range of reasonably possible additional costs is much less certain than the estimates we currently are using to determine how much to accrue. The estimate of the upper range also uses assumptions less favorable to us among the range of reasonably possible outcomes.

REGULATION OF AIR EMISSIONS IN THE UNITED STATES

The United States Environmental Protection Agency (“U.S. EPA”) has promulgated regulations for air emissions from pulp and paper manufacturing facilities. These regulations cover hazardous air pollutants that require use of maximum

14 «

achievable control technology (“MACT”) and controls for pollutants that contribute to smog and haze. The U.S. EPA has also adopted MACT standards for air emissions from wood products facilities and industrial boilers. We anticipate that we might spend as much as $20 million over the next few years to comply with the MACT standards. We cannot currently quantify the amount of capital we will need in the future to comply with new regulations being developed by the U.S. EPA or Canadian environmental agencies because final rules have not been promulgated. However, at this time we anticipate that compliance with the new regulations will not result in capital expenditures in any year that are material in relation to our annual capital expenditures.

We recently adopted a goal of reducing greenhouse gas emissions by 40 percent by 2020 by comparison to our emissions in 2000, assuming a comparable portfolio and regulations. We intend to achieve this goal by increasing energy efficiency and by using systems that enable substitution of greenhouse gas-neutral, biomass fuels for high-priced fossil fuels. As each of our power and recovery boilers reaches its design life span over the next 14 years, we may replace the boiler with a state-of-the-art system. During 2006, we completed the planned replacement of one recovery boiler and completed a substantial amount of work on two additional recovery boilers as part of our budgeted capital expenditures. These replacements will allow an increase in the amount of energy obtained from the biomass by-products created in the pulping process. These biomass by-products include wood bark, lignin (the natural substance that binds wood fibers) and other organic compounds in spent pulping liquors. We also expect to be able to reduce the purchase of electric power by up to fifty percent through improvements in energy efficiency and by increasing the use of combined heat and power technology. This will help to further reduce our operating costs.

REGULATION OF AIR EMISSIONS IN CANADA

We also are actively participating in negotiations between the Forest Products Association of Canada and Natural Resources Canada to define industry obligations for complying with Canada’s national plan for reducing greenhouse gas emissions over the next several years. During 2006, we continued our work with international, national and regional policy makers in their efforts to develop technically sound and economically viable policies, practices and procedures for measuring, reporting and managing greenhouse gas emissions.

POTENTIAL CHANGES IN POLLUTION REGULATION

The U.S. EPA has repealed the regulations promulgated in 2000 that would have required states to develop total maximum daily load (“TMDL”) allocations for pollutants in water bodies determined to be water-quality-impaired. However, states continue to promulgate TMDL requirements. The state TMDL requirements may set limits on pollutants that may be discharged to a body of water or set additional requirements, such as best management practices for non-point sources, including timberland operations, to reduce the amounts of pollutants. It is not possible to estimate the capital expenditures that may be required for the company to meet pollution allocations across the various proposed state TMDL programs until a specific TMDL is promulgated.

» 15

FORWARD-LOOKING STATEMENTS

This report contains statements concerning our future results and performance that are forward-looking statements according to the Private Securities Litigation Reform Act of 1995. These statements:

•

use forward-looking terminology,

•

are based on various assumptions we make and

•

may not be accurate because of risks and uncertainties surrounding the assumptions that we make.

Factors listed in this section – as well as other factors not included – may cause our actual results to differ from our forward-looking statements. There is no guarantee that any of the events anticipated by our forward-looking statements will occur. Or if any of the events occur, there is no guarantee what effect they will have on our operations or financial condition.

We will not update our forward-looking statements after the date of this report.

FORWARD-LOOKING TERMINOLOGY

Some forward-looking statements discuss our plans, strategies and intentions. They use words such as expects, may, will, believes, should, approximately, anticipates, estimates, and plans. In addition, these words may use the positive or negative or a variation of those terms.

STATEMENTS

We make forward-looking statements of our expectations regarding:

•

our markets in the first quarter of 2007;

•

earnings and performance of our business segments during the first quarter of 2007;

•

demand and pricing for our products during the first quarter of 2007;

•

higher domestic log prices during the first quarter of 2007;

•

closing of the combination of our fine paper business and related assets with Domtar Inc. in the first quarter of 2007;

•

increases in manufacturing costs in the Cellulose Fiber and White Papers businesses due to scheduled annual maintenance outages;

•

decline of packaging shipments due to the effect of weather on California produce markets;

•

increases in prices for OCC and wood chips;

•

effect of capital expenditures on our operations;

•

results of execution of our business strategies;

•

cost reduction initiatives;

•

capital expenditures;

•

facility closings and related charges; and

•

new home sales and closings.

In addition, we also base our forward-looking statements on the expected effect of:

•

foreign exchange rates, primarily Canadian and New Zealand;

•

adverse litigation outcomes and the adequacy of reserves;

•

regulations;

•

changes in accounting principles;

•

contributions to pension plans;

•

projected benefit payments;

•

projected tax rates;

•

loss of tax credits; and

•

other related matters.

RISKS, UNCERTAINTIES AND ASSUMPTIONS

The major risks and uncertainties – and assumptions that we make – that affect our business include, but are not limited to:

•

general economic conditions, including the level of interest rates, strength of the U.S. dollar and housing starts;

•

market demand for our products, which is related to the strength of the various U.S. business segments;

•

energy prices;

•

raw material prices;

•

chemical prices;

•

performance of our manufacturing operations including unexpected maintenance requirements;

•

successful execution of our internal performance plans including restructurings and cost reduction initiatives;

•

level of competition from domestic and foreign producers;

•

forestry, land use, environmental and other governmental regulations;

•

weather;

•

loss from fires, floods and other natural disasters;

•

transportation costs;

•

legal proceedings;

•

performance of pension fund investments and derivatives;

•

changes in accounting principles;

•

the effect of timing of retirements and changes in the market price of our common stock on charges for share-based compensation;

•

the failure to obtain government approvals of the Domtar Transaction on the proposed terms and schedule; the failure to obtain approval by shareholders and option holders of Domtar Inc.; and a material adverse change in the business, assets, financial condition or results of operations of Domtar Inc., or the portion of our Cellulose Fiber and White Papers segment to be combined with Domtar Inc.; and

•

the other factors described under “Risk Factors”.

EXPORTING ISSUES

We are a large exporter, affected by changes in:

•

economic activity in Europe and Asia – especially Japan;

•

currency exchange rates – particularly the relative value of the U.S. dollar to the Euro and the Canadian dollar; and

•

restrictions on international trade or tariffs imposed on imports.

16 «

RISK FACTORS

We are subject to certain risks and events that, if one or more of them occur, could adversely affect our business, our financial condition and results of operations and the trading price of our common stock.

You should consider the following risk factors, in addition to the other information presented in this report and the matters described in “Forward-Looking Statements”, as well as the other reports and registration statements we file from time to time with the SEC, in evaluating us, our business and an investment in our securities.

The risks below are not the only risks that we face. Additional risks not currently known to us or that we currently deem immaterial also may adversely affect our business.

RISKS RELATED TO OUR INDUSTRIES AND BUSINESS

CYCLICAL INDUSTRIES

The industries in which we operate are highly cyclical. Fluctuations in the prices of and the demand for our products could result in smaller profit margins and lower sales volumes.

Our businesses are highly cyclical. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates and mortgage interest rates have created cyclical changes in prices, sales volume and margins for our products. The length and magnitude of industry cycles have varied over time and by product, but generally reflect changes in macroeconomic conditions and levels of industry capacity.

Many of our products are commodities that are widely available from other producers. Because commodity products have few distinguishing properties from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand.

The overall levels of demand for the products we manufacture and distribute, and consequently our sales and profitability, reflect fluctuations in levels of end-user demand, which depend in part on general macroeconomic conditions in North America and worldwide and local economic conditions, as well as competition from substitute products.

Changes in the following are some of the factors that may adversely affect our businesses and the results of operations:

•

industrial, non-durable goods production;

•

consumer spending;

•

commercial printing and advertising activity;

•

employment levels;

•

job growth;

•

population growth;

•

consumer confidence;

•

new home construction and repair and remodeling activity;

•

interest rates; and

•

currency exchange rates.

Industry supply of pulp, paper, packaging and wood products also is subject to fluctuation, as changing industry conditions may cause producers to idle or permanently close individual machines or entire mills. In addition, to avoid substantial cash costs in connection with idling or closing a mill, some producers choose to continue to operate at a loss, which could prolong weak prices due to oversupply. Oversupply also may result from producers introducing new capacity in response to favorable short-term pricing trends.

Industry supply of pulp, paper and containerboard also are influenced by overseas production capacity, which has grown in recent years and is expected to continue to grow. While the weakness of the U.S. dollar has mitigated the levels of imports in recent years, imports of pulp, paper and containerboard from overseas may increase, resulting in lower prices.

Prices for our products are affected by many factors outside of our control, and we will have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the prices for our commodity products, the price for any one or more of these products may fall below our cash production costs, requiring us either to incur cash losses on product sales or cease production at one or more of our manufacturing facilities. Our profitability with respect to these products depends on managing our cost structure, particularly raw material and energy costs, which represent significant components of our operating costs and can fluctuate based upon factors beyond our control, as described below. If the prices of or demand for our products decline, or if our raw material or energy costs increase, or both, our sales and profitability could be materially and adversely affected.

LONG-TERM DECLINE IN PAPER DEMAND

Some of our products are vulnerable to long-term declines in demand due to competing technologies or materials.

Our paper business competes with electronic transmission and document storage alternatives, as well as with paper grades it does not produce, such as uncoated groundwood. As a result of such competition, we have experienced decreased demand for some of our existing pulp and paper products. As the use of these alternatives grows, demand for pulp and paper products is likely to further decline. Our corrugated packaging business competes with non-fiber based packaging alternatives, primarily plastics, in several market segments. Changes in prices for oil, petrochemicals and wood-based fiber can change the competitive position of corrugated packaging relative to alternative packaging materials and could increase the substitution of other packaging materials for corrugated packaging.

» 17

CHANGES IN PRODUCT MIX OR PRICING

Our results of operation and financial condition could be materially adversely affected by changes in product mix or pricing.

Our results may be affected by a change in our sales mix. Our outlook assumes a certain volume and product mix of sales. If actual results vary from this projected volume and product mix of sales, our operations and our results could be negatively affected. Our outlook also assumes that we will be successful in implementing previously announced price increases as well as future price increases. Also, delays in acceptance of price increases could negatively affect our results. Moreover, price discounting, if required to maintain our competitive position, could result in lower than anticipated price realizations.

INTENSE COMPETITION

We face intense competition in our markets, and the failure to compete effectively could have a material adverse effect on our business, financial condition and results of operations.

We compete with North American and, for many of our product lines, global producers, some of which may have greater financial resources and lower production costs than we do. The principal basis for competition is selling price. Our ability to maintain satisfactory margins depends in large part on our ability to control our costs. Our industries are also particularly sensitive to other factors including innovation, design, quality and service, with varying emphasis on these factors depending on the product line. To the extent that one or more of our competitors become more successful with respect to any key competitive factor, our ability to attract and retain customers could be materially adversely affected. We cannot assure you that we will be able to compete effectively and maintain current levels of sales and profitability. If we are unable to compete effectively, such failure could have a material adverse effect on our business, financial condition and results of operations.

AVAILABILITY OF RAW MATERIALS AND ENERGY

Our business and operations could be materially adversely affected by changes in the cost or availability of raw materials and energy.

We rely heavily on certain raw materials (principally wood fiber and chemicals) and energy sources (principally natural gas, electricity, coal and fuel oil) in our manufacturing processes. Our ability to increase earnings has been, and will continue to be, affected by changes in the costs and availability of such raw materials and energy sources. We may not be able to fully offset the effects of higher raw material or energy costs through hedging arrangements, price increases, productivity improvements or cost reduction programs.

TRANSPORTATION

We depend on third parties for transportation services and increases in cost and the availability of transportation could materially adversely affect our business and operations.

Our business depends on the transportation of a large number of products, both domestically and internationally. We rely primarily on third parties for transportation of the products we manufacture and/or distribute, as well as delivery of our raw materials. In particular, a significant portion of the goods we manufacture and raw materials we use are transported by railroad or trucks, which are highly regulated.

If any of our third-party transportation providers were to fail to deliver the goods we manufacture or distribute in a timely manner, we may be unable to sell those products at full value, or at all. Similarly, if any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to manufacture our products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them at reasonable cost.

Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could harm our reputation, negatively impact our customer relationships and have a material adverse effect on our financial condition and results of operation.

In addition, an increase in transportation rates or fuel surcharges could materially adversely affect our sales and profitability.

MATERIAL DISRUPTION OF MANUFACTURING

A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our results of operation and financial condition.

Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:

•

unscheduled maintenance outages;

•

prolonged power failures;

•

an equipment failure;

•

a chemical spill or release;

•

explosion of a boiler;

•

the effect of a drought or reduced rainfall on its water supply;

•

labor difficulties;

•

disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels;

•

fires, floods, earthquakes, hurricanes or other catastrophes;

•

terrorism or threats of terrorism;

•

governmental regulations; and

•

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents