DOMTAR ASHDOWN MILL WOODYARD WET DECK 2012 NPDES PERMIT RENEWAL APPLICATION NPDES PERMIT NO. AR0048411

DECEMBER 21, 2012

DOMTAR ASHDOWN MILL WOODYARD WET DECK 2012 NPDES PERMIT RENEWAL APPLICATION NPDES PERMIT NO. AR0048411

Prepared for

Domtar A.W. LLC 285 Highway 71 South Ashdown, AR 71822

Prepared by

FTN Associates, Ltd. 3 Innwood Circle, Suite 220 Little Rock, AR 72211

FTN No. 06395-0100-001

December 21, 2012 ADEQ FORM 1

NPDES PERMIT APPLICATION FORM 1

ARKANSAS DEPARTMENT OF ENVIRONMENTAL QUALITY WATER DIVISION 5301 Northshore Drive North Little Rock, AR 72118-5317 www.adeq.state.ar.us/water

PURPOSE OF THIS APPLICATION INITIAL PERMIT APPLICATION FOR NEW FACILITY INITIAL PERMIT APPLICATION FOR EXISTING FACILITY MODIFICATION OF EXISTING PERMIT REISSUANCE (RENEWAL) OF EXISTING PERMIT MODIFICATION AND CONSTRUCTION OF EXISTING PERMIT CONSTRUCTION PERMIT

SECTION A- GENERAL INFORMATION

1. Operator (Legal) Applicant Name (who has ultimate decision making responsibility over the operation of a facility or activity): Domtar A.W. LLC Note: The legal name of the operator must be identical to the name listed with the Arkansas Secretary of State.

2. Operator Type: Private State Federal Partnership Corporation Other State of Incorporation: Delaware

3. Facility Name: Domtar A.W. LLC - Ashdown Woodyard Wet Deck

4. Is the operator identified in number 1 above, the owner of the facility? Yes No

5. NPDES Permit Number (If Applicable): AR0048411

6. NPDES General Permit Number (If Applicable): ARG

7. NPDES General Storm Water Permit Number (If Applicable):

8. Permit Numbers and/or names of any permits issued by ADEQ or EPA for an activity located in Arkansas that is presently held by the applicant or its parent or subsidiary corporation which are not listed above: Permit Name Permit Number Held by See Page 2a

9. Give driving directions to the wastewater treatment plant with respect to known landmarks: Approximately 16 miles north on Hwy 71 from I-30 in Texarkana. Facility is entered through Woodyard gate (third Domtar gate on left). Turn right at first road past the security checkpoint. Keep left and follow road approx. 1/4 mile to pond on left.

10. Facility Physical Location: (Attach a map with location marked; street, route no. or other specific identifier)

Street: 285 Hwy 71 South City: Ashdown County: Little River State: AR Zip: 71822

Page 2 Revised October 2009 NPDES Permit Renewal Application Domtar A.W. LLC – Ashdown Woodyard Wet Deck AFIN: 41-00002; NPDES: AR0048411

ADEQ Form 1 Page 2a

Section A.8: Permit numbers and/or names of any permits issued by ADEQ or EPA for an activity located in Arkansas that is presently held by the applicant or its parent or subsidiary corporation:

Permit Name Permit Number Held By Title V Air 0287-AOP-R11 Domtar A.W. LLC Hazardous Waste ARD043192988 Domtar A.W. LLC Class III Non-Commercial (Paper Sludge Landfill) 0211-S3N Domtar A.W. LLC Class III Non-Commercial (Mill Trash Landfill) 0244-S3N Domtar A.W. LLC Class III Non-Commercial (Lime Waste Landfill) 0296-S3N Domtar A.W. LLC NPDES AR0002968 Domtar A.W. LLC

11. Facility Mailing Address for permit, DMR, and Invoice (Street or Post Office Box):

Name: Brandon Ayers Title: Senior Environmental Engineer Street: 285 Hwy 71 South P.O. Box City: Ashdown State: AR Zip: 71822 E-mail address*: [email protected] Fax: (870) 898-4724 * Is emailing all documents (permit, letters, DMRs, invoices, etc.) acceptable to the applicant? Yes No 12. Neighboring States Within 20 Miles of the permitted facility (Check all that apply): Oklahoma Missouri Tennessee Louisiana Texas Mississippi 13. Indicate applicable Standard Industrial Classification (SIC) Codes and NAICS codes for primary processes

2411 SIC Facility Activity under this SIC or NAICS: 113310 NAICS Wet Storage of Logs 14. Design Flow: 0 MGD Highest Monthly Average of the last two years Flow: 0 MGD

15. Is Outfall equipped with a diffuser? Yes No

16. Responsible Official (as described on the last page of this application):

Name: Robert C. Grygotis Title: V.P. General Manager Address: 285 Hwy 71 South Phone Number: (870) 898-2711 E-mail Address: City: Ashdown State: AR Zip: 71822 17. Cognizant Official (Duly Authorized Representative of responsible official as describe on the last page of this application):

Name: Steve Smith Title: Production Manager Address: 285 Hwy 71 South Phone Number: (870) 898-2711 E-mail Address: City: Ashdown State: AR Zip: 71822 18. Name, address and telephone number of active consulting engineer firm (If none, so state):

Contact Name: Raymond E. Wieda, PE Company Name: FTN Associates, Ltd. Address: 3 Innwood Circle, Suite 220 Phone Number: (501) 225-7779 E-mail Address: [email protected] City: Little Rock State: AR Zip: 72211 19. Wastewater Operator Information

Wastewater Operator Name: C. Brandon Ayers License number: 009656 Class of municipal wastewater operator: I II III IV Class of industrial wastewater operator: Basic Advanced

Page 3 Revised October 2009

SECTION B: FACILITY AND OUTFALL INFORMATION

1. Facility Location (All information must be based on front door (Gate) location of the facility):

Little Nearest Ashdow Lat: 33  38 ‘ 37.41 “ Long: 94  06 ‘ 26.27 “County: River Town: n

2. Outfall Location (The location of the end of the pipe Discharge point.):

Outfall No. 001:

Latitude: 33  38 ’ 47 ” Longitude: 94  06 ’ 45 ” Where is the collection point? Outfall 001 Name of Receiving Stream (i.e. an unnamed tributary of Mill Creek, thence into Mill Creek; thence into Arkansas River): unnamed tributary of Hudson Creek, thence to Hudson Creek, thence to the Red River

Outfall No. :

Latitude:  ’ ” Longitude:  ’ ” Where is the collection point? Name of Receiving Stream (i.e. an unnamed tributary of Mill Creek, thence into Mill Creek; thence into Arkansas River):

3. Monitoring Location (If the monitoring is conducted at a location different than the above Outfall location):

Outfall No. :

Lat:  ‘ “ Long:  ‘ “

Outfall No. :

Lat:  ‘ “ Long:  ‘ “

Outfall No. :

Lat:  ‘ “ Long:  ‘ “

4. Type of Treatment system (Included all components of treatment system and Attach the process flow diagram):

See Page 4a.

Page 4 Revised October 2009 NPDES Permit Renewal Application Domtar A.W. LLC – Ashdown Woodyard Wet Deck AFIN: 41-00002; NPDES: AR0048411

ADEQ Form 1 Page 4a

Section B.4: Type of Treatment System:

This permit application is for the operation of a log wet deck at Domtar’s Ashdown Paper Mill. The wet deck is adjacent to the Paper Mill Operation, but the spray water collection pond overflow is permitted as a separate discharge. Hardwood and pine logs are stacked in rows that allow water spray to keep the logs wet to reduce the rate of decay of the wood. The water sprays are connected to a common pressure header system. The water supplied to the header comes from a pump station that recycles water from a collection pond. Berms and ditches that surround the log storage area direct spray water back to the collection pond to be reused. If due to evaporation the collection pond level becomes too low, makeup water is supplied from a well at the site. The pond is operated, especially during historically high rainfall months, at as low a level as possible to accommodate runoff from a 10-year, 24-hour storm event. Once the pond reaches a level that no longer provides sufficient runoff capacity, a bypass valve from the spray recirculation pumps is opened. The bypass diverts the excess water to a storm water collection ditch that drains to the mill wastewater treatment system. The need to divert excess water only arises once every 2 to 3 years. There has been no discharge from the NPDES permitted discharge point since 2001 because of the ability to divert excess water from the collection pond.

5. Do you have, or plan to have, automatic sampling equipment or continuous wastewater flow metering equipment at this facility?

Current: Flow Metering Yes Type: ______No N/A Sampling Equipment Yes Type: ______No N/A

Planned: Flow Metering Yes Type: ______No N/A Sampling Equipment Yes Type: ______No N/A

If yes, please indicate the present or future location of this equipment on the sewer schematic and describe the equipment below:

6. Is the proposed or existing facility located above the 100-year flood level? Yes No

NOTE: FEMA Map must be included with this application. Maps can be ordered at www.fema.gov .

If "No", what measures are (or will be) used to protect the facility?

7. Population for Municipal and Domestic Sewer Systems: NA

8. Backup Power Generation for Treatment Plants

Are there any permanent backup generators? Yes No If Yes, How many? Total Horespower (hp)? If No, Please explain? redundant power supply (onsite and SWEPCO)

Page 5 Revised October 2009

SECTION C – WASTE STORAGE AND DISPOSAL INFORMATION

1. Sludge Disposal Method (Check as many as are applicable):

Landfill

Landfill Site Name ADEQ Solid Waste Permit No.

Land Application: ADEQ State Permit No.

Septic tank Arkansas Department of Health Permit No.:

Distribution and Marketing: Facility receiving sludge:

Name: Address: City: State: Zip: Phone: Rail: Pipe: Other:

Subsurface Disposal (Lagooning):

Location of lagoon How old is the lagoon? Surface area of lagoon: Acre Depth: ft Does lagoon have a liner? Yes No

Incineration: Location of incinerator

Remains in Treatment Lagoon(s):

How old is the lagoon(s)? Has sludge depth been measured? Yes No If Yes, Date measured? Sludge Depth? ft If No, When will it be measured? Has sludge ever been removed? Yes No If Yes, When was it removed?

Other (Provide complete description):

Page 6 Revised October 2009

SECTION D - WATER SUPPLY

Water Sources (check as many as are applicable):

Private Well - Distance from Discharge point: Within 5 miles Within 50 miles

Municipal Water Utility (Specify City):

Distance from Discharge point: Within 5 miles Within 50 miles

Surface Water- Name of Surface Water Source: Millwood Lake

Distance from Discharge point: Within 5 miles Within 50 miles

Lat:  ‘ “ Long:  ‘ “

Other (Specify): Little River Rural Development Authority

Distance from Discharge point: Within 5 miles Within 50 miles

Page 7 Revised October 2009

SECTION E: FINANCIAL ASSURANCE AND DISCLOSURE STATEMENT

1. Act 409 of the 2009 Regular Session of the Arkansas Legislature (Act 409) provides for financial assurance requirements for permitting non-municipal domestic sewage treatment systems. Arkansas Code 8-4-203 (b)(1)(A)(i) – “The department shall not issue, modify, or renew a National Pollutant Discharge Elimination System permit or state permit for a non-municipal domestic sewage treatment works without the permit applicant first demonstrating to the department its financial ability to cover the estimated costs of operating and maintaining the non-municipal domestic sewage treatment works for a minimum period of five (5) years.”

The applicant must provide a detailed estimate of the operation and maintenance (O&M) costs for the facility for a five year period. Once the O&M estimate is approved, the applicant must provide financial assurance in order to show that the facility is able to cover the costs of operating and maintaining the treatment system for the next five years.

The minimal financial assurance may be demonstrated to the department by using the following as outlined in Arkansas Code 8- 4-203(b)(2):

A. Obtaining insurance that specifically covers operation and maintenance costs B. Obtaining a letter of credit; C. Obtaining a surety/performance bond; D. Obtaining a trust fund or an escrow account; or E. Using a combination of insurance, letter of credit, surety bond, trust fund, or escrow account.

2. Disclosure Statement:

Arkansas Code Annotated Section 8-1-106 requires that all applicants for any type of permit or transfer of any permit, license, certification or operational authority issued by the Arkansas Department of Environmental Quality (ADEQ) file a Disclosure Statement with their application. The filing of a Disclosure Statement is mandatory. No application can be considered administratively complete without a completed Disclosure Statement. The form may be obtained from the ADEQ web site at:

http://www.adeq.state.ar.us/disclosure_stmt.pdf

Page 8 Revised October 2009

SECTION F – INDUSTRIAL ACTIVITY

1. Does an effluent guideline limitation promulgated by EPA (Link to a Listing of the 40 CFR Effluent Limit Guidelines) under Section 304 of the Clean Water Act (CWA) apply to your facility?

YES (Answer questions 2 and 3) NO

2. What Part of 40 CFR? 429

3. What Subpart(s)? I

4. Give a brief description of all operations at this facility including primary products or services (attach additional sheets if necessary):

See Page 4a

5. Production: (projected for new facilities)

Last 12 Months Highest Production Year of Last 5 Years Product(s) Manufactured lbs/day* lbs/day* (Brand name) Highest Month Days of Operation Monthly Average Days of Operation Limits are not based on production

* These units could be off-lbs, lbs quenched, lbs cleaned/etched/rinsed, lbs poured, lbs extruded, etc.

Page 9 Revised October 2009

SECTION G - WASTEWATER DISCHARGE INFORMATION

Facilities that checked “Yes” in question 1 of Section F are considered Categorical Industrial Users and should skip to question 2.

1. For Non-Categorical Users Only: List average wastewater discharge, maximum discharge, and type of discharge (batch, continuous, or both), for each plant process. Include the reference number from the process flow schematic (reference Figure 1) that corresponds to each process. [New facilities should provide estimates for each discharge.]

Average Flow Maximum Flow Type of Discharge No. Process Description (GPD) (GPD) (batch, continuous, none)

If batch discharge occurs or will occur, indicate: [New facilities may estimate.]

Number of batch discharges: per day Average discharge per batch: (GPD)

Time of batch discharges at (days of week) (hours of day)

Flow rate: gallons/minute Percent of total discharge:

Answer questions 2, 3, and 4 only if you are subject to Categorical Standards.

2. For Categorical Users: Provide the wastewater discharge flows for each of your processes or proposed processes. Include the reference number from the process flow schematic (reference Figure 1) that corresponds to each process. [Note: 1) New facilities should provide estimates for each discharge and 2) Facilities should denote whether the flow was measured or estimated.]

Average Flow Maximum Flow Type of Discharge No. Regulated Process (GPD) (GPD) (batch, continuous, none) Wet Log Storage 0 0 None

Average Flow Maximum Flow Type of Discharge No. Unregulated Process (GPD) (GPD) (batch, continuous, none)

Page 10 Revised October 2009

Dilution Average Flow Maximum Flow Type of Discharge No. (e.g., Cooling Water) (GPD) (GPD) (batch, continuous, none) Stormwater 0 0 None

If batch discharge occurs or will occur, indicate: [New facilities may estimate.]

Number of batch discharges: per day Average discharge per batch: (GPD)

Time of batch discharges at (days of week) (hours of day)

Flow rate: gallons/minute Percent of total discharge:

3. Do you have, or plan to have, automatic sampling equipment or continuous wastewater flow metering equipment at this facility?

Current: Flow Metering Yes Type: ______No N/A Sampling Equipment Yes Type: ______No N/A

Planned: Flow Metering Yes Type: ______No N/A Sampling Equipment Yes Type: ______No N/A

If yes, please indicate the present or future location of this equipment on the sewer schematic and describe the equipment below:

4. Are any process changes or expansions planned during the next three years that could alter wastewater volumes or characteristics?

Yes No (If no, skip Question 5)

5. Briefly describe these changes and their effects on the wastewater volume and characteristics:

Page 11 Revised October 2009

SECTION H -TECHNICAL INFORMATION

Technical information to support this application shall be furnished in appropriate detail to understand the project. Information in this Part is required for obtaining a construction permit or for modification of the treatment system.

1. Describe the treatment system. Include the types of control equipment to be installed along with their methods of operation and control efficiency.

2. One set of construction plans and specifications, approved (Signed and stamped) by a Professional Engineer (PE) registered in Arkansas, must be submitted as follows:

a. The plans must show flow rates in addition to pertinent dimensions so that detention times, overflow rates, and loadings per acre, etc. can be calculated. b. Specifications and complete design calculations. c. All treated wastewater discharges should have a flow measuring device such as a weir or Parshall flume installed. Where there is a significant difference between the flow rates of the raw and treated wastewater, a flow measuring device should be provided both before and after treatment.

3. If this application includes a construction permit disturbing five or more acres, a storm water construction permit must be obtained by submitting a notice of intent (NOI) to ADEQ.

Page 12 Revised October 2009

EPA FORM 2C

EPA I.D. NUMBER (copy from Item 1 of Form 1) Form Approved. OMB No. 2040-0086. Please print or type in the unshaded areas only. Approval expires 3-31-98.

FORM U.S. ENVIRONMENTAL PROTECTION AGENCY APPLICATION FOR PERMIT TO DISCHARGE WASTEWATER 2C EXISTING MANUFACTURING, COMMERCIAL, MINING AND SILVICULTURE OPERATIONS NPDES Consolidated Permits Program I. OUTFALL LOCATION For each outfall, list the latitude and longitude of its location to the nearest 15 seconds and the name of the receiving water. A. OUTFALL NUMBER B. LATITUDE C. LONGITUDE (list) 1. DEG. 2. MIN. 3. SEC. 1. DEG. 2. MIN. 3. SEC. D. RECEIVING WATER (name)

II. FLOWS, SOURCES OF POLLUTION, AND TREATMENT TECHNOLOGIES A. Attach a line drawing showing the water flow through the facility. Indicate sources of intake water, operations contributing wastewater to the effluent, and treatment units labeled to correspond to the more detailed descriptions in Item B. Construct a water balance on the line drawing by showing average flows between intakes, operations, treatment units, and outfalls. If a water balance cannot be determined (e.g., for certain mining activities), provide a pictorial description of the nature and amount of any sources of water and any collection or treatment measures. B. For each outfall, provide a description of: (1) All operations contributing wastewater to the effluent, including process wastewater, sanitary wastewater, cooling water, and storm water runoff; (2) The average flow contributed by each operation; and (3) The treatment received by the wastewater. Continue on additional sheets if necessary. 2. OPERATION(S) CONTRIBUTING FLOW 3. TREATMENT 1. OUT- FALL b. AVERAGE FLOW b. LIST CODES FROM NO. (list) a. OPERATION (list) (include units) a. DESCRIPTION TABLE 2C-1

OFFICIAL USE ONLY (effluent guidelines sub-categories)

EPA Form 3510-2C (8-90) PAGE 1 of 4 CONTINUE ON REVERSE CONTINUED FROM THE FRONT C. Except for storm runoff, leaks, or spills, are any of the discharges described in Items II-A or B intermittent or seasonal? YES (complete the following table) NO (go to Section III)

3. FREQUENCY 4. FLOW

a. DAYS PER B. TOTAL VOLUME 2. OPERATION(s) WEEK b. MONTHS a. FLOW RATE (in mgd) (specify with units) 1. OUTFALL CONTRIBUTING FLOW (specify PER YEAR 1. LONG TERM 2. MAXIMUM 1. LONG TERM 2. MAXIMUM C. DURATION NUMBER (list) (list) average) (specify average) AVERAGE DAILY AVERAGE DAILY (in days)

III. PRODUCTION A. Does an effluent guideline limitation promulgated by EPA under Section 304 of the Clean Water Act apply to your facility? YES (complete Item III-B) NO (go to Section IV) B. Are the limitations in the applicable effluent guideline expressed in terms of production (or other measure of operation)? YES (complete Item III-C) NO (go to Section IV) C. If you answered “yes” to Item III-B, list the quantity which represents an actual measurement of your level of production, expressed in the terms and units used in the applicable effluent guideline, and indicate the affected outfalls. 1. AVERAGE DAILY PRODUCTION 2. AFFECTED OUTFALLS c. OPERATION, PRODUCT, MATERIAL, ETC. a. QUANTITY PER DAY b. UNITS OF MEASURE (list outfall numbers) (specify)

IV. IMPROVEMENTS A. Are you now required by any Federal, State or local authority to meet any implementation schedule for the construction, upgrading or operations of wastewater treatment equipment or practices or any other environmental programs which may affect the discharges described in this application? This includes, but is not limited to, permit conditions, administrative or enforcement orders, enforcement compliance schedule letters, stipulations, court orders, and grant or loan conditions. YES (complete the following table) NO (go to Item IV-B)

1. IDENTIFICATION OF CONDITION, 2. AFFECTED OUTFALLS 4. FINAL COMPLIANCE DATE 3. BRIEF DESCRIPTION OF PROJECT AGREEMENT, ETC. a. NO. b. SOURCE OF DISCHARGE a. REQUIRED b. PROJECTED

B. OPTIONAL: You may attach additional sheets describing any additional water pollution control programs (or other environmental projects which may affect your discharges) you now have underway or which you plan. Indicate whether each program is now underway or planned, and indicate your actual or planned schedules for construction. MARK “X” IF DESCRIPTION OF ADDITIONAL CONTROL PROGRAMS IS ATTACHED EPA Form 3510-2C (8-90) PAGE 2 of 4 CONTINUE ON PAGE 3 EPA I.D. NUMBER (copy from Item 1 of Form 1)

CONTINUED FROM PAGE 2 V. INTAKE AND EFFLUENT CHARACTERISTICS A, B, & C: See instructions before proceeding – Complete one set of tables for each outfall – Annotate the outfall number in the space provided. NOTE: Tables V-A, V-B, and V-C are included on separate sheets numbered V-1 through V-9. D. Use the space below to list any of the pollutants listed in Table 2c-3 of the instructions, which you know or have reason to believe is discharged or may be discharged from any outfall. For every pollutant you list, briefly describe the reasons you believe it to be present and report any analytical data in your possession. 1. POLLUTANT 2. SOURCE 1. POLLUTANT 2. SOURCE

VI. POTENTIAL DISCHARGES NOT COVERED BY ANALYSIS Is any pollutant listed in Item V-C a substance or a component of a substance which you currently use or manufacture as an intermediate or final product or byproduct? YES (list all such pollutants below ) NO (go to Item VI-B)

EPA Form 3510-2C (8-90) PAGE 3 of 4 CONTINUE ON REVERSE

PLEASE PRINT OR TYPE IN THE UNSHADED AREAS ONLY. You may report some or all of this information EPA I.D. NUMBER (copy from Item 1 of Form 1) on separate sheets (use the same format) instead of completing these pages. SEE INSTRUCTIONS. OUTFALL NO. V. INTAKE AND EFFLUENT CHARACTERISTICS (continued from page 3 of Form 2-C)

PART A –You must provide the results of at least one analysis for every pollutant in this table. Complete one table for each outfall. See instructions for additional details. 3. UNITS 4. INTAKE 2. EFFLUENT (specify if blank) (optional) b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. VALUE a. LONG TERM a. MAXIMUM DAILY VALUE (if available) (if available) AVERAGE VALUE (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF 1. POLLUTANT CONCENTRATION (2) MASS CONCENTRATION (2) MASS (1) CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES a. Biochemical Oxygen Demand (BOD) b. Chemical Oxygen Demand (COD) c. Total Organic Carbon (TOC) d. Total Suspended Solids (TSS)

e. Ammonia (as N)

VALUE VALUE VALUE VALUE f. Flow

g. Temperature VALUE VALUE VALUE VALUE °C (winter) h. Temperature VALUE VALUE VALUE VALUE °C (summer) MINIMUM MAXIMUM MINIMUM MAXIMUM i. pH STANDARD UNITS

PART B – Mark “X” in column 2-a for each pollutant you know or have reason to believe is present. Mark “X” in column 2-b for each pollutant you believe to be absent. If you mark column 2a for any pollutant which is limited either directly, or indirectly but expressly, in an effluent limitations guideline, you must provide the results of at least one analysis for that pollutant. For other pollutants for which you mark column 2a, you must provide quantitative data or an explanation of their presence in your discharge. Complete one table for each outfall. See the instructions for additional details and requirements. 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. VALUE a. LONG TERM AVERAGE AND a. b. a. MAXIMUM DAILY VALUE (if available) (if available) VALUE CAS NO. BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES a. Bromide (24959-67-9) b. Chlorine, Total Residual

c. Color

d. Fecal Coliform

e. Fluoride (16984-48-8) f. Nitrate-Nitrite (as N) EPA Form 3510-2C (8-90) PAGE V-1 CONTINUE ON REVERSE ITEM V-B CONTINUED FROM FRONT 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. VALUE a. LONG TERM AND a. b. a. MAXIMUM DAILY VALUE (if available) (if available) AVERAGE VALUE CAS NO. BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES g. Nitrogen, Total Organic (as N) h. Oil and Grease i. Phosphorus (as P), Total (7723-14-0) j. Radioactivity

(1) Alpha, Total

(2) Beta, Total

(3) Radium,

Total (4) Radium 226,

Total k. Sulfate (as SO4) (14808-79-8) l. Sulfide

(as S) m. Sulfite (as SO3) (14265-45-3) n. Surfactants o. Aluminum, Total (7429-90-5) p. Barium, Total

(7440-39-3) q. Boron, Total

(7440-42-8) r. Cobalt, Total

(7440-48-4) s. Iron, Total

(7439-89-6) t. Magnesium, Total (7439-95-4) u. Molybdenum, Total (7439-98-7) v. Manganese, Total (7439-96-5) w. Tin, Total

(7440-31-5) x. Titanium, Total (7440-32-6)

EPA Form 3510-2C (8-90) PAGE V-2 CONTINUE ON PAGE V-3

EPA I.D. NUMBER (copy from Item 1 of Form 1) OUTFALL NUMBER

CONTINUED FROM PAGE 3 OF FORM 2-C PART C - If you are a primary industry and this outfall contains process wastewater, refer to Table 2c-2 in the instructions to determine which of the GC/MS fractions you must test for. Mark “X” in column 2-a for all such GC/MS fractions that apply to your industry and for ALL toxic metals, cyanides, and total phenols. If you are not required to mark column 2-a (secondary industries, nonprocess wastewater outfalls, and nonrequired GC/MS fractions), mark “X” in column 2-b for each pollutant you know or have reason to believe is present. Mark “X” in column 2-c for each pollutant you believe is absent. If you mark column 2a for any pollutant, you must provide the results of at least one analysis for that pollutant. If you mark column 2b for any pollutant, you must provide the results of at least one analysis for that pollutant if you know or have reason to believe it will be discharged in concentrations of 10 ppb or greater. If you mark column 2b for acrolein, acrylonitrile, 2,4 dinitrophenol, or 2-methyl-4, 6 dinitrophenol, you must provide the results of at least one analysis for each of these pollutants which you know or have reason to believe that you discharge in concentrations of 100 ppb or greater. Otherwise, for pollutants for which you mark column 2b, you must either submit at least one analysis or briefly describe the reasons the pollutant is expected to be discharged. Note that there are 7 pages to this part; please review each carefully. Complete one table (all 7 pages) for each outfall. See instructions for additional details and requirements. 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. a. LONG TERM AND a. b. c. a. MAXIMUM DAILY VALUE (if available) VALUE (if available) AVERAGE VALUE CAS NUMBER TESTING BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) REQUIRED PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES METALS, CYANIDE, AND TOTAL PHENOLS 1M. Antimony, Total

(7440-36-0) 2M. Arsenic, Total

(7440-38-2) 3M. Beryllium, Total

(7440-41-7) 4M. Cadmium, Total

(7440-43-9) 5M. Chromium,

Total (7440-47-3) 6M. Copper, Total

(7440-50-8) 7M. Lead, Total

(7439-92-1) 8M. Mercury, Total

(7439-97-6) 9M. Nickel, Total

(7440-02-0) 10M. Selenium,

Total (7782-49-2) 11M. Silver, Total

(7440-22-4) 12M. Thallium,

Total (7440-28-0) 13M. Zinc, Total

(7440-66-6) 14M. Cyanide,

Total (57-12-5) 15M. Phenols,

Total DIOXIN 2,3,7,8-Tetra- DESCRIBE RESULTS chlorodibenzo-P- Dioxin (1764-01-6) EPA Form 3510-2C (8-90) PAGE V-3 CONTINUE ON REVERSE CONTINUED FROM THE FRONT 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. a. LONG TERM AND a. b. c. a. MAXIMUM DAILY VALUE (if available) VALUE (if available) AVERAGE VALUE CAS NUMBER TESTING BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) REQUIRED PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES GC/MS FRACTION – VOLATILE COMPOUNDS 1V. Accrolein

(107-02-8) 2V. Acrylonitrile

(107-13-1) 3V. Benzene

(71-43-2) 4V. Bis (Chloro- methyl) Ether (542-88-1) 5V. Bromoform

(75-25-2) 6V. Carbon Tetrachloride (56-23-5) 7V. Chlorobenzene

(108-90-7) 8V. Chlorodi- bromomethane (124-48-1) 9V. Chloroethane

(75-00-3) 10V. 2-Chloro- ethylvinyl Ether (110-75-8) 11V. Chloroform

(67-66-3) 12V. Dichloro- bromomethane (75-27-4) 13V. Dichloro- difluoromethane (75-71-8) 14V. 1,1-Dichloro- ethane (75-34-3) 15V. 1,2-Dichloro- ethane (107-06-2) 16V. 1,1-Dichloro- ethylene (75-35-4) 17V. 1,2-Dichloro- propane (78-87-5) 18V. 1,3-Dichloro- propylene (542-75-6) 19V. Ethylbenzene

(100-41-4) 20V. Methyl

Bromide (74-83-9) 21V. Methyl

Chloride (74-87-3)

EPA Form 3510-2C (8-90) PAGE V-4 CONTINUE ON PAGE V-5 CONTINUED FROM PAGE V-4 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. a. LONG TERM AND a. b. c. a. MAXIMUM DAILY VALUE (if available) VALUE (if available) AVERAGE VALUE CAS NUMBER TESTING BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) REQUIRED PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES GC/MS FRACTION – VOLATILE COMPOUNDS (continued) 22V. Methylene

Chloride (75-09-2) 23V. 1,1,2,2- Tetrachloroethane (79-34-5) 24V. Tetrachloro- ethylene (127-18-4) 25V. Toluene

(108-88-3) 26V. 1,2-Trans- Dichloroethylene (156-60-5) 27V. 1,1,1-Trichloro- ethane (71-55-6) 28V. 1,1,2-Trichloro- ethane (79-00-5) 29V Trichloro- ethylene (79-01-6) 30V. Trichloro- fluoromethane (75-69-4) 31V. Vinyl Chloride

(75-01-4) GC/MS FRACTION – ACID COMPOUNDS 1A. 2-Chlorophenol

(95-57-8) 2A. 2,4-Dichloro- phenol (120-83-2) 3A. 2,4-Dimethyl- phenol (105-67-9) 4A. 4,6-Dinitro-O-

Cresol (534-52-1) 5A. 2,4-Dinitro- phenol (51-28-5) 6A. 2-Nitrophenol

(88-75-5) 7A. 4-Nitrophenol

(100-02-7) 8A. P-Chloro-M-

Cresol (59-50-7) 9A. Pentachloro- phenol (87-86-5) 10A. Phenol

(108-95-2) 11A. 2,4,6-Trichloro- phenol (88-05-2)

EPA Form 3510-2C (8-90) PAGE V-5 CONTINUE ON REVERSE CONTINUED FROM THE FRONT 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. a. LONG TERM AND a. b. c. a. MAXIMUM DAILY VALUE (if available) VALUE (if available) AVERAGE VALUE CAS NUMBER TESTING BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) REQUIRED PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES GC/MS FRACTION – BASE/NEUTRAL COMPOUNDS 1B. Acenaphthene (83-32-9) 2B. Acenaphtylene (208-96-8) 3B. Anthracene (120-12-7) 4B. Benzidine (92-87-5) 5B. Benzo (a) Anthracene (56-55-3) 6B. Benzo (a) Pyrene (50-32-8) 7B. 3,4-Benzo- fluoranthene (205-99-2) 8B. Benzo (ghi) Perylene (191-24-2) 9B. Benzo (k) Fluoranthene (207-08-9) 10B. Bis (2-Chloro- ethoxy) Methane (111-91-1) 11B. Bis (2-Chloro- ethyl) Ether (111-44-4) 12B. Bis (2- Chloroisopropyl) Ether (102-80-1) 13B. Bis (2-Ethyl- hexyl) Phthalate (117-81-7) 14B. 4-Bromophenyl Phenyl Ether (101-55-3) 15B. Butyl Benzyl Phthalate (85-68-7) 16B. 2-Chloro- naphthalene (91-58-7) 17B. 4-Chloro- phenyl Phenyl Ether (7005-72-3) 18B. Chrysene (218-01-9) 19B. Dibenzo (a,h) Anthracene (53-70-3) 20B. 1,2-Dichloro- benzene (95-50-1) 21B. 1,3-Di-chloro- benzene (541-73-1) EPA Form 3510-2C (8-90) PAGE V-6 CONTINUE ON PAGE V-7 CONTINUED FROM PAGE V-6 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. a. LONG TERM AND a. b. c. a. MAXIMUM DAILY VALUE (if available) VALUE (if available) AVERAGE VALUE CAS NUMBER TESTING BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) REQUIRED PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES GC/MS FRACTION – BASE/NEUTRAL COMPOUNDS (continued) 22B. 1,4-Dichloro- benzene (106-46-7) 23B. 3,3-Dichloro- benzidine (91-94-1) 24B. Diethyl

Phthalate (84-66-2) 25B. Dimethyl Phthalate (131 -11-3) 26B. Di-N-Butyl

Phthalate (84-74-2) 27B. 2,4-Dinitro- toluene (121-14-2) 28B. 2,6-Dinitro- toluene (606-20-2) 29B. Di-N-Octyl

Phthalate (117-84-0) 30B. 1,2-Diphenyl- hydrazine (as Azo- benzene) (122-66-7) 31B. Fluoranthene

(206-44-0) 32B. Fluorene

(86-73-7) 33B. Hexachloro- benzene (118-74-1) 34B. Hexachloro- butadiene (87-68-3) 35B. Hexachloro- cyclopentadiene (77-47-4) 36B Hexachloro- ethane (67-72-1) 37B. Indeno (1,2,3-cd) Pyrene (193-39-5) 38B. Isophorone

(78-59-1) 39B. Naphthalene

(91-20-3) 40B. Nitrobenzene

(98-95-3) 41B. N-Nitro- sodimethylamine (62-75-9) 42B. N-Nitrosodi- N-Propylamine (621-64-7) EPA Form 3510-2C (8-90) PAGE V-7 CONTINUE ON REVERSE CONTINUED FROM THE FRONT 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. a. LONG TERM AND a. b. c. a. MAXIMUM DAILY VALUE (if available) VALUE (if available) AVERAGE VALUE CAS NUMBER TESTING BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) REQUIRED PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES GC/MS FRACTION – BASE/NEUTRAL COMPOUNDS (continued) 43B. N-Nitro- sodiphenylamine (86-30-6) 44B. Phenanthrene

(85-01-8) 45B. Pyrene

(129-00-0) 46B. 1,2,4-Tri- chlorobenzene (120-82-1) GC/MS FRACTION – PESTICIDES 1P. Aldrin

(309-00-2)

2P. α-BHC (319-84-6)

3P. β-BHC (319-85-7)

4P. γ-BHC (58-89-9)

5P. δ-BHC (319-86-8) 6P. Chlordane

(57-74-9) 7P. 4,4’-DDT

(50-29-3) 8P. 4,4’-DDE

(72-55-9) 9P. 4,4’-DDD

(72-54-8) 10P. Dieldrin

(60-57-1)

11P. α-Enosulfan (115-29-7)

12P. β-Endosulfan (115-29-7) 13P. Endosulfan Sulfate (1031-07-8) 14P. Endrin

(72-20-8) 15P. Endrin Aldehyde (7421-93-4) 16P. Heptachlor

(76-44-8) EPA Form 3510-2C (8-90) PAGE V-8 CONTINUE ON PAGE V-9

EPA I.D. NUMBER (copy from Item 1 of Form 1) OUTFALL NUMBER

CONTINUED FROM PAGE V-8 2. MARK “X” 3. EFFLUENT 4. UNITS 5. INTAKE (optional) 1. POLLUTANT b. MAXIMUM 30 DAY VALUE c. LONG TERM AVRG. a. LONG TERM AND a. b. c. a. MAXIMUM DAILY VALUE (if available) VALUE (if available) AVERAGE VALUE CAS NUMBER TESTING BELIEVED BELIEVED (1) (1) (1) d. NO. OF a. CONCEN- (1) b. NO. OF (if available) REQUIRED PRESENT ABSENT CONCENTRATION (2) MASS CONCENTRATION (2) MASS CONCENTRATION (2) MASS ANALYSES TRATION b. MASS CONCENTRATION (2) MASS ANALYSES GC/MS FRACTION – PESTICIDES (continued) 17P. Heptachlor Epoxide (1024-57-3) 18P. PCB-1242

(53469-21-9) 19P. PCB-1254

(11097-69-1) 20P. PCB-1221

(11104-28-2) 21P. PCB-1232

(11141-16-5) 22P. PCB-1248

(12672-29-6) 23P. PCB-1260

(11096-82-5) 24P. PCB-1016

(12674-11-2) 25P. Toxaphene

(8001-35-2)

EPA Form 3510-2C (8-90) PAGE V-9

DISCLOSURE STATEMENT

In lieu of a Disclosure Statement, electronic copies of the most recent Domtar Corporation quarterly (10-Q) and annual (10-K) filings with the Securities and Exchange Commission have been included on the enclosed CD. ATTACHMENTS

ATTACHMENT 1 FIRM Map

ATTACHMENT 2 Location Maps PROJECT LOCATION

R:\CAD\CAD_PROJ\6395-030\DWG\6395-030-LM01.DWG

Vicinity map.

R:\CAD\CAD_PROJ\6395-030\DWG\6395-030-QD01.DWG

ATTACHMENT 3 Site Map R:\CAD\CAD_PROJ\6395-030\DWG\6395-030-AP01.DWG

ATTACHMENT 4 Flow Diagram/Water Balance

2011 AnnuAl RepoRt

IT’S IN OUR FIBER

Meagan Walker Senior Process Engineer Ashdown, Arkansas We’re not just a fiber company. We’re a company of fiber.

Our visiOn Our MissiOn To be the leader in innovating fiber-based As a world-class industry leader we deliver products, technologies, and services; the highest value to our customers, empower committed to a sustainable and better future. our employees to excel, and positively impact our communities.

Our values AGILE Our industry is CARING The people of INNOVATIVE We always constantly changing. And Domtar care for each other. look to the future we will be the ones leading We treat each other with beyond the horizon. We’re the way. When we need compassion and respect. never satisfied with things to change course, we do We look out for each as they are; we always it. We are doers, not other’s safety as well as want to make them better, talkers. But when we act, our own. We never forget and we work together we act thoughtfully. We that our company is woven to do it. We bring our have the power to make into the fabric of our resourcefulness and decisions for the benefit of communities, and we treat creativity to bear for our company and our environmental stewardship long‑term success. customers. We’re always as a sacred trust. We care We relish challenges of all looking for simpler, more deeply for our customers kinds, whether they come efficient ways to work. and invest ourselves fully from our clients or from in their success. within, and never rest until we’ve solved them.

Our strategic Objectives TO GROw and find ways TO REduCE VOLATILITy TO CREATE VALuE to become less vulnerable in our earnings profile by over time by using our to the secular decline of increasing the visibility and capital wisely. uncoated freesheet paper predictability of our cash demand. flows. IT’S IN Jan Martin Events, Fulfillment & CommunicationsManager Fort Mill, MY South Carolina FIBER tO be agile We strive tO lead Our industry by cOntinually iMprOving the Way We WOrk.

e’re living in an ever-changing business envi- look for new ways of doing things. I’m empowered to do this for ronment. Instead of viewing this as a threat, the benefit of my colleagues, my team and the company. I see it as an opportunity for me to excel and

Domtar has a powerful story to tell about our commitment to the environment, our products and services, and our customers, and I am excited about the new possibilities that our fiber can lead us to. I want to be part of this journey and I know my agility will be required. MarianikManager, Leduc, cA

General Accounting Montreal, Quebec

IT’S IN MY FIBER tO be caring We care abOut Our custOMers, Our cOMMunities and each Other.

eing caring is holding the safety of our people and the to spread this mindset outside of the walls of Domtar, whenever environment above all else. It’s coming to work each I deal with customers and stakeholders. Our daily business morning and knowing I can expect a positive and decisions are interwoven with the future of our communities and respectful atmosphere, where employee wellness is our planet—we must never lose sight of this. Bnot viewed as an expense, but a true commitment. It’s choosing

My work requires attention to detail and as a member of the corporate finance team, I am proud of my role and the service I offer my clients. It is motivating that Domtar offers me the opportunity to better myself, break new ground and thrive for years to come. This is the fiber of my company. Deion Mucker Process Tester,

H2 PaperHawesville, Machine Kentucky IT’S IN MY FIBER to be innovative We are resourceful, creative and collaborative.

e’re already a leader in environmentally and without teamwork and talking to clients to understand their socially responsible paper products; we’re now own challenges, needs, and goals. It’s not always about coming developing strong, groundbreaking materials up with the boldest proposition—small improvements can make from fiber that have the potential to lead to a big difference, and I’m on a daily mission to find them. Wpromising new applications. None of this could be possible

The Domtar brand brings a promise of quality. As a technician, I know it is important that I execute my tasks with precision every time. Being innovative in my work is about adapting to new ways of testing our products and this is what makes my job exciting! Selected Financial FigureS (In millions of dollars, unless otherwise noted)

2009 2010 2011 Consolidated sales $5,465 $5,850 $5,612 Operating income (loss) per segment Pulp and paper 650 667 581 Distribution 7 (3) – Personal care –– 7 Wood1 (42) (54) – Corporate – (7) 4 Operating income 615 603 592 Net earnings 310 605 365 Cash flow provided from operating activities 792 1,166 883 Capital expenditures 106 153 144 Free cash flow2 686 1,013 739 Total assets 6,519 6,026 5,869 Long-term debt, including current portion 1,712 827 841 Net debt-to-total capitalization ratio2 35% 9% 12% Total shareholders’ equity 2,662 3,202 2,972 Weighted average number of common and exchangeable shares outstanding in millions (diluted) 43.2 43.2 40.2

Revenue peR sAles HeADcounT 3 business segment per region per region Pulp and paper United States United States 85% 75% 63% Distribution Canada Canada 14% 13% 32% Personal care Other Other 1% 12% 5%

1 Domtar sold its Wood business on June 30, 2010. 2 Non-GAAP financial measure. Consult the Reconciliation of Non-GAAP Financial Measures at the end of this document or at www.domtar.com 3 Including employees from Attends Healthcare Limited (“Attends Europe”) which was acquired on February 29, 2012.

dOMtar_2011 annual report_IT’S IN OUR FIBER 2 at a glance

Domtar Corporation (NYSE: UFS) (TSX: UFS) designs, manufactures, markets and distributes a wide variety of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products. The foundation of its business is a network of world-class wood fiber converting assets that produce papergrade, fluff and specialty pulp. The majority of its pulp production is consumed internally to manufacture paper and consumer products. Domtar is the largest integrated marketer of uncoated freesheet paper in North America with recognized brands such as Cougar®, Lynx® Opaque Ultra, Husky® Opaque Offset, First Choice® and Domtar EarthChoice®. Domtar is also a fast-growing marketer of a complete line of incontinence care products and distributes washcloths marketed primarily under the Attends® brand name. Domtar owns and operates Ariva™, an extensive network of strategically located distribution facilities. In 2011, Domtar had sales of US$5.6 billion from nearly 50 countries. The Company employs approximately 9,100 people. To learn more, please visit www.domtar.com

Sales Operating income EBITDA before items2 Net debt-to-total (In millions of dollars) (In millions of dollars) (In millions of dollars) capitalization2 (In percentage) 35 615 603 592 5,850 1,100 1,083 5,612 5,465 640 12 9

09 10 11 09 10 11 09 10 11 09 10 11

2 Non-GAAP financial measure. Consult the Reconciliation of Non-GAAP Financial Measures at the end of this document or at www.domtar.com

3 dOMtar_2011 annual report_IT’S IN OUR FIBER MeSSage tO SharehOlderS IT’S IN OUR FIBER

ur organization reported results beyond expectations again in 2011, a solid financial performance on par with our record 2010 results. We met or surpassed our annual targets on three out of four key performance indicators: profitability as measured by EBITDA, inventory turnover and customer satisfaction. While we remain one of the safest companies within our industry, we fell short of our occupational health and safety target with a total Ofrequency rate of 1.37 in 2011. The safety of our employees is a core focus for Domtar, and even though we measure very well against the industry average, we aim to improve our performance year over year. We will pursue our efforts in 2012.

a year of great strides

Throughout 2011, we accomplished a great deal to position Domtar for the years to come. We completed several projects funded under the Canadian Pulp and Paper Green Transformation Program and acquired a business with high growth potential. Above all else, we reported solid earnings. Operationally, we maintained our volumes despite the 3.4% decline in uncoated freesheet paper industry shipments in North America and the softening in global pulp markets.

We also signed labor agreements at our largest Canadian mill and ratified a four-year master agreement covering 2,900 employees in eight mills and one converting site in the United States. With this ratification, some mills now have labor agreements in place through 2018.

In August, we expanded our range of EarthChoice papers to include unique specialty and book papers. We have the largest, most comprehensive line of environmentally and socially responsible papers in the North American uncoated freesheet business, selling nearly one million tons of Forest Stewardship Council™ (FSC®) certified paper in the past year.

In November, we rolled out the second phase of our award-winning PAPERbecause® campaign. The series of 30-second satirical clips has proven to be an effective means of promoting responsible paper use while highlighting the continued value of paper in our lives.

Because sustainability is an increasingly important aspect of consumers’ buying John D. Williams decisions, we launched the Domtar Paper Trail, a new environmental tool that offers President and Chief Executive Officer customers the ability to view the environmental impacts of specific Domtar paper grades. The tool provides unmatched transparency and assists businesses and consumers in measuring their own impact on the environment. We took home the Environmental Strategy of the Year award at the 2011 Pulp and Paper International Awards in Brussels in large part because of the efforts we made in developing and promoting this innovative tool.

a step into consumer products

Executing on our long-term growth plans, last summer we acquired Attends Healthcare, Inc. (“Attends”) of Greenville, North Carolina—a business that develops, manufactures, markets and distributes adult incontinence care products sold primarily under the Attends brand. We subsequently acquired Attends Healthcare Limited (“Attends Europe”) in early 2012, consolidating our ownership of the brand on both sides of the Atlantic.

dOMtar_2011 annual report_IT’S IN OUR FIBER 4 This measured entry into the consumer products market is driven by our quest to bring growth into Domtar’s business profile. With this acquisition, we have a strategic fit by way of integration with our nearby pulp mill in Plymouth, North Carolina. Our Lighthouse™ fluff pulp is used in the making of incontinence products, and the acquisition of Attends connects our mill to an end-product with favorable demographics that will “our PaPerbecause camPaign conveys a strong drive demand growth for many years to message about resPonsible PaPer use. We are at come. The results are presented under our Personal Care segment and our a Point in history Where PeoPle are groWing commitment is to double the segment’s concerned about their environmental footPrint. annual run-rate earnings by 2017. We resPect that. ‘you don’t need it, you don’t Waste it.’ PaPerbecause is not just a utilitarian limitless possibilities defense of PaPer, it is an exPression of the through innovation emotional connection that takes Place When We

We are giving innovation a prominent send a simPle thank you card. the truth is that role within Domtar. The inauguration of PaPer, for over 2,000 years, has Proven to be an the CelluForce nanocrystalline cellulose effective means of communication. What’s more, (NCC) demonstration plant jointly owned for PeoPle concerned about the environmental with our partner FPInnovations opens new possibilities for our fiber. NCC is a imPact of PaPer making, We have a green story molecular building block, otherwise known to tell, surPrisingly green to some. this is the as a nano-component, extracted from essence of our PaPerbecause camPaign.” wood fiber (pulp) that has outstanding strength and iridescent features that could take our business in new and exciting directions—far from traditional pulp and paper applications. Over the next two to three years, we will put our efforts into creating a customer base through R&D and market development.

We are also investing in other innovative projects, including lignin isolation with the LignoBoost technology at our Plymouth, North Carolina pulp mill. The project will allow us to debottleneck the pulp line and explore new revenue streams and new uses for the lignin we produce, in an effort to extract the maximum value from the wood fiber we consume in our mills. three strategic objectives

One of Domtar’s challenges comes from the expected decline in demand for uncoated freesheet in North America at 2–4% per year for the foreseeable future. Our communication papers, accounting for approximately 88% of Domtar’s consolidated sales, are subject to these secular demand declines while demand for our specialty and packaging papers trends in line with economic growth.

We are committed to keeping a balance between our supply and our customer demand in paper and will continue to look for opportunities to migrate the production of communication papers to specialty and packaging papers where possible. Alternatively, we will reduce paper-making capacity as demand warrants and look to repurpose those assets and associated revenue streams by selling the pulp on the market, converting to other pulp grades or by moving downstream to consume pulp internally in the manufacturing of other fiber-based products. This is our path for sustainable growth.

5 dOMtar_2011 annual report_IT’S IN OUR FIBER Number of In this context, Domtar has three key business objectives: (1) to grow and find recordable injuries ways to become less vulnerable to the secular decline of uncoated freesheet paper (Per 200,000 work hours) demand; (2) to reduce volatility in our earnings profile by increasing the visibility and predictability of our cash flows; and, (3) to create value over time by using our capital wisely.

Through a combination of organic growth and acquisitions, we aim to have $300 to

1.51 $500 million of EBITDA (approximately 27–45% of 2011 EBITDA) generated from new business streams within five years. 1.41

1.37 returning capital to shareholders

After completing our systematic debt pay down in 2010, we made a commitment to return the majority of free cash flow to shareholders. The combination of stock buybacks and dividends returned to shareholders amounted to $543 million or 73% of free cash flow in 2011.

In May, we announced a 40% increase in our quarterly dividend and also increased the 09 10 11 authorization for stock buybacks to an aggregate of $600 million. Our solid financial performance in 2011 allowed us to pursue a more aggressive capital allocation policy.

dOMtar_2011 annual report_IT’S IN OUR FIBER 6 Our intent is to continue on the same path in 2012, as evidenced by the second increase in our authorization to $1 billion that we announced in December 2011. In total, we repurchased $539 million or over 15% of the share count since program inception in May 2010. Finally, Standard & Poor’s added us to the S&P 400 Mid Cap Index “Without a customer, a business is very much in May, recognizing our solid financial prospects and making a theoretical concePt. We are deePly engaged Domtar an attractive investment to a broader range of investors. toWards building on our core comPetencies to Position domtar for the future. since 2007, the Fiber of domtar We have been the leading uncoated freesheet We launched a significant initiative in September 2011 to help marketer in north america, a Position that redefine our identity and establish our path forward. “The Fiber serves us Well With the invaluable suPPort of Domtar” is the articulation of our vision to be the leader in of our customers. While demand is in decline, innovating fiber-based products, technologies and services, committed to a sustainable and better future. PaPer remains the Platform to suPPort our future groWth. neW business streams The artistic expression of this vision is captured on the opposite page, in the papercut tapestry depicting the roots of our have started contributing to our financial legacy as well as our aspiration to build on the fiber of our people. Performance, and this Will gradually shift

I am pleased with the enthusiasm generated by “The Fiber of our Profile for long-term sustainability, Domtar” since the internal rollout. I hope to build on this initiative one that Will Position us to thrive for and our shared values of agility, caring and innovation to position many years to come. not a revolution, but Domtar as a global leader in fiber innovation. an evolution. the successful execution of our Perform– groW – break out strategic conclusion roadmaP—With the suPPort of our best

We plan to continue breaking new ground in our business and the resource, our emPloyees—Will drive industry. We have a solid balance sheet and the financial flexibility this transformation.” to make sensible investments that fit our growth strategy.

Our journey of transformation from paper maker to fiber innovator is well underway. This journey will be the foundation of our long-term prosperity and value creation for our customers, employees, host communities and shareholders. Rediscover Domtar!

John D. Williams President and Chief Executive Officer

7 dOMtar_2011 annual report_IT’S IN OUR FIBER Our netwOrk

global reach, local roots ur tapestry of fiber procurement, manufacturing, marketing and distribution operations is woven across North America, Europe and into parts of Asia. We have a network of 13 wood fiber converting mills across North America that manufacture pulp and paper. This production system is supported by 15 converting and/or forms manufacturing operations, an extensive distribution network and regional replenishment centers. It includes Enterprise Group®, a Domtar business that primarily sells and distributes Domtar-branded cut-size business paper and continuous forms, as well as digital papers, converting rolls and specialty products. OIn Asia, we are in the process of establishing a converting and distribution presence in southern mainland China, in the province of Guangdong. We also have a representative office in Hong Kong to provide customer service support to overseas pulp customers. Our distribution business, Ariva, sells and distributes a wide range of paper products from Domtar and other manufacturers. Ariva serves a diverse customer base through 23 locations, primarily in the U.S. Midwest and Northeast, and Eastern Canada.

Our personal care business produces a wide range of adult incontinence products, marketed primarily under the Attends brand name, for the North American and European markets out of manufacturing facilities in Greenville, North Carolina (acquired in 2011) and Aneby, Jönköping County, Sweden (acquired in 2012).

head office regional replenishment centers distribution Personal care Montreal, Quebec (rrc)– united states: operations center: operations center: Addison, Illinois Covington, Kentucky Greenville, North Carolina PulP and PaPer Charlotte, North Carolina operations center: Garland, Texas ariva– eastern region: attends north america– Fort Mill, South Carolina Jacksonville, Florida Albany, New York manufacturing and distribution: Boston, Massachusetts Greenville, North Carolina uncoated freesheet: Kent, Washington Langhorne, Pennsylvania Harrisburg, Pennsylvania Ashdown, Arkansas attends europe– manufacturing, Mira Loma, California Hartford, Connecticut Espanola, Ontario Lancaster, Pennsylvania r&d and distribution: Hawesville, Kentucky regional replenishment centers New York, New York Aneby, Sweden Johnsonburg, Pennsylvania (rrc)– canada: Philadelphia, Pennsylvania attends europe– Kingsport, Tennessee Mississauga, Ontario Southport, Connecticut direct sales organizations: Marlboro, South Carolina Richmond, Quebec Washington, DC/Baltimore, Maryland Boxmeer, The Netherlands Nekoosa, Wisconsin Winnipeg, Manitoba Espoo, Finland Port Huron, Michigan ariva– midwest region: Keerbergen, Belgium Rothschild, Wisconsin enterprise group: Cincinnati, Ohio Newcastle Upon Tyne, United Kingdom Windsor, Quebec 58 locations in North America Cleveland, Ohio Oslo, Norway representative office: Columbus, Ohio Pulp: Covington, Kentucky Pasching, Austria Hong Kong, China Dryden, Ontario Dallas/Fort Worth, Texas Rheinfelden, Switzerland Kamloops, British Columbia Dayton, Ohio Schwalbach am Taunus, Germany Plymouth, North Carolina Fort Wayne, Indiana converting and distribution– onsite: Indianapolis, Indiana Ashdown, Arkansas ariva– canada: Rothschild, Wisconsin Halifax, Nova Scotia Windsor, Quebec Montreal, Quebec converting and distribution– offsite: Mount Pearl, Newfoundland and Labrador Addison, Illinois Ottawa, Ontario Brownsville, Tennessee Quebec City, Quebec Dallas, Texas Toronto, Ontario DuBois, Pennsylvania Griffin, Georgia Indianapolis, Indiana Mira Loma, California Owensboro, Kentucky Ridgefields, Tennessee Tatum, South Carolina Washington Court House, Ohio Guangzhou, Guangdong, China forms manufacturing: Dallas, Texas Indianapolis, Indiana Rock Hill, South Carolina

dOMtar_2011 annual report_IT’S IN OUR FIBER 8 liStliSt OF lOcatiOnSOnS and capacitieS

Hong Kong

head office Montreal, QC

operations center – Pulp and Paper Fort Mill, SC Pulp and Paper Mills Converting and /or Forms Operations Distribution, Supply list of locations and caPacities and Service Facilities Representative Office PulP and PaPer mills Port huron, mi operations center – distribution ashdown, ar 114,000 ST of paper per year Covington, KY 703,000 ST of paper per year rothschild, Wi Ariva 129,000 ADMT of pulp per year 138,000 ST of paper per year espanola, on Windsor, Qc operations center – Personal care Greenville, NC 77,000 ST of paper per year 646,000 ST of paper per year 117,000 ADMT of pulp per year 54,000 ADMT of pulp per year Manufacturing and Distribution Greenville, NC hawesville, ky Aneby, Sweden 578,000 ST of paper per year market PulP mills 100,000 ADMT of pulp per year Attends Sales Offices dryden, on johnsonburg, Pa 322,000 ADMT of pulp per year 369,000 ST of paper per year kamloops, bc kingsport, tn 470,000 ADMT of pulp per year 416,000 ST of paper per year Plymouth, nc marlboro, sc 436,000 ADMT of pulp per year 351,000 ST of paper per year 46,000 ADMT of pulp per year nekoosa, Wi 149,000 ST of paper per year 10,000 ADMT of pulp per year

All paper tonnage is expressed in short tons (ST) All pulp tonnage is expressed in air dry metric tons (ADMT) and by mill production capacity. and by mill market pulp production capacity.

9 dOMtar_2011 annual report_IT’S IN OUR FIBER OUR PRODUCTS AND SERVICE SOLUTIONS

PULP AND PAPER

Our Pulp and Paper segment involves the manufacturing, sale and distribution of communication, specialty and packaging papers. We distribute our products to a variety of customers in the United States, Canada and overseas, including merchants, retail outlets, stationers, printers, publishers, converters and end-users. We sell a combination of private labels and well-recognized branded products such as Cougar, Lynx Opaque Ultra, Husky Opaque Offset, First Choice, and Domtar EarthChoice Office Paper, part of our Forest Stewardship Council certified family of environmentally and socially responsible papers. Domtar is the largest integrated marketer and manufacturer of uncoated freesheet paper in North America.

Our Pulp and Paper segment also includes the marketing and distribution of softwood, fluff and hardwood market pulp, produced in excess of our internal requirements for papermaking. This pulp is dried and sold to customers overseas, in the United States and in Canada. The sales to most overseas customers are made directly or through commission agents, while we sell to customers in North America mainly through a North American sales force. Domtar is the third largest market pulp producer in North America, and the seventh largest in the world.

Market Conditions PAPER PULP In 2011, 10 million short tons of uncoated freesheet paper was North American production of chemical manufactured in North America, which represents a 3.1% decline market pulp was 15.5 million metric over the previous year. Demand represented 10.1 million short tons in 2011, a 2% increase when tons over the same period, a 3.5% decrease when compared to compared to 2010. Global production 2010. Global demand for uncoated freesheet was approximately of chemical market pulp in 2011 was 45.2 million short tons, a 0.02% increase compared to the approximately 53.1 million metric tons, previous year. which represents a 4.5% increase when compared to the previous year. North American demand has been declining at a rate of approximately 3.9% per year since 2000, while global demand has been increasing at a rate of approximately 0.3% per year since 2000. According to RISI, global demand is forecasted to grow at an annual rate of 1.6% over the next five years, buoyed by stronger demand in Southeast Asia and Eastern Europe.

Pulp bales Kamloops, British Columbia

Domtar in numbers PAPER PULP Uncoated freesheet production capacity of Capacity to sell approximately 1.7 million metric tons approximately 3.5 million short tons (ADMT) of trade pulp Paper production capacity: Trade pulp production capacity: U.S.: 78% Canada: 22% U.S.: 43% Canada: 57% Shipments of paper products: Shipments of pulp: Communication: 88% Softwood: 57% Specialty and packaging: 12% Fluff: 24% Pulp and paper segment sales by region: Hardwood: 19% U.S.: 77% Canada: 10% Other: 13%

Source: All figures from Pulp and Paper Products Council (PPPC) unless otherwise indicated.

DOMTAR_2011 Annual Report_IT’S IN OUR FIBER 10 revieW highlights • Sales decreased by 2% to $4.760 billion compared to 2010. • Announced the opening of a paper converting, sales and This decrease was mainly driven by lower shipments in both distribution business in southern China in Guangzhou, pulp and paper, due to the closure of our Columbus, Mississippi Guangdong, where the largest concentration of commercial mill and the sale of the Woodland, Maine market pulp mill in 2010. printers in China can be found. • EBITDA before items increased by 0.6% to $1.088 billion • Announced the installation of the LignoBoost technology compared to 2010. at Domtar’s Plymouth, North Carolina mill. A world first, • Capital expenditures stood at $133 million, representing the technology will allow for the extraction and isolation of a 6% decrease from 2010, mostly due to major capital projects lignin and will bring benefits to the Plymouth Mill by increasing in 2010. pulp production by approximately 6%. The lignin separated • Health and safety performance as measured by the total from the black liquor will allow us to explore new revenue frequency rate (TFR) improved by 3.1% compared to the streams and new uses for a product we currently burn in our previous year. recovery boilers. • Expanded the range of EarthChoice papers to include specialty papers used for bandage wraps, popcorn bags, candy wrappers, sugar pouches, hamburger wrap and a wide range of other everyday applications. Also, Domtar Tradebook™ paper was Forest Stewardship Council certified and renamed EarthChoice Tradebook™. As a result, Domtar continues to offer the largest, most comprehensive line of environmentally and socially responsible papers in the North American uncoated freesheet business, selling nearly one million tons of Forest Stewardship Council certified paper in 2011. • Launched the Domtar Paper Trail (www.domtarpapertrail.com), an online calculator that develops personalized reports measuring the impact of Domtar paper products across five categories including water usage, greenhouse gas emissions and renewable energy usage. This innovative tool also key figures illustrates how Domtar’s environmental performance Year ended December 31 2009 2010 2011 compares to the industry. Domtar took home the (In millions of dollars, unless otherwise noted) Environmental Strategy of the Year award at the 2011 Pulp and Sales (including sales to Distribution) 4,632 5,070 4,953 Paper International (PPI) Awards in Brussels, Belgium, in part Operating income 650 667 581 due to the industry-leading transparency the Paper Trail Depreciation and amortization 382 381 368 provides. EBITDA before items* 652 1,082 1,088 • Ratified a four-year master agreement with the United Capital expenditures 93 142 130 Steelworkers covering approximately 2,900 employees at Total assets 5,538 5,088 4,874 eight pulp and paper mills and one converting site in the Paper shipments (‘000 ST) 3,757 3,597 3,534 United States. As a result of this agreement, all employees not Pulp shipments (‘000 ADMT) 1,539 1,662 1,497 currently grandfathered under the existing defined benefit * Non-GAAP financial measure. Consult the Reconciliation of Non-GAAP Financial Measures at the end pension plans, will transition to a defined contribution pension of this document or at www.domtar.com plan for future service. • Closed one paper machine at the Ashdown, Arkansas mill and sold the permanently closed Prince Albert, Saskatchewan mill.

11 dOMtar_2011 annual report_IT’S IN OUR FIBER diStributiOn highlights • Achieved strong double-digit growth in sales of digital Our Distribution segment involves the purchasing, warehousing, paper products. sale and distribution of our paper products, as well as those • Further improved working capital management including a 17% of other manufacturers. We distribute our products to a wide improvement in inventory turns compared to the previous year. and diverse customer base, including small, medium and large • Invested in new skills and digital and packaging specialists, commercial printers, publishers, quick copy firms, catalog and laying the groundwork for future expansion in these areas in retail companies and institutional entities. These products include the years to come. business, printing and digital papers, including substrates such • Continued business restructuring including headcount as pressure-sensitives and synthetics, packaging equipment and reduction, extensive leadership team change, centralization of materials, as well as printing supplies. procurement, facility consolidation and expense control. • Sold Contract Paper Group business and shut down the International Sales Group. ArivA in numbers • Completed the preparation phase for the implementation of a new Enterprise Resource Planning (ERP) system, to be rolled out in 2012. key figures

Year ended December 31 2009 2010 2011

(In millions of dollars, unless otherwise noted) Sales 873 870 781 Operating income (loss) 7 (3) – Depreciation and amortization 3 4 4 EBITDA before items* 12 2 2 Capital expenditures 1 2 2 Total assets 101 99 84

* Non-GAAP financial measure. Consult the Reconciliation of Non-GAAP Financial Measures at the end of this document or at www.domtar.com revieW • Sales decreased by 10% to $781 million compared to 2010, mostly due to a 14% decrease in product deliveries, including the sale and closure of two businesses. • EBITDA before items was unchanged at $2 million compared to 2010. • Health and safety performance as measured by the total frequency rate (TFR) stood at 3.03, an increase from the previous year.

Ariva Cincinnati, Ohio

dOMtar_2011 annual report_IT’S IN OUR FIBER 12 perSOnal care revieW • Sales stood at $71 million in 2011 for the four-month period Our Personal Care segment involves the manufacturing, sale and ending December 31, 2011. distribution of adult incontinence products. The products are • EBITDA before items stood at $12 million for the four-month distributed in four channels: acute care, long-term care, homecare, period ending December 31, 2011. and retail. We sell a combination of branded and private label briefs, protective underwear, underpads, pads and washcloths. highlights We are a fast-growing supplier of adult incontinence products • Completed the acquisition of Attends Healthcare, Inc. sold to North American hospitals (acute care) and nursing homes (“Attends”) on September 1, 2011 and formed the Personal (long-term care), and we have a strong and growing presence in Care segment. the domestic homecare and retail channels. • Completed the acquisition of Attends Healthcare Limited (“Attends Europe”) on February 29, 2012. Attends in numbers key figures Attends north AmericA Four months ended December 31 2011

(In millions of dollars, unless otherwise noted) Sales 71 Operating income 7 Depreciation and amortization 4 EBITDA before items* 12 Capital expenditures – Attends europe2 Total assets 458

* Non-GAAP financial measure. Consult the Reconciliation of Non-GAAP Financial Measures at the end of this document or at www.domtar.com

Keisha Little Greenville, North Carolina

1 Domtar formed its Personal Care segment with the acquisition of Attends as of September 1, 2011.

2 Domtar announced on January 26, 2012 the signing of a definitive agreement for the acquisition of privately-held Attends Healthcare Limited (“Attends Europe”). The acquisition was completed on February 29, 2012.

13 dOMtar_2011 annual report_IT’S IN OUR FIBER ADULT INCONTINENCE GROWING IN mArkET a GROWING maRket

feminine l ight moderate Heavy severe Hygiene

consumer profile • 10-60 yrs old • 35-55 yrs old • 45-65 yrs old • +65 yrs old • Elderly and disabled (Generalized) • Active • Active • Health impedes • Low activity • Immobile • Female • Mostly female lifestyle • Male & female • Male & female • Mostly female

product Fem-Hy pads Bladder control Protective underwear • Briefs • Briefs preference (Pads, liners, guards) • Protective underwear • Underpads

primary channel Retail Retail • Retail • Long-term care • Long-term care • Homecare • Homecare • Acute

primary Self Self/caregiver Caregiver/self Healthcare facility Healthcare facility purchaser

primary purchase n/a Quality & price Quality Price Price decision driver (Quality as a cost saver) (Quality as a cost saver)

primary payor Self pay/cash Self pay/cash Medicaid Medicaid Medicare

Market penetration glObal adult incOntinence of incontinence products prOduct SaleS (In billions of U.S. dollars) is estiMated to be about The Japanese market is projected 30-35% to reach $1.6 billion by 2015. of the potential. $8.8 B 4% $7.4 B The European market is forecast to reach $4.9 billion by 2015, registering a 3.5% average growth rate over the period 2007-2015.

incontinence euRope affects noRTH AmeRIcA ResT of WoRlD 2010 2015 Forecast

5-7% The global adult incontinence market of the World’s totals approximately $8 billion, PoPulation. and is growing at about 4% annually.

dOMtar_2011 annual report_IT’S IN OUR FIBER 14 grOwth in aging pOpulatiOn in the united StateS (In millions) 27 million The South Atlantic americans region has the suffered largest population from adult of residents age 65+ 15.4 incontinence (projected to grow 9.6 by 2.5x by 2030). in 2010.

7.4 6.1 health 4.2 6.3% 4.4 expenditureS in the 61.9 64.6 47.2 united StateS 30.8 34.1 (In trillions of U.S. dollars) 65-85 85+ 2.6 2000 2010 2020 2030 2040 Forecast

Baby boomers began to turn 65 in 2011, with the number of It is estimated that healthcare Americans age 65 and older more than doubling to 71 million spending will grow 6.3% by 2030, representing 20% of the U.S. population. per year through 2018, outpacing the growth The European population of 65+ years will increase by forecasted for the broader 27 million between 2010-2030. economy. 2010 2018 Forecast the north american sales volume in 2010 Median age 2008/2020

accounted 44.2 for aPProximately 43.2

37.6 27% 36.8 of the global volume.

2008 By 2020, the median age of China’s population will be over 48.6 47.8 40 and approaching 50 in some developed markets. 42.0

38.0

cHInA JApAn GeRmAnY usA 2020 Forecast

15 dOMtar_2011 annual report_IT’S IN OUR FIBER COrpOrATE GOvErNANCE AND mANAGEmENT

OMtar’S ManageMent cOMMittee and bOard OF directOrS are cOMMitted tO the SuStainability OF the buSineSS and tO uphOlding the higheSt StandardS OF ethical and SOcially reSpOnSible behaViOr. they are reSpOnSible FOr the OVerall StewardShip OF the cOMpany and enSuring that deciSiOnS are taken in the beSt intereStS OF dOMtar and itS Share- hOlderS. they wOrk clOSely tOgether in deVelOping and apprOVing buSineSS StrategieS and Material cOrpOrate actiOnS while alwayS taking intO accOunt the ecOnOMic, SOcial and enVirOnMental iMpactS OF their deciSiOnS. they are alSO cOnStantly aSSeSSing the VariOuS riSkS and OppOrtunitieS Facing the cOMpany while enSuring Strict cOMpliance with lawS and ethical guidelineS. DDomtar’s commitment to sustainability and high standard of conduct governs the company’s relationships with customers, suppliers, shareholders, competitors, host communities, and employees at every level of the organization. This standard is outlined in Domtar’s Code of Business Conduct and Ethics applicable to all employees, including officers. The Board also adheres to its own Code as well as to the Corporate Governance Guidelines set by the New York and Toronto stock exchanges.

For complete information on Domtar’s policies, procedures and governance documents, please visit domtar.com/en/corporate

ManageMent cOMMittee

John D. Williams Melissa Anderson Daniel Buron Michael Edwards President and Senior Vice-President Senior Vice-President and Senior Vice-President Chief Executive Officer Human Resources Chief Financial Officer Pulp and Paper Manufacturing

Zygmunt Jablonski Patrick Loulou Richard L. Thomas Mark Ushpol Senior Vice-President Senior Vice-President Senior Vice-President Senior Vice-President Law and Corporate Affairs Corporate Development Sales and Marketing Distribution (Ariva)

dOMtar_2011 annual report_IT’S IN OUR FIBER 16 bOard OF directOrS

Harold H. MacKay Jack C. Bingleman Louis P. Gignac Brian M. Levitt Chairman of the Board President President Counsel Counsel, MacPherson JCB Consulting, LLC G Mining Services Inc. Osler, Hoskin & Harcourt LLP Leslie & Tyerman LLP Vero Beach, Florida, USA Montreal, Quebec, Canada Montreal, Quebec, Canada Regina, Saskatchewan, Canada

David G. Maffucci W. Henson Moore1 Michael R. Onustock1 Corporate Director Corporate Director Corporate Director Isle of Palms, South Carolina, USA Baton Rouge, Louisiana, USA Portland, Oregon, USA

Robert J. Steacy Pamela B. Strobel Denis Turcotte Corporate Director Corporate Director President and Toronto, Ontario, Canada Winnetka, Illinois, USA Chief Executive Officer North Channel Management Sault Ste. Marie, Ontario, Canada

John D. Williams President and Chief Executive Officer Domtar Corporation Montreal, Quebec, Canada

1 In accordance with our Corporate Governance Guidelines, W. Henson Moore and Michael R. Onustock will not stand for re-election at Domtar’s 2012 Annual Shareholder Meeting, having reached the retirement age of 72.

17 dOMtar_2011 annual report_IT’S IN OUR FIBER UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 or ‘ 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: 001-33164 Domtar Corporation (Exact name of registrant as specified in its charter) Delaware 20-5901152 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 395 de Maisonneuve Blvd. West Montreal, Quebec H3A 1L6 Canada (Address of Principal Executive Offices) (Zip Code) Registrant’s telephone number, including area code: (514) 848-5555 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value $0.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È 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 ‘ No È 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. Yes È No ‘ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È 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, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer È Accelerated Filer ‘ Non-Accelerated Filer ‘ Smaller reporting company ‘ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È As of June 30, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $3,742,000,932. Number of shares of common stock outstanding as of February 17, 2012: 36,134,262 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Proxy Statement, to be filed within 120 days of the close of the registrant’s fiscal year, in connection with its 2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. DOMTAR CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2011 TABLE OF CONTENTS

PAGE PART I ITEM 1 BUSINESS ...... 4 General ...... 4 Our Corporate Structure ...... 4 Our Business Segments ...... 5 Pulp and Paper ...... 6 Distribution ...... 11 Personal Care ...... 12 Our Strategic Initiatives and Financial Priorities ...... 12 Our Competition ...... 13 Our Employees ...... 14 Our Approach to Sustainability ...... 14 Our Environmental Challenges ...... 15 Our Intellectual Property ...... 15 Internet Availability of Information ...... 16 Our Executive Officers ...... 16 Forward-looking Statements ...... 17 ITEM 1A RISK FACTORS ...... 18 ITEM 1B UNRESOLVED STAFF COMMENTS ...... 26 ITEM 2 PROPERTIES ...... 26 ITEM 3 LEGAL PROCEEDINGS ...... 28 ITEM 4 MINE SAFETY DISCLOSURES ...... 30 PART II ITEM 5 MARKET REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ...... 31 Market Information ...... 31 Holders ...... 31 Dividends and Stock Repurchase Program ...... 31 Performance Graph ...... 33 ITEM 6 SELECTED FINANCIAL DATA ...... 34 ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 35 Executive Summary ...... 35 Recent Developments ...... 39 Our Business ...... 39 Consolidated Results of Operations and Segments Review ...... 41 Stock-Based Compensation Expense ...... 54 Liquidity and Capital Resources ...... 54 Off Balance Sheet Arrangements ...... 57

2 PAGE Guarantees ...... 57 Contractual Obligations and Commercial Commitments ...... 58 Recent Accounting Pronouncements ...... 58 Critical Accounting Policies ...... 59 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ... 71 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...... 74 Management’s Reports to Shareholders of Domtar Corporation ...... 74 Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm ...... 75 Consolidated Statements of Earnings ...... 76 Consolidated Balance Sheets ...... 77 Consolidated Statement of Shareholders’ Equity ...... 78 Consolidated Statements of Cash Flows ...... 79 Notes to Consolidated Financial Statements ...... 81 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ...... 155 ITEM 9A CONTROLS AND PROCEDURES ...... 155 ITEM 9B OTHER INFORMATION ...... 156 PART III ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ...... 157 ITEM 11 EXECUTIVE COMPENSATION ...... 157 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ...... 157 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ...... 158 ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES ...... 158 PART IV ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ...... 159 Report of Independent Registered Public Accounting Firm on Financial Statement Schedules ...... 159 Schedule II—Valuation and Qualifying Accounts ...... 164 SIGNATURES ...... 165

3 PART I ITEM 1. BUSINESS GENERAL We design, manufacture, market and distribute a wide variety of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products. We are the largest integrated marketer and manufacturer of uncoated freesheet paper in North America for a variety of customers, including merchants, retail outlets, stationers, printers, publishers, converters and end-users. On September 1, 2011, we completed the acquisition of Attends Healthcare Inc. (“Attends”), a producer of adult incontinence products. We also own and operate Ariva, an extensive network of strategically located paper and printing supplies distribution facilities. The foundation of our business is the efficient operation of pulp mills, converting fiber into papergrade, fluff and specialty pulp. The majority of this pulp is consumed internally to make communication and specialty papers with the balance being sold as market pulp.

We operate the following business segments: Pulp and Paper, Distribution and Personal Care. We had revenues of $5.6 billion in 2011, of which approximately 85% was from the Pulp and Paper segment, approximately 14% was from the Distribution segment and approximately 1% was from the Personal Care segment. Our Personal Care segment was formed on September 1, 2011, upon completion of the acquisition of Attends.

Throughout this Annual Report on Form 10-K, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refer to Domtar Corporation, its subsidiaries, as well as its investments. Unless otherwise specified, “Domtar Inc.” refers to Domtar Inc., a 100% owned Canadian subsidiary.

OUR CORPORATE STRUCTURE At December 31, 2011, Domtar Corporation had a total of 36,131,200 shares of common stock issued and outstanding, and Domtar (Canada) Paper Inc., an indirectly 100% owned subsidiary, had a total of 619,108 exchangeable shares issued and outstanding. These exchangeable shares are intended to be substantially the economic equivalent to shares of our common stock and are currently exchangeable at the option of the holder on a one-for-one basis for shares of our common stock. As such, the total combined number of shares of common stock and exchangeable shares issued and outstanding was 36,750,308 at December 31, 2011. Our common shares are traded on the New York Stock Exchange and the Toronto Stock Exchange under the symbol “UFS” and our exchangeable shares are traded on the Toronto Stock Exchange under the symbol “UFX.” Information regarding our common stock and the exchangeable shares is included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 21 “Shareholders’ Equity”.

4 The following chart summarizes our corporate structure.

At December 31, 2011

36,131,200 Domtar Corporation of common stock

U.S. operations

619,108 Domtar (Canada) Paper Inc. exchangeable shares

Canadian operations

OUR BUSINESS SEGMENTS We operate in the three reportable segments described below. Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies.

The following summary briefly describes the operations included in each of our reportable segments: • Pulp and Paper – Our Pulp and Paper segment comprises the manufacturing, sale and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp. • Distribution – Our Distribution segment involves the purchasing, warehousing, sale and distribution of our paper products and those of other manufacturers. These products include business and printing papers, certain industrial products and printing supplies. • Personal Care – Our Personal Care segment, which we formed in September 2011, consists of the manufacturing, sale and distribution of adult incontinence products.

5 Information regarding our reportable segments is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as Item 8, Financial Statements and Supplementary Data, under Note 24, of this Annual Report on Form 10-K. Geographic information is also included under Note 24 of the Financial Statements and Supplementary Data.

Year ended Year ended Year ended FINANCIAL HIGHLIGHTS PER SEGMENT December 31, 2011 December 31, 2010 December 31, 2009 (In millions of dollars, unless otherwise noted) Sales: Pulp and Paper $4,953 $5,070 $4,632 Distribution 781 870 873 Personal Care (2) 71 —— Wood (3) — 150 211 Total for reportable segments 5,805 6,090 5,716 Intersegment sales—Pulp and Paper (193) (229) (231) Intersegment sales—Wood — (11) (20) Consolidated sales $5,612 $5,850 $5,465 Operating income (loss): (1) Pulp and Paper $ 581 $ 667 $ 650 Distribution — (3) 7 Personal Care (2) 7 —— Wood (3) — (54) (42) Corporate 4 (7) — Total $ 592 $ 603 $ 615 Segment assets: Pulp and Paper $4,874 $5,088 $5,538 Distribution 84 99 101 Personal Care (2) 458 —— Wood (3) — — 250 Corporate 453 839 630 Total $5,869 $6,026 $6,519

(1) Factors that affected the year-over-year comparison of financial results are discussed in the year-over-year and segment analysis included in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation of this Annual Report on Form 10-K. (2) On September 1, 2011 we acquired Attends Healthcare Inc (“Attends”) and formed a new reportable segment entitled Personal Care. Results of Attends are included in the consolidated financial statements as of September 1, 2011. (3) We sold our Wood Products business on June 30, 2010.

PULP AND PAPER

Our Operations We produce 4.3 million metric tons of hardwood, softwood and fluff pulp at 12 of our 13 mills. The majority of our pulp is consumed internally to manufacture paper and consumer products, with the balance being sold as market pulp. We also purchase papergrade pulp from third parties allowing us to optimize the logistics of our pulp capacity while reducing transportation costs.

6 We are the largest integrated marketer and manufacturer of uncoated freesheet paper in North America. We have 10 pulp and paper mills (eight in the United States and two in Canada), with an annual paper production capacity of approximately 3.5 million tons of uncoated freesheet paper. Our paper manufacturing operations are supported by 15 converting and distribution operations including a network of 12 plants located offsite of our paper making operations. Also, we have forms manufacturing operations at one offsite converting and distribution operations and two stand-alone forms manufacturing operations. Approximately 78% of our paper production capacity is in the U.S., and the remaining 22% is located in Canada.

We produce market pulp in excess of our internal requirements at our three non-integrated pulp mills in Kamloops, Dryden, and Plymouth as well as at our pulp and paper mills in Espanola, Ashdown, Hawesville, Windsor, Marlboro and Nekoosa. We have the capacity to sell approximately 1.7 million metric tons of pulp per year depending on market conditions. Approximately 43% of our trade pulp production capacity is in the U.S., and the remaining 57% is located in Canada.

The table below lists our operating pulp and paper mills and their annual production capacity.

Saleable Production Facility Fiberline Pulp Capacity Paper (1) Trade Pulp (2) # lines (’000 ADMT) (4) # machines Category(3) (’000 ST) (’000 ADMT) (4) Uncoated freesheet Ashdown, Arkansas 3 747 3 Communication 703 129 Windsor, Quebec 1 447 2 Communication 646 54 Hawesville, Kentucky 1 430 2 Communication 578 100 Kingsport, Tennessee 1 276 1 Communication 416 — Marlboro, South Carolina 1 325 1 Communication 351 46 Johnsonburg, Pennsylvania 1 238 2 Communication 369 — Nekoosa, Wisconsin 1 161 3 Specialty & Packaging 149 10 Rothschild, Wisconsin 1 66 1 Communication 138 — Port Huron, Michigan — — 4 Specialty & Packaging 114 — Espanola, Ontario 2 352 2 Specialty & Packaging 77 117 Total Uncoated freesheet 12 3,042 21 3,541 456 Pulp Kamloops, British Columbia 2 475 — — 470 Dryden, Ontario 1 328 — — 322 Plymouth, North Carolina 2 438 — — 436 Total Pulp 5 1,241 — — 1,228 Total 17 4,283 21 3,541 1,684 Pulp purchases 131 Net pulp 1,553

(1) Paper capacity is based on an operating schedule of 360 days and the production at the winder. (2) Estimated third-party shipments dependent upon market conditions. (3) Represents the majority of the capacity at each of these facilities. (4) ADMT refers to an air dry metric ton.

Our Raw Materials The manufacturing of pulp and paper requires wood fiber, chemicals and energy. We discuss these three major raw materials used in our manufacturing operations below.

7 Wood Fiber United States pulp and paper mills The fiber used by our pulp and paper mills in the United States is primarily hardwood and secondarily softwood, both being readily available in the market from multiple third-party sources. The mills obtain fiber from a variety of sources, depending on their location. These sources include a combination of long-term supply contracts, wood lot management arrangements, advance stumpage purchases and spot market purchases.

Canadian pulp and paper mills The fiber used at our Windsor pulp and paper mill is hardwood originating from a variety of sources, including purchases on the open market in Canada and the United States, contracts with Quebec wood producers’ marketing boards, public land where we have wood supply allocations and from Domtar’s private lands. The softwood and hardwood fiber for our Espanola pulp and paper mill and the softwood fiber for our Dryden pulp mill, is obtained from third parties, directly or indirectly from public lands, through designated wood supply allocations for the pulp mills. The fiber used at our Kamloops pulp mill is all softwood, originating mostly from third-party sawmilling operations in the southern-interior part of British Columbia.

Cutting rights on public lands related to our pulp and paper mills in Canada represent about 0.9 million cubic meters of softwood and 1.0 million cubic meters of hardwood, for a total of 1.9 million cubic meters of wood per year. Access to harvesting of fiber on public lands in Ontario and Quebec is subject to licenses and review by the respective governmental authorities.

During 2011, the cost of wood fiber relating to our Pulp and Paper segment for our pulp and paper mills in the United States and in Canada, comprised approximately 20% of the total consolidated cost of sales.

Chemicals We use various chemical compounds in our pulp and paper manufacturing facilities that we purchase, primarily on a central basis, through contracts varying between one and twelve years in length to ensure product availability. Most of the contracts have pricing that fluctuates based on prevailing market conditions. For pulp manufacturing, we use numerous chemicals including caustic soda, sodium chlorate, sulfuric acid, lime and peroxide. For paper manufacturing, we also use several chemical products including starch, precipitated calcium carbonate, optical brighteners, dyes and aluminum sulfate.

During 2011, the cost of chemicals relating to our Pulp and Paper segment comprised approximately 13% of the total consolidated cost of sales.

Energy Our operations consume substantial amounts of fuel including natural gas, fuel oil, coal and biomass, as well as electricity. We purchase substantial portions of the fuel we consume under supply contracts. Under most of these contracts, suppliers are committed to provide quantities within pre-determined ranges that provide us with our needs for a particular type of fuel at a specific facility. Most of these contracts have pricing that fluctuates based on prevailing market conditions. Natural gas, fuel oil, coal and biomass are consumed primarily to produce steam that is used in the manufacturing process and, to a lesser extent, to provide direct heat to be used in the chemical recovery process. About 77% of the total energy required to manufacture our products comes from renewable fuels such as bark and spent cooking liquor. The remainder of the energy comes from purchased fossil fuels such as natural gas, oil and coal.

We own power generating assets, including steam turbines, at all of our integrated pulp and paper mills, as well as hydro assets at four locations: Espanola, Ottawa-Hull, Nekoosa and Rothschild. Electricity is primarily used to drive motors and other equipment, as well as provide lighting. Approximately 68% of our electric power requirements are produced internally. We purchase the balance of our power requirements from local utilities.

8 During 2011, energy costs relating to our Pulp and Paper segment comprised approximately 6% of the total consolidated cost of sales.

Our Transportation Transportation of raw materials, wood fiber, chemicals and pulp to our mills is mostly done by rail although trucks are used in certain circumstances. We rely strictly on third parties for the transportation of our pulp and paper products between our mills, converting operations, distribution centers and customers. Our paper products are shipped mostly by truck, and logistics are managed centrally in collaboration with each location. Our pulp is either shipped by vessel, rail or truck. We work with all major railroads and truck companies in the U.S. and Canada. The length of our carrier contracts are generally from one to three years. We pay diesel fuel surcharges which vary depending on market conditions, but are mostly tied to the cost of diesel fuel.

During 2011, outbound transportation costs relating to our Pulp and Paper segment comprised approximately 11% of the total consolidated cost of sales.

Our Product Offering and Go-to-Market Strategy Our uncoated freesheet papers are used for communication and specialty and converting applications. Communication papers are further categorized into business, commercial printing and publishing applications.

Business papers include copy and electronic imaging papers, which are used with ink jet and laser printers, photocopiers and plain-paper fax machines, as well as computer papers, preprinted forms and digital papers. These products are primarily for office and home use. Business papers accounted for approximately 45% of our shipments of paper products in 2011.

Our commercial printing and publishing papers include uncoated freesheet papers, such as offset papers and opaques. These uncoated freesheet grades are used in sheet and roll fed offset presses across the spectrum of commercial printing end-uses, including digital printing. Our publishing papers include tradebook and lightweight uncoated papers used primarily in book publishing applications such as textbooks, dictionaries, catalogs, magazines, hard cover novels and financial documents. Design papers, a sub-group of commercial printing and publishing papers, have distinct features of color, brightness and texture and are targeted towards graphic artists, design and advertising agencies, primarily for special brochures and annual reports. These products also include base papers that are converted into finished products, such as envelopes, tablets, business forms and data processing/computer forms. Commercial printing and publishing papers accounted for approximately 43% of our shipments of paper products in 2011.

We also produce paper for several specialty and packaging markets. Products consist primarily of base stock used by the flexible packaging industry in the production of food and medical packaging and other specialty papers for various other industrial applications, including base stock for sandpaper, base stock for medical gowns, drapes and packaging, as well as transfer paper for printing processes. We also manufacture products for security applications. These specialty and packaging papers accounted for approximately 12% of our shipments of paper products in 2011. These grades of papers require a certain amount of innovation and agility in the manufacturing system.

9 The chart below illustrates our main paper products and their applications.

Communication Papers Specialty and Converting Papers Commercial Printing and Category Business Papers Publishing Papers Type Uncoated Freesheet Uncoated Freesheet Grade Copy Premium imaging Offset Opaques Food packaging Technology papers Colors Premium opaques Bag stock Index Lightweight Security papers Tag Tradebook Imaging papers Bristol Label papers Medical disposables Application Photocopies Presentations Commercial Stationery Food & candy packaging Office Reports printing Brochures Fast food takeout bag stock documents Direct mail Annual reports Check and security papers Presentations Pamphlets Books Surgical gowns Brochures Catalogs, Forms & Cards Envelopes Posters

Our customer service personnel work closely with sales, marketing and production staff to provide service and support to merchants, converters, end-users, stationers, printers and retailers. We promote our products directly to end-users and others who influence paper purchasing decisions in order to enhance brand recognition and increase product demand. In addition, our sales representatives work closely with mill-based new product development personnel and undertake joint marketing initiatives with customers in order to better understand their businesses and needs and to support their future requirements.

We sell business papers primarily to paper stationers, merchants, office equipment manufacturers and retail outlets. We distribute uncoated commercial printing and publishing papers to end-users and commercial printers, mainly through paper merchants, as well as selling directly to converters. We sell our specialty and packaging products mainly to converters, who apply a further production process such as coating, laminating, folding or waxing to our papers before selling them to a variety of specialized end-users. We distributed approximately 34% of our paper products in 2011 through a large network of paper merchants operating throughout North America, one of which we own (see “Distribution”). Distributors, who sell our products to their own customers, represents our largest group of customers.

The chart below illustrates our channels of distribution for our paper products.

Specialty and Communication Papers Converting Papers Commercial Printing and Category Business Papers Publishing Papers Domtar sells to: Merchants Office Retailers Merchants Converters End-Users Converters ↓ Equipment ↓ ↓ ↓ ↓ Manufacturers /Stationers ↓ Customer sells to: Printers/ Retailers/ Printers/ Printers/ Merchants/ End-users Retailers/ Stationers/ End-users Converters/ Retailers End-users End-users End-users

10 We sell market pulp to customers in North America mainly through a North American sales force while sales to most overseas customers are made directly or through commission agents. We maintain pulp supplies at strategically located warehouses, which allow us to respond to orders on short notice. In 2011, approximately 31% of our sales of market pulp were domestic, 12% were in Canada and 57% were in other countries.

Our ten largest customers represented approximately 47% of our 2011 Pulp and Paper segment sales or 40% of our total sales in 2011. In 2011, Staples, one of our customers of our Pulp and Paper segment represented approximately 10% of our total sales. The majority of our customers purchase products through individual purchase orders. In 2011, approximately 77% of our Pulp and Paper segment sales were domestic, 10% were in Canada, and 13% were in other countries.

DISTRIBUTION

Our Operations Our Distribution business involves the purchasing, warehousing, sale and distribution of our various products and those of other manufacturers. These products include business, printing and publishing papers and certain industrial products. These products are sold to a wide and diverse customer base, which includes small, medium and large commercial printers, publishers, quick copy firms, catalog and retail companies and institutional entities.

Our Distribution business operates in the United States and Canada under a single banner and umbrella name, Ariva. Ariva operates throughout the Northeast, Mid-Atlantic and Midwest areas from 17 locations in the United States, including 13 distribution centers serving customers across North America. The Canadian business operates in two locations in Ontario, in two locations in Quebec; and from two locations in Atlantic Canada.

Sales are executed by our sales force, based at branches strategically located in served markets. We distribute about 51% of our paper sales from our own warehouse distribution system and about 49% of our paper sales through mill-direct deliveries (i.e., deliveries directly from manufacturers, including ourselves, to our customers).

The table below lists all of our Ariva locations.

Eastern Region MidWest Region Ontario, Canada Quebec, Canada Atlantic Canada Albany, New York Cincinnati, Ohio Ottawa, Ontario Montreal, Quebec Halifax, Nova Scotia Boston, Massachusetts Cleveland, Ohio Toronto, Ontario Quebec City, Quebec Mount Pearl, Newfoundland Harrisburg, Pennsylvania Columbus, Ohio Hartford, Connecticut Covington, Kentucky Lancaster, Pennsylvania Dayton, Ohio New York, New York Dallas/Forth Worth, Texas Philadelphia, Pennsylvania Fort Wayne, Indiana Southport, Connecticut Indianapolis, Indiana Washington, DC / Baltimore, Maryland

Our Raw Materials The Distribution business sells annually approximately 0.6 million tons of paper, forms and industrial/ packaging products from over 60 suppliers located around the world. Domtar products represent approximately 30% of the total.

11 Our Product Offering and Go-to-Market Strategy Our product offerings address a broad range of printing, publishing, imaging, advertising, consumer and industrial needs and are comprised of uncoated, coated and specialized papers and industrial products. Our go-to-market strategy is to serve numerous segments of the commercial printing, publishing, retail, wholesale, catalog and industrial markets with logistics and services tailored to the needs of our customers. In 2011, approximately 63% of our sales were made in the United States and 37% were made in Canada.

PERSONAL CARE

Our Operations Our Personal Care business sells and manufactures adult incontinence products and distributes disposable washcloths marketed primarily under the Attends® brand name. We are one of the leading suppliers of adult incontinence products sold into North American hospitals (acute care) and nursing homes (long-term care) and we have a growing presence in the domestic homecare and retail channels. We operate nine different production lines to manufacture our products, with all nine lines having the ability to produce multiple items within each category.

Attends operates out of the Southeastern United States from one location in Greenville, North Carolina.

Our Raw Materials The primary raw materials used in our manufacturing process are nonwovens, pulp, super absorbent polymers, polypropylene film, elastics, adhesives and packaging materials.

Our Product Offering and Go-to-Market Strategy Our products, which include branded and private label briefs, protective underwear, underpads, pads and washcloths, are available in a variety of sizes, as well as with differing performance levels and product attributes.

We serve four channels: acute care, long-term care, homecare, and retail. Through the utilization of our flexible production platform, manufacturing expertise and efficient supply chain management, we are able to provide a complete and high-quality line of branded and unbranded products reliably to customers across all channels.

OUR STRATEGIC INITIATIVES AND FINANCIAL PRIORITIES As a leading innovative fiber-based technology company, we strive to be the supplier of choice for our customers, to be a core investment for our shareholders and to be recognized as an industry leader in sustainability. We have three unwavering business objectives: (1) to grow and find ways to become less vulnerable to the secular decline in communication paper demand, (2) to reduce volatility in our earnings profile by increasing the visibility and predictability of our cash flows, and (3) to create value over time by ensuring that we maximize the strategic and operational use of our capital.

To achieve these goals, we have established the following business strategies: Perform: Drive performance in everything we do focusing on customers, costs and cash. We are determined to operate our assets efficiently and to ensure we balance our production with our customer demand in papers. To generate free cash flow, we are focused on assigning our capital expenditures effectively and minimizing working capital requirements. We apply prudent financial management policies to retain the flexibility needed to successfully execute on our strategic roadmap.

12 Grow: To counteract the secular demand decline in our communication paper products and sustain the success of our company, we believe that we must leverage our core competencies and expertise as operators of large scale operations in fiber sourcing and in the marketing, manufacturing and distribution of fiber-based products. We are focused on optimizing and expanding our operations in markets with positive demand dynamics through the repurposing of assets, through investments to organically grow or through strategic acquisitions.

Break Out: Through agility and innovation, move from a paper to a fiber-centric organization by seeking opportunities to break out from traditional pulp and paper making. We continue to explore opportunities to invest in innovative fiber-based technologies to bring our business in new directions and leverage our expertise and our assets to extract the maximum value for the wood fiber we consume in our operations.

Grow our line of environmentally and ethically responsible products: We believe we are delivering best-in-class service to customers through a broad range of certified products. The development of EarthChoice®, our line of environmentally and socially responsible paper, is providing a platform upon which to expand our offering to customers. This product line is supported by leading environmental groups and offers customers the solutions and peace of mind through the use of a combination of FSC® virgin fiber and recycled fiber.

Operate in a responsible way: We try to make a positive difference every day by pursuing sustainable growth, valuing relationships, and responsibly managing our resources. We care for our customers, end-users and stakeholders in the communities where we operate, all seeking assurances that resources are managed in a sustainable manner. We strive to provide these assurances by certifying our distribution and manufacturing operations and measuring our performance against internationally recognized benchmarks. We are committed to the responsible use of forest resources across our operations and we are enrolled in programs and initiatives to encourage landowners engage towards certification to improve their market access and increase their revenue opportunities.

OUR COMPETITION The markets in which our businesses operate are highly competitive with well-established domestic and foreign manufacturers.

In the paper business, our paper production does not rely on proprietary processes or formulas, except in highly specialized papers or customized products. In order to gain market share in uncoated freesheet, we compete primarily on the basis of product quality, breadth of offering, service solutions and competitively priced paper products. We seek product differentiation through an extensive offering of high quality FSC-certified paper products. While we have a leading position in the North American uncoated freesheet market, we also compete with other paper grades, including coated freesheet, and with electronic transmission and document storage alternatives. As the use of these alternative products continues to grow, we continue to see a decrease in the overall demand for paper products or shifts from one type of paper to another. All of our pulp and paper manufacturing facilities are located in the United States or in Canada where we sell 86% of our products. The five largest manufacturers of uncoated freesheet papers in North America represent approximately 80% of the total production capacity. On a global basis, there are hundreds of manufacturers that produce and sell uncoated freesheet papers. The level of competitive pressures from foreign producers in the North American market is highly dependent upon exchange rates, including the rate between the U.S. dollar and the Euro as well as the U.S. dollar and the Brazilian real.

The market pulp we sell is either fluff, softwood or hardwood pulp. The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and competitively priced pulp products. The fluff pulp we sell is used in absorbent products, incontinence products, diapers and feminine hygiene products. The softwood and hardwood pulp we sell is primarily slow growth northern bleached softwood and hardwood kraft, and we produce specialty engineered pulp grades with a pre-determined mix of wood species. Our hardwood and softwood pulps are sold

13 to “non-paper grade” customers who make a variety of products for specialty paper, packaging, tissue and industrial applications, and customers who make printing and writing grades. We also seek product differentiation through the certification of our pulp mills to the FSC chain-of-custody standard and the procurement of FSC-certified virgin fiber. All of our market pulp production capacity is located in the United States or in Canada, and we sell 53% of our pulp to other countries.

In the adult incontinence segment, there are high barriers to entry and the top 5 manufacturers supply approximately 90% of the North American market share and have done so for at least the last 10 years.

Competition is along the line of four major product categories – briefs, protective underwear, underpads, and pads with customers split between retail and institutional channels. The retail channel has the majority of sales concentrated in drug stores and mass marketers. The institutional channel includes extended care (long term care and homecare) and acute care facilities.

In North America, an estimated $2.7 billion was spent on Adult Incontinence products in 2010 with the spending estimates of $2.83 billion in 2011. Globally, sales of Adult Incontinence products were estimated to be $8.7 billion in 2010 and are estimated to be $9.3 billion in 2011. Our estimated North American market share, based on the 2011 sales, was between 5% and 15% in the various channels.

OUR EMPLOYEES We have over 8,700 employees, of which approximately 66% are employed in the United States and 34% in Canada. Approximately 57% of our employees are covered by collective bargaining agreements, generally on a facility-by-facility basis, certain of which expired in 2011 and some will expire between 2012 and 2015.

A new umbrella agreement with the United Steelworkers Union (“USW”), expiring in 2015, affecting approximately 2,900 employees at eight U.S. mills and one converting operation was ratified effective December 1, 2011. This agreement only covers certain economic elements, and all other issues are negotiated at each operating location, as the related collective bargaining agreements become subject to renewal. The parties have agreed not to strike or lock-out during the terms of the respective local agreements. Should the parties fail to reach an agreement during the local negotiations, the related collective bargaining agreements are automatically renewed for another four years.

In Canada, the collective agreement expired in 2010 at our Windsor facility in Quebec, Canada, with the Confederation of National Trade Unions (“CNTU”). A new agreement was ratified in mid-November 2011. At the Espanola Mill facility, agreements have been reached with the Communication, Energy and Paperworkers Union of Canada (“CEP”), locals 74 and 156 and with the International Brotherhood of Electrical Workers (“IBEW”). Agreements that expired in 2009 at our Dryden facilities in Canada are being negotiated with the CEP and are on-going. These Canadian collective agreements are unrelated to the umbrella agreement with the USW covering our U.S. locations.

OUR APPROACH TO SUSTAINABILITY Domtar delivers a higher, lasting value to our customers, employees, shareholders and communities by viewing our business decisions within the larger context of sustainability. As a renewable fiber-based company, we take the long-term view on managing natural resources for the future. We prize efficiency in everything we do. We strive to minimize waste and encourage recycling. We have the highest standards for ethical conduct, for caring about the health and safety of each other, and for maintaining the environmental quality in the communities where we live and work. We value the partnerships we have formed with non-governmental organizations and believe they make us a better company, even if we do not always agree on every issue. We pay attention to being agile to respond to new opportunities, and we are focused in order to turn innovation into value creation. By embracing sustainability as our operating philosophy, we seek to internalize the fact that the choices

14 we have and the impact of the decisions we make on our stakeholders are all interconnected. Further, we believe that our business and the people and communities who depend upon us are better served as we weave this focus on sustainability into the things we do.

Domtar effects this commitment to sustainability at every level and every location across the company. With the support of the Board of Directors, our Management Committee empowers senior managers from manufacturing, technology, finance, sales and marketing and corporate staff functions to regularly come together and establish key sustainability performance metrics, and to routinely assess and report on progress. In 2011, Domtar decided to establish a new, vice-president position to help lead this effort, allowing the company’s organizational structure to better reflect the priority focus the company places on sustainable performance. At the same time, recognizing that the promise of sustainability is only achieved if it is woven into the fiber of an organization, Domtar is committed to establishing EarthChoice Ambassadors – sustainability leaders and advocates – in every one of the company’s locations. We believe that weaving sustainability into our business positions Domtar for the future.

OUR ENVIRONMENTAL CHALLENGES Our business is subject to a wide range of general and industry-specific laws and regulations in the United States and Canada relating to the protection of the environment, including those governing harvesting, air emissions, climate change, waste water discharges, the storage, management and disposal of hazardous substances and wastes, contaminated sites, landfill operation and closure obligations and health and safety matters. Compliance with these laws and regulations is a significant factor in the operation of our business. We may encounter situations in which our operations fail to maintain full compliance with applicable environmental requirements, possibly leading to civil or criminal fines, penalties or enforcement actions, including those that could result in governmental or judicial orders that stop or interrupt our operations or require us to take corrective measures at substantial costs, such as the installation of additional pollution control equipment or other remedial actions.

Compliance with U.S. federal, state and local and Canadian federal and provincial environmental laws and regulations involves capital expenditures as well as additional operating costs. For example, the United States Environmental Protection Agency will be promulgating regulations addressing the emissions of hazardous air pollutants from all industrial boilers, including those present at pulp and paper mills, which will require the use of maximum achievable control technology. Additional information regarding environmental matters is included in Part I, Item 3, Legal Proceedings, under the caption “Climate change regulation” and in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K, under the section of Critical accounting policies, caption “Environmental matters and other asset retirement obligations.”

OUR INTELLECTUAL PROPERTY Many of our brand name products are protected by registered trademarks. Our key trademarks include Attends®, Cougar®, Lynx® Opaque Ultra, Husky® Opaque Offset, First Choice®, Domtar EarthChoice® and Ariva®. These brand names and trademarks are important to the business. Our numerous trademarks have been registered in the United States and/or in other countries where our products are sold. The current registrations of these trademarks are effective for various periods of time. These trademarks may be renewed periodically, provided that we, as the registered owner, and/or licensee comply with all applicable renewal requirements, including the continued use of the trademarks in connection with similar goods.

We own U.S. and foreign patents, some of which have expired or been abandoned, and have several pending patent applications. Our management regards these patents and patent applications as important but does not consider any single patent or group of patents to be materially important to our business as a whole.

15 INTERNET AVAILABILITY OF INFORMATION In this Annual Report on Form 10-K, we incorporate by reference certain information contained in other documents filed with the Securities and Exchange Commission (“SEC”) and we refer you to such information. We file annual, quarterly and current reports and other information with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100F Street, NE, Washington DC, 20549. You may obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains our quarterly and current reports, proxy and information statements, and other information we file electronically with the SEC. You may also access, free of charge, our reports filed with the SEC through our website. Reports filed or furnished to the SEC will be available through our website as soon as reasonably practicable after they are filed or furnished to the SEC. The information contained on our website, www.domtar.com, is not, and should in no way be construed as, a part of this or any other report that we filed with or furnished to the SEC.

OUR EXECUTIVE OFFICERS John D. Williams, age 57, has been president, chief executive officer and a director of the Company since January 1, 2009. Previously, Mr. Williams served as president of SCA Packaging Europe between 2005 and 2008. Prior to assuming his leadership position with SCA Packaging Europe, Mr. Williams held increasingly senior management and operational roles in the packaging business and related industries.

Melissa Anderson, age 47, is the senior vice-president, human resources of the Company. Ms. Anderson joined Domtar in January 2010. Previously, she was senior vice-president, human resources and government relations, at The Pantry, Inc., an independently operated convenience store chain in the southeastern United States. Prior to this, she held senior management positions with International Business Machine (“IBM”) over the span of 18 years.

Daniel Buron, age 48, is the senior vice-president and chief financial officer of the Company. Mr. Buron was senior vice-president and chief financial officer of Domtar Inc. since May 2004. He joined Domtar Inc. in 1999. Prior to May 2004, he was vice-president, finance, pulp and paper sales division and, prior to September 2002, he was vice-president and controller. He has over 23 years of experience in finance.

Michael Edwards, age 64, is the senior vice-president, pulp and paper manufacturing of the Company. Mr. Edwards was vice-president, fine paper manufacturing of Weyerhaeuser since 2002. Since joining Weyerhaeuser in 1994, he has held various management positions in the pulp and paper operations. Prior to Weyerhaeuser, Mr. Edwards worked at Domtar Inc. for 11 years. His career in the pulp and paper industry spans over 48 years.

Zygmunt Jablonski, age 58, is the senior vice-president, law and corporate affairs of the Company. Mr. Jablonski joined Domtar in 2008, after serving in various in-house counsel positions for major manufacturing and distribution companies in the paper industry for 13 years. From 1985 to 1994, he practiced law in Washington, DC.

Mark Ushpol, age 48, is the senior vice-president, distribution of the Company. Mr. Ushpol joined Domtar in January 2010. Previously, he was sales and marketing director of Mondi Europe & International Uncoated Fine Paper, where he was in charge of global uncoated fine paper sales. He has over 22 years of experience in senior marketing and sales management with the last 15 years in the pulp and paper sector. Prior to that, he was involved in the plastics industry in South Africa for 8 years.

Patrick Loulou, age 43, is the senior vice-president, corporate development since he joined the Company in March 2007. Previously, he held a number of positions in the telecommunications sector as well as in management consulting. He has over 13 years of experience in corporate strategy and business development.

Richard L. Thomas, age 58, is the senior vice-president, sales and marketing of the Company. Mr. Thomas was vice-president of fine papers of Weyerhaeuser since 2005. Prior to 2005, he was vice-president, business

16 papers of Weyerhaeuser. Mr. Thomas joined Weyerhaeuser in 2002 when Willamette Industries, Inc. was acquired by Weyerhaeuser. At Willamette, he held various management positions in operations since joining in 1992. Previously, he was with Champion International Corporation for 12 years.

FORWARD-LOOKING STATEMENTS

The information included in this Annual Report on Form 10-K may contain forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar Corporation’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,” “project,” “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 and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occurs, what effect they will have on Domtar Corporation’s results of operations or financial condition. These factors include, but are not limited to:

• conditions in the global capital and credit markets, and the economy generally, particularly in the U.S. and Canada; • continued decline in usage of fine paper products in our core North American market; • our ability to implement our business diversification initiatives, including strategic acquisitions; • product selling prices; • raw material prices, including wood fiber, chemical and energy; • performance of Domtar Corporation’s manufacturing operations, including unexpected maintenance requirements; • the level of competition from domestic and foreign producers; • the effect of, or change in, forestry, land use, environmental and other governmental regulations (including tax), and accounting regulations; • the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters; • transportation costs;

• the loss of current customers or the inability to obtain new customers;

• legal proceedings; • changes in asset valuations, including write downs of property, plant and equipment, inventory, accounts receivable or other assets for impairment or other reasons; • changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar; • the effect of timing of retirements and changes in the market price of Domtar Corporation’s common stock on charges for stock-based compensation; • performance of pension fund investments and related derivatives, if any; and • the other factors described under “Risk Factors,” in Part I, Item 1A of this Annual Report on Form 10-K.

17 You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Annual Report on Form 10-K. Unless specifically required by law, Domtar Corporation assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances.

ITEM 1A. RISK FACTORS You should carefully consider the risks described below in addition to the other information presented in this Annual Report on Form 10-K.

RISKS RELATING TO THE INDUSTRIES AND BUSINESSES OF THE COMPANY Some of the Company’s products are vulnerable to long-term declines in demand due to competing technologies or materials. The Company’s 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, the Company is experiencing on-going decreasing demand for most of its existing paper products. As the use of these alternatives grows, demand for paper products is likely to further decline. Declines in demand for our paper products may adversely affect the Company’s business, results of operations and financial position.

Failure to successfully implement our business diversification initiatives could have a material adverse affect on our business, financial results or condition. We are pursuing strategic initiatives that management considers important to our long-term success including, but not limited to, optimizing and expanding our operations in markets with positive demand dynamics to help grow our business and counteract secular demand decline in our core North American paper business. These initiatives may involve organic growth, select joint ventures and strategic acquisitions. The success of these initiatives will depend, among other things, on our ability to identify potential strategic initiatives, understand the key trends and principal drivers affecting businesses to be acquired and to execute the initiatives in a cost effective manner. There are significant risks involved with the execution of these initiatives, including significant business, economic and competitive uncertainties, many of which are outside of our control.

Strategic acquisitions may expose us to additional risks. We may have to compete for acquisition targets and any acquisitions we make may fail to accomplish our strategic objectives or may not perform as expected. In addition, the costs of integrating an acquired business may exceed our estimates and may take significant time and attention from senior management. Accordingly, we cannot predict whether we will succeed in implementing these strategic initiatives. If we fail to successfully diversify our business, it may have a material adverse effect on our competitive position, financial condition and operating results.

The pulp and paper industry is highly cyclical. Fluctuations in the prices of and the demand for the Company’s products could result in lower sales volumes and smaller profit margins. The pulp and paper industry is highly cyclical. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume and margins for the Company’s 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. Most of the Company’s paper products are commodities that are widely available from other producers. Even the Company’s non-commodity products, such as value-added papers, are susceptible to commodity dynamics. Because commodity products have few distinguishing qualities 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 the Company manufactures and distributes, and consequently its sales and profitability, reflect fluctuations in levels of end-user demand, which depend in part on general

18 macroeconomic conditions in North America and worldwide, the continuation of the current level of service and cost of postal services, as well as competition from electronic substitution. See “Conditions in the global capital and credit markets, and the economy generally, can adversely affect the Company business, results of operations and financial position” and “Some of the Company’s products are vulnerable to long-term declines in demand due to competing technologies or materials.” For example, demand for cut-size office paper may fluctuate with levels of white-collar employment. Industry supply of pulp and paper products is also subject to fluctuation, as changing industry conditions can influence producers to idle or permanently close individual machines or entire mills. Such closures can result in significant cash and/or non-cash charges. In addition, to avoid substantial cash costs in connection with idling or closing a mill, some producers will choose to continue to operate at a loss, sometimes even a cash loss, which could prolong weak pricing environments due to oversupply. Oversupply can also result from producers introducing new capacity in response to favorable short-term pricing trends. Industry supply of pulp and paper products is also influenced by overseas production capacity, which has grown in recent years and is expected to continue to grow. As a result, prices for all of the Company’s products are driven by many factors outside of its control, and the Company has little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond the Company’s control determine the prices for its commodity products, the price for any one or more of these products may fall below its cash production costs, requiring the Company to either incur cash losses on product sales or cease production at one or more of its manufacturing facilities. The Company continuously evaluates potential adjustments to its production capacity, which may include additional closures of machines or entire mills, and the Company could recognize significant cash and/or non-cash charges relating to any such closures in future periods. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, under “Closure and restructuring activities.” Therefore, the Company’s profitability with respect to these products depends on managing its cost structure, particularly wood fiber, chemical and energy costs, which represent the largest components of its operating costs and can fluctuate based upon factors beyond its control, as described below. If the prices of or demand for its products decline, or if its wood fiber, chemical or energy costs increase, or both, its sales and profitability could be materially and adversely affected.

Conditions in the global capital and credit markets, and the economy generally, can adversely affect the Company’s business, results of operations and financial position. A significant or prolonged downturn in general economic conditions may affect the Company’s sales and profitability. The Company has exposure to counterparties with which we routinely execute transactions. Such counterparties include commercial banks, insurance companies and other financial institutions, some of which may be exposed to bankruptcy or liquidity risks. While the Company has not realized any significant losses to date, a bankruptcy or illiquidity event by one of its significant counterparties may materially and adversely affect the Company’s access to capital, future business and results of operations. In addition, our customers and suppliers may be adversely affected by severe economic conditions. This could result in reduced demand for our products or our inability to obtain necessary supplies at reasonable costs or at all.

The Company faces intense competition in its markets, and the failure to compete effectively would have a material adverse effect on its business and results of operations. The Company competes with both U.S. and Canadian producers and, for many of its product lines, global producers, some of which may have greater financial resources and lower production costs than the Company. The principal basis for competition is selling price. The Company’s ability to maintain satisfactory margins depends in large part on its ability to control its costs. The Company cannot provide assurance that it will compete effectively and maintain current levels of sales and profitability. If the Company cannot compete effectively, such failure will have a material adverse effect on its business and results of operations.

19 The Company’s manufacturing businesses may have difficulty obtaining wood fiber at favorable prices, or at all. Wood fiber is the principal raw material used by the Company, comprising approximately 20% of the total cost of sales during 2011. Wood fiber is a commodity, and prices historically have been cyclical. The primary source for wood fiber is timber. Environmental litigation and regulatory developments, alternative use for energy production and reduction in harvesting related to the housing market, have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest in the United States and Canada. In addition, future domestic or foreign legislation and litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest health and the response to and prevention of catastrophic wildfires could also affect timber supplies. Availability of harvested timber may be further limited by adverse weather, fire, insect infestation, disease, ice storms, wind storms, flooding and other natural and man made causes, thereby reducing supply and increasing prices. Wood fiber pricing is subject to regional market influences, and the Company’s cost of wood fiber may increase in particular regions due to market shifts in those regions. Any sustained increase in wood fiber prices would increase the Company’s operating costs, and the Company may be unable to increase prices for its products in response to increased wood fiber costs due to additional factors affecting the demand or supply of these products.

The Company currently meets its wood fiber requirements by purchasing wood fiber from third parties and by harvesting timber pursuant to its forest licenses and forest management agreements. If the Company’s cutting rights, pursuant to its forest licenses or forest management agreements are reduced, or any third-party supplier of wood fiber stops selling or is unable to sell wood fiber to the Company, our financial condition or results of operations could be materially and adversely affected.

An increase in the cost of the Company’s purchased energy or chemicals would lead to higher manufacturing costs, thereby reducing its margins. The Company’s operations consume substantial amounts of energy such as electricity, natural gas, fuel oil, coal and hog fuel. Energy comprised approximately 6% of the total cost of sales in 2011. Energy prices, particularly for electricity, natural gas and fuel oil, have been volatile in recent years. As a result, fluctuations in energy prices will impact the Company’s manufacturing costs and contribute to earnings volatility. While the Company purchases substantial portions of its energy under supply contracts, most of these contracts are based on market pricing.

Other raw materials the Company uses include various chemical compounds, such as precipitated calcium carbonate, sodium chlorate and sodium hydroxide, sulfuric acid, dyes, peroxide, methanol and aluminum sulfate. Purchases of chemicals comprised approximately 13% of the total consolidated cost of sales in 2011. The costs of these chemicals have been volatile historically, and they are influenced by capacity utilization, energy prices and other factors beyond the Company’s control.

Due to the commodity nature of the Company’s products, the relationship between industry supply and demand for these products, rather than solely changes in the cost of raw materials, will determine the Company’s ability to increase prices. Consequently, the Company may be unable to pass on increases in its operating costs to its customers. Any sustained increase in chemical or energy prices without any corresponding increase in product pricing would reduce the Company’s operating margins and may have a material adverse effect on its business and results of operations.

The Company depends on third parties for transportation services. The Company relies primarily on third parties for transportation of the products it manufactures and/or distributes, as well as delivery of its raw materials. In particular, a significant portion of the goods it manufactures and raw materials it uses are transported by railroad or trucks, which are highly regulated. If any of its third-party transportation providers were to fail to deliver the goods the Company manufactures or distributes in a timely manner, the Company may be unable to sell those products at full value, or at all. Similarly, if any of

20 these providers were to fail to deliver raw materials to the Company in a timely manner, it may be unable to manufacture its products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with the Company, it 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 the Company’s reputation, negatively impact its customer relationships and have a material adverse effect on its financial condition and operating results.

The Company could experience disruptions in operations and/or increased labor costs due to labor disputes or restructuring activities. Employees at 23 of the Company’s facilities, representing a majority of the Company’s 8,700 employees, are represented by unions through collective bargaining agreements generally on a facility basis. Certain of these agreements expired in 2011 and others will expire between 2012 and 2015. Currently, 12 collective bargaining agreements representing 2,280 employees are up for renegotiation of which six, representing 1,205 employees, are currently under negotiation. The Company may not be able to negotiate acceptable new collective bargaining agreements, which could result in strikes or work stoppages or other labor disputes by affected workers. Renewal of collective bargaining agreements could also result in higher wages or benefits paid to union members. In addition, labor organizing activities could occur at any of the Company’s facilities. Therefore, the Company could experience a disruption of its operations or higher ongoing labor costs, which could have a material adverse effect on its business and financial condition.

In connection with the Company’s restructuring efforts, the Company has suspended operations at, or closed or announced its intention to close, various facilities and may incur liability with respect to affected employees, which could have a material adverse effect on its business or financial condition. In addition, the Company continues to evaluate potential adjustments to its production capacity, which may include additional closures of machines or entire mills, and the Company could recognize significant cash and/or non-cash charges relating to any such closures in the future.

The Company relies heavily on a small number of significant customers, including one customer that represented approximately 10% of the Company’s sales in 2011. A loss of any of these significant customers could materially adversely affect the Company’s business, financial condition or results of operations. The Company heavily relies on a small number of significant customers. The Company’s largest customer, Staples, represented approximately 10% of the Company’s sales in 2011. A significant reduction in sales to any of the Company’s key customers, which could be due to factors outside its control, such as purchasing diversification or financial difficulties experienced by these customers, could materially adversely affect the Company’s business, financial condition or results of operations.

A material disruption at one or more of the Company’s manufacturing facilities could prevent it from meeting customer demand, reduce its sales and/or negatively impact its net income. Any of the Company’s pulp or paper manufacturing facilities, or any of its machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including: • unscheduled maintenance outages; • prolonged power failures; • equipment failure; • chemical spill or release; • explosion of a boiler; • the effect of a drought or reduced rainfall on its water supply;

21 • labor difficulties; • government regulations; • disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels; • adverse weather, fires, floods, earthquakes, hurricanes or other catastrophes; • terrorism or threats of terrorism; or • other operational problems, including those resulting from the risks described in this section.

Events such as those listed above have resulted in operating losses in the past. Future events may cause shutdowns, which may result in additional downtime and/or cause additional damage to the Company’s facilities. Any such downtime or facility damage could prevent the Company from meeting customer demand for its products and/or require it to make unplanned capital expenditures. If one or more of these machines or facilities were to incur significant downtime, it may have a material adverse effect on the Company financial results and financial position.

The Company’s operations require substantial capital, and it may not have adequate capital resources to provide for all of its capital requirements. The Company’s businesses are capital intensive and require that it regularly incur capital expenditures in order to maintain its equipment, increase its operating efficiency and comply with environmental laws. In 2011, the Company’s total capital expenditures were $144 million (2010—$153 million). In addition, $83 million was spent under the Pulp and Paper Green Transformation Program (2010—$51 million), which is reimbursed by the Government of Canada.

If the Company’s available cash resources and cash generated from operations are not sufficient to fund its operating needs and capital expenditures, the Company would have to obtain additional funds from borrowings or other available sources or reduce or delay its capital expenditures. The Company may not be able to obtain additional funds on favorable terms, or at all. In addition, the Company’s debt service obligations will reduce its available cash flows. If the Company cannot maintain or upgrade its equipment as it requires or allocate funds to ensure environmental compliance, it could be required to curtail or cease some of its manufacturing operations, or it may become unable to manufacture products that compete effectively in one or more of its product lines.

The Company and its subsidiaries may incur substantially more debt. This could increase risks associated with its leverage. The Company and its subsidiaries may incur substantial additional indebtedness in the future. Although the revolving credit facility contains restrictions on the incurrence of additional indebtedness, including secured indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be substantial. As of December 31, 2011, the Company had no borrowings and had outstanding letters of credit amounting to $29 million under its revolving credit facility, resulting in $571 million of availability for future drawings under this credit facility. Also, the Company can use securitization of certain receivables to provide additional liquidity to fund its operations. At December 31, 2011 the Company had no borrowings and $28 million of letters of credit outstanding under the securitization program (2010—nil and nil), resulting in $122 million of availability for future drawings under this program. Other new borrowings could also be incurred by Domtar Corporation or its subsidiaries. Among other things, the Company could determine to incur additional debt in connection with a strategic acquisition. If the Company incurs additional debt, the risks associated with its leverage would increase.

22 The Company’s ability to generate the significant amount of cash needed to pay interest and principal on the Company’s unsecured long-term notes and service its other debt and financial obligations and its ability to refinance all or a portion of its indebtedness or obtain additional financing depends on many factors beyond the Company’s control. As of December 31, 2011, the Company had approximately $74 million of annual interest payments and its aggregate debt service obligations are approximately $70 million each year from 2012 through 2015, $50 million in 2016 and $20 million in 2017. The Company’s ability to make payments on and refinance its debt, including the Company’s unsecured long-term notes and amounts borrowed under its revolving credit facility, if any, and other financial obligations and to fund its operations will depend on its ability to generate substantial operating cash flow. The Company’s cash flow generation will depend on its future performance, which will be subject to prevailing economic conditions and to financial, business and other factors, many of which are beyond its control.

The Company’s business may not generate sufficient cash flow from operations and future borrowings may not be available to the Company under its revolving credit facility or otherwise in amounts sufficient to enable the Company to service its indebtedness, including the Company’s unsecured long-term notes, and borrowings, if any, under its revolving credit facility or to fund its other liquidity needs. If the Company cannot service its debt, the Company will have to take actions such as reducing or delaying capital investments, selling assets, restructuring or refinancing its debt or seeking additional equity capital. Any of these remedies may not be effected on commercially reasonable terms, or at all, and may impede the implementation of its business strategy. Furthermore, the revolving credit facility may restrict the Company from adopting any of these alternatives. Because of these and other factors that may be beyond its control, the Company may be unable to service its indebtedness.

The Company is affected by changes in currency exchange rates. The Company manufactures a significant portion of pulp and paper in Canada. Sales of these products by the Company’s Canadian operations will be invoiced in U.S. dollars or in Canadian dollars linked to U.S. pricing but most of the costs relating to these products will be incurred in Canadian dollars. As a result, any decrease in the value of the U.S. dollar relative to the Canadian dollar will reduce the Company’s profitability.

Exchange rate fluctuations are beyond the Company’s control. From 2007 to 2011, the Canadian dollar had appreciated over 15% relative to the U.S. dollar. In 2011, when compared to 2010, the Canadian dollar decreased in value by approximately 2% relative to the U.S. dollar. The level of the Canadian dollar can have a material adverse effect on the sales and profitability of the Canadian operations.

The Company has liabilities with respect to its pension plans and the actual cost of its pension plan obligations could exceed current provisions. As of December 31, 2011, the Company’s defined benefit plans had a surplus of $53 million on certain plans and a deficit of $143 million on others on an ongoing basis. The Company’s future funding obligations for the defined benefit pension plans depend upon changes to the level of benefits provided by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine minimum funding levels, actuarial data and experience, and any changes in government laws and regulations. As of December 31, 2011, the Company’s Canadian defined benefit pension plans held assets with a fair value of $1,445 million (CDN $1,470 million), including a fair value of $205 million (CDN $208 million) of asset backed commercial paper (“ABCP”). Most of the ABCP investments were subject to restructuring (under the court order governing the Montreal Accord that was completed in January 2009) while the remainder is in conduits restructured outside the Montreal Accord or subject to litigation between the sponsor and the credit counterparty.

23 At December 31, 2011, the Company determined that the fair value of these ABCP investments was $205 million (CDN $208 million) (2010—$214 million (CDN $213 million)). Possible changes that could have a material effect on the future value of the ABCP include (1) changes in the value of the underlying assets and the related derivative transactions, (2) developments related to the liquidity of the ABCP market, and (3) a severe and prolonged economic slowdown in North America and the bankruptcy of referenced corporate credits.

The Company does not expect any potential short-term liquidity issues to affect the pension funds since pension fund obligations are primarily long-term in nature. Losses in pension fund investments, if any, would result in future increased contributions by the Company or its Canadian subsidiaries. Additional contributions to these pension funds would be required to be paid over 5 year or 10 year periods, depending upon the applicable provincial requirement for funding solvency deficits. Losses, if any, would also impact operating results over a longer period of time and immediately increase liabilities and reduce equity.

The Company could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations. It could also incur costs as a result of asbestos-related personal injury litigation. The Company is subject, in both the United States and Canada, to a wide range of general and industry- specific laws and regulations relating to the protection of the environment and natural resources, including those governing air emissions, greenhouse gases and climate change, wastewater discharges, harvesting, silvicultural activities, the storage, management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, landfill operation and closure obligations, forestry operations and endangered species habitat, and health and safety matters. In particular, the pulp and paper industry in the United States is subject to the United States Environmental Protection Agency’s (“EPA”) “Cluster Rules.”

The Company has incurred, and expects that it will continue to incur, significant capital, operating and other expenditures complying with applicable environmental laws and regulations as a result of remedial obligations. The Company incurred approximately $62 million of operating expenses and $8 million of capital expenditures in connection with environmental compliance and remediation in 2011. As of December 31, 2011, the Company had a provision of $92 million for environmental expenditures, including certain asset retirement obligations (such as for landfill capping and asbestos removal) ($107 million as of December 31, 2010).

The Company also could incur substantial costs, such as civil or criminal fines, sanctions and enforcement actions (including orders limiting its operations or requiring corrective measures, installation of pollution control equipment or other remedial actions), cleanup and closure costs, and third-party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws and regulations. The Company’s ongoing efforts to identify potential environmental concerns that may be associated with its past and present properties will lead to future environmental investigations. Those efforts will likely result in the determination of additional environmental costs and liabilities which cannot be reasonably estimated at this time.

As the owner and operator of real estate, the Company may be liable under environmental laws for cleanup, closure and other damages resulting from the presence and release of hazardous substances, including asbestos, on or from its properties or operations. The amount and timing of environmental expenditures is difficult to predict, and, in some cases, the Company’s liability may be imposed without regard to contribution or to whether it knew of, or caused, the release of hazardous substances and may exceed forecasted amounts or the value of the property itself. The discovery of additional contamination or the imposition of additional cleanup obligations at the Company’s or third-party sites may result in significant additional costs. Any material liability the Company incurs could adversely impact its financial condition or preclude it from making capital expenditures that would otherwise benefit its business.

In addition, the Company may be subject to asbestos-related personal injury litigation arising out of exposure to asbestos on or from its properties or operations, and may incur substantial costs as a result of any defense, settlement, or adverse judgment in such litigation. The Company may not have access to insurance proceeds to cover costs associated with asbestos-related personal injury litigation.

24 Enactment of new environmental laws or regulations or changes in existing laws or regulations, or interpretation thereof, might require significant expenditures. For example, changes in climate change regulation—See Part I, Item 3, Legal Proceedings, under the caption “Climate change regulation,” and see Part II, Item 8, Note 22 “Commitments and Contingencies” “Industrial Boiler Maximum Achievable Controlled Technology Standard (“MACT”).”

The Company may be unable to generate funds or other sources of liquidity and capital to fund environmental liabilities or expenditures.

Failure to comply with applicable laws and regulations could have a material adverse affect on our business, financial results or condition. In addition to environmental laws, our business and operations are subject to a broad range of other laws and regulations in the United States and Canada as well as other jurisdictions in which we operate, including antitrust and competition laws, occupational health and safety laws and employment laws. Many of these laws and regulations are complex and subject to evolving and differing interpretation. If the Company is determined to have violated any such laws or regulations, whether inadvertently or willfully, it may be subject to civil and criminal penalties, including substantial fines, or claims for damages by third parties which may have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company’s intellectual property rights are valuable, and any inability to protect them could reduce the value of its products and its brands. The Company relies on patent, trademark and other intellectual property laws of the United States and other countries to protect its intellectual property rights. However, the Company may be unable to prevent third parties from using its intellectual property without its authorization, which may reduce any competitive advantage it has developed. If the Company had to litigate to protect these rights, any proceedings could be costly, and it may not prevail. The Company cannot guarantee that any United States or foreign patents, issued or pending, will provide it with any competitive advantage or will not be challenged by third parties. Additionally, the Company has obtained and applied for United States and foreign trademark registrations, and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any of its pending patent or trademark applications will be approved by the applicable governmental authorities and, even if the applications are approved, third parties may seek to oppose or otherwise challenge these registrations. The failure to secure any pending patent or trademark applications may limit the Company’s ability to protect the intellectual property rights that these applications were intended to cover.

If the Company is unable to successfully retain and develop executive leadership and other key personnel, it may be unable to fully realize critical organizational strategies, goals and objectives. The success of the Company is substantially dependent on the efforts and abilities of its key personnel, including its executive management team, to develop and implement its business strategies and manage its operations. The failure to retain key personnel or to develop successors with appropriate skills and experience for key positions in the Company could adversely affect the development and achievement of critical organizational strategies, goals and objectives. There can be no assurance that the Company will be able to retain or develop the key personnel it needs and the failure to do so may adversely affect its financial condition and results of operations.

A third party has demanded an increase in consideration from Domtar Inc. under an existing contract. In July 1998, Domtar Inc. (now a 100% owned subsidiary of Domtar 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

25 the event of the acquisition by a third-party of more than 50% of the shares of Domtar Inc. in specified circumstances, Domtar Inc. may be required to pay an increase in consideration of up to a maximum of $118 million (CDN$120 million), an amount gradually declining over a 25-year period. At March 7, 2007, the maximum amount of the purchase price adjustment was approximately $108 million (CDN$110 million).

On March 14, 2007, the Company received a letter from George Weston Limited (the previous owner of E.B. Eddy and a party to the purchase agreement) demanding payment of $108 million (CDN$110 million) as a result of the consummation of the series of transactions whereby the Fine Paper Business of Weyerhaeuser Company was transferred to the Company and the Company acquired Domtar Inc. (the “Transaction”). On June 12, 2007, an action was commenced by George Weston Limited against Domtar Inc. in the Superior Court of Justice of the Province of Ontario, Canada, claiming that the consummation of the Transaction triggered the purchase price adjustment and sought a purchase price adjustment of $108 million (CDN$110 million) as well as additional compensatory damages. The Company does not believe that the consummation of the Transaction triggers an obligation to pay an increase in consideration under the purchase price adjustment and intends to defend itself vigorously against any claims with respect thereto. However, the Company may not be successful in its defense of such claims, and if the Company is ultimately required to pay an increase in consideration, such payment may have a material adverse effect on the Company’s financial position, results of operations or cash flows. On March 31, 2011, George Weston Limited filed a motion for summary judgment which the Company expects to be resolved by the Court in due course. No provision is recorded for this potential purchase price adjustment.

ITEM 1B. UNRESOLVED STAFF COMMENTS None.

ITEM 2. PROPERTIES A description of our mills and related properties is included in Part I, Item I, Business, of this Annual Report on Form 10-K.

Production facilities We own all of our production facilities with the exception of certain portions that are subject to leases with government agencies in connection with industrial development bond financings or fee-in-lieu-of-tax agreements, and lease substantially all of our sales offices, regional replenishment centers and warehouse facilities. We believe our properties are in good operating condition and are suitable and adequate for the operations for which they are used. We own substantially all of the equipment used in our facilities.

Forestlands We optimized 16 million acres of forestland directly and indirectly licensed or owned 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.

26 Listing of facilities and locations

Head Office Forms Manufacturing: Memphis, Tennessee Montreal, Quebec Dallas, Texas Antioch, Tennessee Indianapolis, Indiana El Paso, Texas Pulp and Paper Rock Hill, South Carolina Garland, Texas Operation Center: Houston, Texas Fort Mill, South Carolina Enterprise Group*—United San Antonio, Texas States: Uncoated Freesheet: Salt Lake City, Utah Birmingham, Alabama Ashdown, Arkansas Richmond, Virginia Phoenix, Arizona Espanola, Ontario Kent, Washington Little Rock, Arkansas Hawesville, Kentucky Vancouver, Washington San Lorenzo, California Johnsonburg, Pennsylvania Milwaukee, Wisconsin Riverside, California Kingsport, Tennessee Denver, Colorado Enterprise Group*—Canada: Marlboro, South Carolina Jacksonville, Florida Calgary, Alberta Nekoosa, Wisconsin Lakeland, Florida Dorval, Quebec Port Huron, Michigan Medley, Florida Etobicoke, Ontario Rothschild, Wisconsin Duluth, Georgia Delta, British Columbia Windsor, Quebec Boise, Idaho Regional Replenishment Centers Pulp: Addison, Illinois (RRC)—United States: Dryden, Ontario East Peoria, Illinois Charlotte, North Carolina Kamloops, British Columbia Evansville, Indiana Addison, Illinois Plymouth, North Carolina Fort Wayne, Indiana Garland, Texas Indianapolis, Indiana Chip Mills: Jacksonville, Florida Altoona, Iowa Hawesville, Kentucky Langhorne, Pennsylvania Kansas City, Kansas Johnsonburg, Pennsylvania Mira Loma, California Lexington, Kentucky Kingsport, Tennessee Kent, Washington Louisville, Kentucky Marlboro, South Carolina Kenner, Louisiana Regional Replenishment Centers Converting and Distribution— Mansfield, Massachusetts (RRC)—Canada: Onsite: Wayland, Michigan Richmond, Quebec Ashdown, Arkansas Wayne, Michigan Missisauga, Ontario Rothschild, Wisconsin Minneapolis, Minnesota Winnipeg, Manitoba Windsor, Quebec Jackson, Mississippi Representative office— Overland, Missouri Converting and Distribution— International Omaha, Nebraska Offsite: Hong Kong, China Hoboken, New Jersey Addison, Illinois Albuquerque, New Mexico Distribution Brownsville, Tennessee Buffalo, New York Head Office: Dallas, Texas Syracuse, New York Covington, Kentucky DuBois, Pennsylvania Charlotte, North Carolina Griffin, Georgia Ariva—Eastern Region: Brookpark, Ohio Indianapolis, Indiana Albany, New York Cincinnati, Ohio Mira Loma, California Boston, Massachusetts Plain City, Ohio Owensboro, Kentucky Harrisburg, Pennsylvania Oklahoma City, Oklahoma Ridgefields, Tennessee Hartford, Connecticut Tulsa, Oklahoma Tatum, South Carolina Lancaster, Pennsylvania Langhorne, Pennsylvania Washington Court House, Ohio New York, New York Pittsburgh, Pennsylvania Guangzhou, China Philadelphia, Pennsylvania Rock Hill, South Carolina Southport, Connecticut Chattanooga, Tennessee Washington, DC / Baltimore, Knoxville, Tennessee Maryland

27 Ariva—MidWest Region: Ariva—Canada: Personal Care Covington, Kentucky Ottawa, Ontario Attends North America—Head Cincinnati, Ohio Toronto, Ontario Office, Manufacturing and Cleveland, Ohio Montreal, Quebec Distribution: Columbus, Ohio Quebec City, Quebec Greenville, North Carolina Dayton, Ohio Halifax, Nova Scotia Dallas/Fort Worth, Texas Mount Pearl, Newfoundland Fort Wayne, Indiana Indianapolis, Indiana

* Enterprise Group is involved in the sale and distribution of Domtar papers, notably continuous forms, cut size business papers as well as digital papers, converting rolls and specialty products.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. The Company periodically reviews the status of these proceedings and assesses the likelihood of any adverse judgments or outcomes of these legal proceedings, as well as analyzes probable losses. Although the final outcome of any legal proceeding is subject to a number of variables and cannot be predicted with any degree of certainty, management currently believes that the ultimate outcome of current legal proceedings will not have a material adverse effect on the Company’s long-term results of operations, cash flow or financial position. However, an adverse outcome in one or more of the following significant legal proceedings could have a material adverse effect on our results or cash flow in a given quarter or year.

Prince Albert facility The pulp and paper mill in Prince Albert was closed in the first quarter of 2006 and has not been operated since. In December 2009, the Company decided to dismantle the Prince Albert facility. In a grievance relating to the closure of the Prince Albert facility, the union claimed that it was entitled to the accumulated pension benefits during the actual layoff period because, according to the union, a majority of employees still had recall rights during the layoff. Arbitration in this matter was held in February 2010, and the arbitrator ruled in favor of the Company on August 24, 2010. As a result of the sale of the Prince Albert facility to Paper Excellence Canada Holdings Corporation (“Paper Excellence”) in May 2011, the union agreed to release any claims for judicial review it may have against the Company in relation to the grievance.

Acquisition of E.B. Eddy Limited and E.B. Eddy Paper, Inc. In July 1998, Domtar Inc. (now a 100% owned subsidiary of Domtar 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 included a purchase price adjustment whereby, in the event of the acquisition by a third party of more than 50% of the shares of Domtar Inc. in specified circumstances, Domtar Inc. may be required to pay an increase in consideration of up to a maximum of $118 million (CDN$120 million), an amount gradually declining over a 25-year period. At March 7, 2007, the maximum amount of the purchase price adjustment was approximately $108 million (CDN$110 million).

On March 14, 2007, the Company received a letter from George Weston Limited (the previous owner of E.B. Eddy and a party to the purchase agreement) demanding payment of $108 million (CDN$110 million) as a result of the consummation of the Transaction. On June 12, 2007, an action was commenced by George Weston Limited against Domtar Inc. in the Superior Court of Justice of the Province of Ontario, Canada, claiming that the consummation of the Transaction triggered the purchase price adjustment and sought a purchase price adjustment of $108 million (CDN$110 million) as well as additional compensatory damages. The Company does

28 not believe that the consummation of the Transaction triggers an obligation to pay an increase in consideration under the purchase price adjustment and intends to defend itself vigorously against any claims with respect thereto. However, the Company may not be successful in the defense of such claims, and if the Company is ultimately required to pay an increase in consideration, such payment may have a material adverse effect on the Company’s financial position, results of operations or cash flows. On March 31, 2011, George Weston Limited filed a motion for summary judgment which the Company expects to be resolved by the Court in due course. No provision is recorded for this potential purchase price adjustment.

Asbestos claims Various asbestos-related personal injury claims have been filed in U.S. state and federal courts against Domtar Industries Inc. and certain other affiliates of the Company in connection with alleged exposure by people to products or premises containing asbestos. While the Company believes that the ultimate disposition of these matters, both individually and on an aggregate basis, will not have a material adverse effect on its financial condition, there can be no assurance that the Company will not incur substantial costs as a result of any such claim. These claims have not yielded a significant exposure in the past. The Company has recorded a provision for these claims and any reasonable possible loss in excess of the provision is not considered to be material.

Environment The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities.

Domtar Inc. and the Company is or may be a “potentially responsible party” with respect to various hazardous waste sites that are being addressed pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“Superfund”) or similar laws. Domtar continues to take remedial action under its Care and Control Program, as such sites mostly relate to its former wood preserving operating sites, and a number of operating sites due to possible soil, sediment or groundwater contamination. The investigation and remediation process is lengthy and subject to the uncertainties of changes in legal requirements, technological developments and, if and when applicable, the allocation of liability among potentially responsible parties.

During the first quarter of 2006, the pulp and paper mill in Prince Albert was closed due to poor market conditions. The Company’s management determined that the Prince Albert facility was no longer a strategic fit for the Company and would not be reopened. On May 3, 2011, Domtar sold its Prince Albert facility to Paper Excellence Canada Holdings Corporation (“Paper Excellence”). Paper Excellence agreed to assume all past, present and future known and unknown environmental liabilities and as such, the Company removed its reserve for environmental liabilities for this site in the second quarter of 2011.

An action was commenced by Seaspan International Ltd. (“Seaspan”) in the Supreme Court of British Columbia, on March 31, 1999 against Domtar Inc. and others with respect to alleged contamination of Seaspan’s site bordering Burrard Inlet in North Vancouver, British Columbia, including contamination of sediments in Burrard Inlet, due to the presence of creosote and heavy metals. On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan and Domtar Inc. in order to define and implement an action plan to address soil, sediment and groundwater issues. This Order was appealed to the Environmental Appeal Board (“Board”) on March 17, 2010 but there is no suspension in the execution of this Order unless the Board orders otherwise. The appeal hearing has been scheduled for October 2012. The relevant government authorities selected a remediation plan on July 15, 2011. In the interim, no stay of execution has been granted or requested. The Company has recorded an environmental reserve to address estimated exposure and the reasonably possible loss in excess of the reserve is not considered to be material.

At December 31, 2011, the Company had a provision of $92 million ($107 million at December 31, 2010) for environmental matters and other asset retirement obligations. Certain of these amounts have been discounted

29 due to more certainty of the timing of expenditures. Additional costs, not known or identifiable, could be incurred for remediation efforts. Based on policies and procedures in place to monitor environmental exposure, management believes that such additional remediation costs would not have a material adverse effect on the Company’s financial position, result of operations or cash flows.

Climate change regulation Since 1997, when an international conference on global warming concluded an agreement known as the Kyoto Protocol, which called for reductions of certain emissions that may contribute to increases in atmospheric greenhouse gas (“GHG”) concentrations, various international, national and local laws have been proposed or implemented focusing on reducing GHG emissions. These actual or proposed laws do or may apply in the countries where the Company currently has, or may have in the future, manufacturing facilities or investments.

In the United States, Congress has considered legislation to reduce emissions of GHGs, although it appears unlikely that any Federal legislation will be actively considered again until after the 2012 elections. Several states already are regulating GHG emissions from public utilities and certain other significant emitters, primarily through regional GHG cap-and-trade programs. Furthermore, the U.S. Environmental Protection Agency (“EPA”) is expected, in 2012, to propose GHG permitting requirements for some existing industrial facilities under the agency’s existing Clean Air Act authority. Passage of GHG legislation by Congress or individual states, or the adoption of regulations by the EPA or analogous state agencies, that restrict emissions of GHGs in areas in which the Company conducts business could have a variety of impacts upon the Company, including requiring it to implement GHG containment and reduction programs or to pay taxes or other fees with respect to any failure to achieve the mandated results. This, in turn, will increase the Company’s operating costs, which, to the extent passed through to customers, could reduce demand for the Company’s products. However, the Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers in the United States.

The province of Quebec initiated, as part of its commitment to the Western Climate Initiative (“WCI”), a GHG cap-and-trade system on January 1, 2012. Reduction targets for Quebec are expected to be promulgated later in 2012, to be effective January 1, 2013. There are presently no federal or provincial legislation on regulatory obligations to reduce GHGs for the Company’s pulp and paper operations elsewhere in Canada.

While it is likely that there will be increased regulation relating to GHG emissions in the future, at this stage it is not possible to estimate either a timetable for the promulgation or implementation of any new regulations or the Company’s cost of compliance to said regulations. The impact could, however, be material.

ITEM 4. MINE SAFETY DISCLOSURES Not applicable.

30 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION Domtar Corporation’s common stock is traded on the New York Stock Exchange and the Toronto Stock Exchange under the symbol “UFS.” The following table sets forth the price ranges of our common stock during 2011 and 2010.

New York Stock Toronto Stock Exchange Exchange ($) (CDN$) High Low Close High Low Close 2011 Quarter First 93.88 75.49 91.78 92.71 75.43 89.00 Second 105.80 84.72 94.72 102.31 81.53 91.37 Third 99.65 64.58 68.17 95.44 63.88 71.36 Fourth 85.21 62.28 79.96 84.82 66.12 81.51 Year 105.80 62.28 79.96 102.31 63.88 81.51 2010 Quarter First 69.99 47.26 64.41 70.75 50.90 65.44 Second 78.93 48.33 49.15 79.36 50.75 52.02 Third 66.44 46.25 64.58 69.50 48.85 67.00 Fourth 84.96 62.86 75.92 86.28 64.36 75.69 Year 84.96 46.25 75.92 86.28 48.85 75.69

HOLDERS At December 31, 2011, the number of shareholders of record (registered and non-registered) of Domtar Corporation common stock was approximately 10,819 and the number of shareholders of record (registered and non-registered) of Domtar (Canada) Paper Inc. exchangeable shares was approximately 6,311.

DIVIDENDS AND STOCK REPURCHASE PROGRAM In 2011, Domtar Corporation declared and paid four quarterly dividends. The first quarter dividend was $0.25 per share relating to 2010 and the remainder were $0.35 per share relating to 2011, to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc., a subsidiary of Domtar Corporation. The total dividends of approximately $10 million, $15 million and $13 million were paid on April 15, July 15 and October 17, 2011, respectively, and the fourth quarter dividend of approximately $13 million was paid on January 17, 2012.

In 2010, Domtar Corporation declared three and paid two quarterly dividends of $0.25 per share to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc., a subsidiary of Domtar Corporation. The total dividends of approximately $11 million and $10 million were paid on July 15 and October 15, 2010, respectively, and the third total dividend of approximately $11 million was paid on January 17, 2011.

On February 22, 2012, our Board of Directors approved a quarterly dividend of $0.35 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc. This dividend is to be paid on April 16, 2012 to shareholders of record on March 15, 2012.

31 In addition, on May 4, 2010 the Board of Directors authorized a stock repurchase program (the “Program”) for up to $150 million of the Company’s common stock. On May 4, 2011, the Company’s Board of Directors approved an increase to the Program from $150 million to $600 million. On December 15, 2011, the Company’s Board of Directors approved another increase to the Program from $600 million to $1 billion. Under the Program, the Company is authorized to repurchase from time to time shares of its outstanding common stock on the open market or in privately negotiated transactions in the United States. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock, from time to time, in part to reduce the dilutive effects of its stock options, awards, and employee stock purchase plan and to improve shareholders’ returns.

The Company makes open market purchases of its common stock using general corporate funds. Additionally, it may enter into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements require the Company to make an up-front payment to the counterparty financial institution which results in either (i) the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or (ii) the receipt of either stock or cash at the maturity of the agreements depending upon the price of the stock.

During 2011, the Company repurchased 5,921,732 shares at an average price of $83.52 for a total cost of $494 million.

During 2010, the Company repurchased 738,047 shares at an average price of $59.96 for a total cost of $44 million. Also in 2010, the Company entered into structured stock repurchase agreements that did not result in the repurchase of shares but resulted in net gains of $2 million which are recorded as a component of Shareholders’ equity.

All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

Share repurchase activity under our share repurchase program was as follows during the year ended December 31, 2011:

(d) Approximate Dollar (c) Total Number of Value of Shares that Shares Purchased as May Yet be Purchased Part of Publicly under the Plans or (a) Total Number of (b) Average Price Paid Announced Plans or Programs Period Shares Purchased per Share Programs (in 000s) January 1 through March 31, 2011 789,957 $87.79 789,957 $ 36,396 April 1 through June 30, 2011 1,682,047 $98.27 1,682,047 $321,105 July 1 through September 30, 2011 2,515,791 $76.13 2,515,791 $129,575 October 1 through December 31, 2011 933,937 $73.23 933,937 $461,186 5,921,732 $83.52 5,921,732 $461,186

32 PERFORMANCE GRAPH This graph compares the return on a $100 investment in the Company’s common stock on March 7, 2007 with a $100 investment in an equally-weighted portfolio of a peer group(1), and a $100 investment in the S&P 400 Midcap Index. This graph assumes that returns are in local currencies and assumes quarterly reinvestment of dividends. The measurement dates are the last trading day of the period as shown.

Return on $100 Investment

140

120

100

80

Dollars 60

40

20

0 3/6/2007 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011

Domtar Corporation Peer Group S&P 400 S&P 500 S&P 500 Materials

In May 2011, Domtar Corporation was added to the Standard and Poor’s MidCap 400 Index and will be using this Index going forward.

(1) On May 18, 2007, the Human Resources Committee of the Board of Directors established performance measures as part of the Performance Conditioned Restricted Stock Unit (“PCRSUs”) Agreement including the achievement of a total shareholder return compared to a peer group. The 2011 peer group includes Buckeye Technologies Inc., Clearwater Paper Corporation, RockTenn Company, Temple-Inland Inc, Kapstone Paper & Packaging Corporation, Schweitzer-Mauduit International Inc., and Sonoco Products Company, Glatfelter Corporation, International Paper Co., MeadWestvaco Corporation, Packaging Corp. of America, Sappi Ltd., Smurfit-Stone Container Corp., UPM-Kymmene Corp., and Wausau Paper Corporation.

This graph assumes that returns are in local currencies and assumes quarterly reinvestment of dividends and special dividends.

33 ITEM 6. SELECTED FINANCIAL DATA The following sets forth selected historical financial data of the Company for the periods and as of the dates indicated. The selected financial data as of and for the fiscal years then ended have been derived from the audited financial statements of Domtar Corporation. The 2007 fiscal year ended on the last Sunday of the calendar year. Starting in 2008, the fiscal year was based on the calendar year and ends December 31.

The Company acquired Domtar Inc. as of March 7, 2007. Accordingly, the results of operations for Domtar Inc. are reflected in the financial statements only as of and for the period after that date. Prior to March 7, 2007, the financial statements of the Company reflect only the results of operations of the Weyerhaeuser Fine Paper Business. The following table should be read in conjunction with Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Year ended December 31, December 31, December 31, December 31, December 30, FIVE YEAR FINANCIAL SUMMARY 2011 2010 2009 2008(1) 2007 (In millions of dollars, except per share figures) Statement of Income Data: Sales $5,612 $5,850 $5,465 $ 6,394 $5,947 Closure and restructuring costs and, impairment and write-down of goodwill, property, plant and equipment and intangible assets 137 77 125 751 110 Depreciation and amortization 376 395 405 463 471 Operating income (loss) 592 603 615 (437) 270 Net earnings (loss) 365 605 310 (573) 70 Net earnings (loss) per share—basic $ 9.15 $14.14 $ 7.21 ($13.33) $ 1.77 Net earnings (loss) per share—diluted $ 9.08 $14.00 $ 7.18 ($13.33) $ 1.76 Cash dividends declared per common and exchangeable share $ 1.30 $ 0.75 — — — Balance Sheet Data: Cash and cash equivalents $ 444 $ 530 $ 324 $ 16 $ 71 Net property, plant and equipment 3,459 3,767 4,129 4,301 5,362 Total assets 5,869 6,026 6,519 6,104 7,726 Long-term debt 837 825 1,701 2,110 2,213 Total shareholders’ equity 2,972 3,202 2,662 2,143 3,197 (1) In 2008, the Company conducted an impairment test on its goodwill and concluded that goodwill was impaired and the Company recorded a non-cash impairment charge of $321 million. Also in 2008, the Company conducted impairment tests on its Dryden and Columbus facilities and concluded the assets were impaired and recorded a non-cash impairment charge of $360 million.

34 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with Domtar Corporation’s audited consolidated financial statements and notes thereto included in Part II, in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refer to Domtar Corporation and its subsidiaries, as well as its investments. Domtar Corporation’s common stock is listed on the New York Stock Exchange and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is determined on the basis of accounting principles generally accepted in the United States (“GAAP”).

In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT” refers to an air dry metric ton and the term “MFBM” refers to million foot board measure. In this report, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars, and the term “dollars” and the symbol “$” refer to U.S. dollars. In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, prices, contribution to net earnings (loss), and shipment volume are based on the twelve month periods ended December 31, 2011, 2010 and 2009. The twelve month periods are also referred to as 2011, 2010 and 2009.

EXECUTIVE SUMMARY In 2011, we reported operating income of $592 million, a decrease of $11 million compared to $603 million in 2010. This decrease is mainly attributable to increased asset impairment and write-down of property, plant and equipment as well as restructuring charges recorded in 2011, combined with an overall decrease in sales. Our overall sales decreased due to decreased demand in our Pulp and Paper and Distribution segments. The operating profit of 2010 included the net loss on the sale of our Wood business and our Woodland, Maine mill. In addition, we recorded $25 million of fuel tax credits, which had a positive impact on our results. Excluding those 2010 items, operating profit improved as compared to 2010. This is due to the acquisition of Attends Healthcare Inc., in the third quarter of 2011 and increased sales prices in paper.

These and other factors that affected the year-over-year comparison of financial results are discussed in the year-over-year and segment analysis.

Prices for pulp are still expected to continue to remain under pressure in certain geographies, while market dynamics in the Asian markets are stabilizing. In fine papers, North American demand is expected to decline at a rate of 2-4% in 2012, consistent with long-term forecasts. Any acceleration in employment growth may help mitigate the structural decline in paper demand. Inflation on input costs is expected to be moderate in 2012.

Closure and restructuring activities We regularly review our overall production capacity with the objective of aligning our production capacity with anticipated long-term demand.

During the fourth quarter of 2011, we decided to withdraw from one of our U.S. multiemployer pension plans and recorded an estimated withdrawal liability and a charge to earnings of $32 million. We also incurred in the fourth quarter of 2011, a $9 million loss from a pension curtailment associated with the conversion of certain of our U.S defined benefit pension plans to defined contribution pension plans.

Following the permanent closure announced on December 18, 2008 of our Lebel-sur-Quévillon pulp mill and sawmill, we recorded a $4 million loss related to pension curtailment in 2009. Operations at the pulp mill had been indefinitely idled since November 2005 due to unfavorable economic conditions and the sawmill had

35 been indefinitely idled since 2006. At the time, the pulp mill and sawmill employed 425 and 140 employees, respectively. The Lebel-sur-Quévillon pulp mill had an annual production capacity of 300,000 metric tons. During 2011, we reversed $2 million of severance and termination provision and following the signing of a definitive agreement (see Item II, Part 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 27 “Subsequent events”), we recorded a $12 million write-down for the remaining fixed assets net book value, a component of Impairment and write-down of property, plant and equipment.

On March 29, 2011, we announced that on July 1, 2011, we would permanently shut down one paper machine at our Ashdown, Arkansas pulp and paper mill. We subsequently postponed the shut down of the paper machine until August 1, 2011. The closure resulted in an aggregate pre-tax charge to earnings of approximately $75 million, which included $74 million in non-cash charges relating to the accelerated depreciation of the carrying amounts of manufacturing equipment and the write-off of related spare parts and $1 million related to other costs. This closure reduced Domtar’s annual uncoated freesheet paper production capacity by approximately 125,000 short tons and the mill’s workforce by approximately 110 employees. Operations ceased on August 1, 2011.

On February 1, 2011, we announced the closure of our Langhorne, Pennsylvania forms converting center. The closure resulted in a charge to earnings of $4 million for severance and termination costs. The closure affected 48 employees.

In November 2010, we announced the start up of our new fluff pulp machine in Plymouth, North Carolina, which increased annual fluff pulp making capacity to approximately 444,000 metric tons. The conversion of our Plymouth pulp and paper mill in 2009 is discussed below.

In July 2010, we announced our decision to end all manufacturing activities at our forms converting plant in Cerritos, California. Operations ceased on July 16, 2010. Approximately 50 plant employees were impacted by this decision.

In March 2010, we announced the permanent closure of our coated groundwood paper mill in Columbus, Mississippi. Operations ceased in April 2010. This measure resulted in the permanent curtailment of approximately 238,000 tons of coated groundwood production capacity per year as well as approximately 70,000 metric tons of thermo-mechanical pulp, and affected approximately 219 employees.

Our Prince Albert pulp and paper mill was closed in the first quarter of 2006 due to poor market conditions and had not been operated since. Our management determined that our Prince Albert facility was no longer a strategic fit, and would not be reopened. On May 3, 2011, we sold our Prince Albert pulp and paper mill to Paper Excellence, and recorded a loss on sale of $12 million in the second quarter of 2011.

In February 2009, we announced the permanent shut down of a paper machine at our Plymouth pulp and paper mill, effective at the end of February 2009. This measure resulted in the permanent curtailment of approximately 293,000 tons of paper production capacity per year and affected approximately 185 employees. In October 2009, we announced that we would convert our Plymouth pulp and paper mill to 100% fluff pulp production at a cost of $74 million. Our annual fluff pulp making capacity has increased to 444,000 metric tons. The mill conversion also resulted in the permanent shut down of Plymouth’s remaining paper machine with an annual production capacity of 199,000 tons. The mill conversion helped preserve approximately 360 positions. In connection with this announcement, we recognized $13 million of accelerated depreciation in the fourth quarter of 2009, and a further $39 million of accelerated depreciation over the first nine months of 2010 was recorded in relation to the assets that ceased productive use in October 2010. The remaining assets of this facility were tested for impairment at the time of this 2009 announcement, and no additional impairment charge was required.

In April 2009, we announced that we would idle our Dryden pulp facility for approximately ten weeks, effective April 25, 2009. This decision was taken in response to continued weak global demand at that time for

36 pulp and the need to manage inventory levels. In addition, we also idled our former Ear Falls sawmill for approximately seven weeks, effective April 10, 2009, as this sawmill was a supplier of chips to our Dryden pulp mill. These temporary measures affected approximately 500 employees at the pulp mill, sawmill and related forestland operations. Our Dryden pulp mill has an annual softwood pulp production capacity of 319,000 metric tons. The former Ear Falls sawmill had an annual production capacity of 190 MFBM. Our Dryden pulp mill restarted its pulp production in July 2009. Our former Ear Falls sawmill restarted its operations in August 2009, but we decided to indefinitely idle the sawmill again, effective in the fourth quarter of 2009.

We continue to evaluate potential adjustments to our production capacity, which may include additional closures of machines or entire mills, and we could recognize significant cash and/or non-cash charges relating to any such closures in future periods.

Sale of Woodland, Maine hardwood market pulp mill On September 30, 2010, we sold our Woodland hardwood market pulp mill, hydro electric assets and related assets, located in Baileyville, Maine and New Brunswick, Canada. The purchase price was for an aggregate value of $60 million plus net working capital of $8 million. The sale resulted in a gain on disposal of the Woodland, Maine mill of $10 million net of related pension curtailments costs of $2 million.

The Woodland, Maine mill was our only non-integrated hardwood market pulp mill. It had an annual production capacity of 395,000 metric tons and employed approximately 300 people.

Sale of Wood business On June 30, 2010, we sold our Wood business to EACOM Timber Corporation (“EACOM”), following the obtainment of various third party consents and customary closing conditions, which included approvals of transfers of cutting rights in Quebec and Ontario, for proceeds of $75 million (CDN$80 million) plus elements of working capital of approximately $42 million (CDN$45 million). We received 19% of the proceeds in shares of EACOM representing an approximate 12% ownership interest in EACOM. The sale resulted in a loss on disposal of the Wood business and related pension and other post retirement benefit plan curtailments and settlements of $50 million, which was recorded in the second quarter of 2010 in Other operating (income) loss on the Consolidated Statement of Earnings. Our investment in EACOM was then accounted for under the equity method.

The transaction included the sale of five operating sawmills: Timmins, Nairn Centre and Gogama in Ontario, and Val-d’Or and Matagami in Quebec; as well as two non-operating sawmills: Ear Falls in Ontario and Ste-Marie in Quebec. The sawmills had approximately 3.5 million cubic meters of annual harvesting rights and a production capacity of close to 900 million board feet. Also included in the transaction was the Sullivan remanufacturing facility in Quebec and our interests in two investments: Anthony-Domtar Inc. and Elk Lake Planning Mill Limited.

In December 2010, in an unrelated transaction, we sold our remaining investment in EACOM Timber Corporation for CDN$0.51 per common share for net proceeds of $24 million (CDN$24 million) resulting in no further gain or loss. We have fiber supply agreements in place with our former wood division at our Espanola facility. Since these continuing cash outflows are expected to be significant to the former Wood business, the sale of the Wood business did not qualify as a discontinued operation under ASC 205-20.

Dividend and Stock Repurchase Program In 2011, we repurchased 5,921,732 shares at $83.52 for a total of $494 million and paid dividends of $49 million.

37 Cellulosic Biofuel Credit In July 2010, the U.S. Internal Revenue Service (“IRS”) Office of Chief Counsel released an Advice Memorandum concluding that qualifying cellulose biofuel sold or used before January 1, 2010, is eligible for the cellulosic biofuel producer credit (“CBPC”) and would not be required to be registered by the Environmental Protection Agency. Each gallon of qualifying cellulose biofuel produced by any taxpayer operating a pulp and paper mill and used as a fuel in the taxpayer’s trade or business during calendar year 2009 would qualify for the $1.01 non-refundable CBPC. A taxpayer could be able to claim the credit on its federal income tax return for the 2009 tax year upon the receipt of a letter of registration from the IRS and any unused CBPC could be carried forward until 2015 to offset a portion of federal taxes otherwise payable.

We had approximately 207 million gallons of cellulose biofuel that qualified for this CBPC for which we had not previously claimed under the Alternative Fuel Mixture Credit (“AFMC”) that represented approximately $209 million of CBPC or approximately $127 million of after tax benefit to the Corporation. In July 2010, we submitted an application with the IRS to be registered for the CBPC and on September 28, 2010, we received our notification from the IRS that we were successfully registered. On October 15, 2010 the IRS Office of Chief Counsel issued an Advice Memorandum concluding that the AFMC and CBPC could be claimed in the same year for different volumes of biofuel. In November 2010, we filed an amended 2009 tax return with the IRS claiming a cellulosic biofuel producer credit of $209 million and recorded a net tax benefit of $127 million in Income tax expense (benefit) on the Consolidated Statement of Earnings for December 31, 2010. As of December 31, 2011, approximately $25 million of this credit remains to offset future U.S. federal income tax liability.

Valuation Allowances In 2011, we recorded a valuation allowance of $4 million related to state tax credits in U.S. that we expect to expire prior to utilization. This impacted the U.S. and overall consolidated effective tax rate for 2011.

In 2010, we released the valuation allowance on our Canadian net deferred tax assets during the fourth quarter. The full $164 million valuation allowance balance that existed at January 1st, 2010 was either utilized during 2010 or reversed at the end of 2010 based on future projected income, which impacted the Canadian and overall consolidated effective tax rate.

Alternative Fuel Tax Credits The U.S. Internal Revenue Code of 1986, as amended (the “Code”) permitted a refundable excise tax credit, until the end of 2009, for the production and use of alternative bio fuel mixtures derived from biomass. We submitted an application with the IRS to be registered as an alternative fuel mixer and received notification that our registration had been accepted in late March 2009. We began producing and consuming alternative fuel mixtures in February 2009 at our eligible mills. Although the credit ended at the end of 2009, in 2010, we recorded $25 million of such credits in Other operating (income) loss on the Consolidated Statement of Earnings (Loss) compared to $498 million in 2009. The $25 million represented an adjustment to amounts presented as deferred revenue at December 31, 2009 and was released to income following guidance issued by the IRS in March 2010. We recorded an income tax expense of $7 million in 2010 compared to $162 million in 2009 related to the alternative fuel mixture income. The amounts for the refundable credits were based on the volume of alternative bio fuel mixtures produced and burned during that period.

In 2009, we received a $140 million cash refund and another $368 million cash refund, net of federal income tax offsets, in 2010. Additional information regarding unrecognized tax benefits is included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 10 “Income taxes.”

38 Although we do not expect a significant change in our unrecognized tax benefits associated with the alternative fuel tax credits from 2009 during the next 12 months, a favorable audit by the IRS or the issuance of authoritative guidance could result in the recognition of some or all of these previously unrecognized tax benefits. As of December 31, 2011, we have gross unrecognized tax benefits and interest of $192 million and related deferred tax assets of $15 million associated with the alternative fuel tax credits. The recognition of these benefits, $177 million net of deferred taxes, would impact the effective tax rate.

RECENT DEVELOPMENTS Acquisition of Attends Healthcare Limited On January 26, 2012, we announced the signing of a definitive agreement for the acquisition of privately- held Attends Healthcare Limited (“Attends Europe”), a manufacturer and supplier of adult incontinence care products in Europe, from Rutland Partners. The purchase price is estimated at $236 million (£180 million), including assumed debt. Attends Europe operates a manufacturing, research and development and distribution facility in Aneby, Sweden, and also operates distribution centers in Scotland and Germany. Attends Europe has approximately 413 employees. The transaction is expected to close during the first quarter of 2012, subject to customary closing conditions. The acquired business will be presented under our new reporting segment, “Personal Care”.

Sale of Lebel-sur-Quévillon assets

On January 31, 2012, we announced the signing of a definitive agreement with Fortress Global Cellulose Ltd (“Fortress”), and with a subsidiary of the Government of Quebec, for the sale of our Lebel-sur-Quévillon assets. The transaction is subject to customary closing conditions and is expected to close in the second quarter of 2012. All pulp and sawmilling assets including the buildings and equipment will be sold to Fortress for the nominal sum of $1 and all lands related to the facilities will be sold to a subsidiary of the Government of Quebec for the nominal sum of $1. The manufacturing operations at the pulp mill ceased in November 2005 due to unfavorable economic conditions while sawmilling operations at the facility ceased in 2006.

Tender offer for certain outstanding notes

On February 22, 2012, we announced the commencement of a cash tender offer for our outstanding 10.75% Notes due 2017 (the “First Priority Notes”), 9.5% Notes due 2016 (the “Second Priority Notes”), 7.125% Notes due 2015 (the “Third Priority Notes”) and 5.375% Notes due 2013 (the “Fourth Priority Notes”) such that the maximum aggregate consideration for Notes purchased in the tender offer, excluding accrued and unpaid interest, which will not exceed $250 million. The tender offer is scheduled to expire at 12:00 midnight, New York City time, on March 20, 2012, unless extended or earlier terminated.

We may waive, increase or decrease the maximum payment amount at our sole discretion. Our obligation to consummate the tender offer is conditioned upon the satisfaction or waiver of certain conditions, including obtaining approximately $250 million of proceeds from a debt financing, on terms and conditions reasonably satisfactory to us, at or before the expiration date of the tender.

OUR BUSINESS We operate the following business activities: Pulp and Paper (previously named “Papers”), Distribution (previously named “Paper Merchants”) and Personal Care. A description of our business is included in Part I, Item 1, Business of this Annual Report on Form 10-K.

Pulp and Paper We produce 4.3 million metric tons of hardwood, softwood and fluff pulp at 12 of our 13 mills. The majority of our pulp is consumed internally to manufacture paper and consumer products, with the balance being sold as market pulp. We also purchase papergrade pulp from third parties allowing us to optimize the logistics of our pulp capacity while reducing transportation costs.

39 We are the largest integrated manufacturer and marketer of uncoated freesheet paper in North America. We have 10 pulp and paper mills (eight in the United States and two in Canada), with an annual paper production capacity of approximately 3.5 million tons of uncoated freesheet paper. Our paper manufacturing operations are supported by 15 converting and distribution operations including a network of 12 plants located offsite of our paper making operations. Also, we have forms manufacturing operations at one offsite converting and distribution operations and two stand-alone forms manufacturing operations.

Approximately 78% of our paper production capacity is in the U.S., and the remaining 22% is located in Canada. We produce market pulp in excess of our internal requirements at our three non-integrated pulp mills in Kamloops, Dryden, and Plymouth as well as at our pulp and paper mills in Espanola, Ashdown, Hawesville, Windsor, Marlboro and Nekoosa. We have the capacity to sell approximately 1.7 million metric tons of pulp per year depending on market conditions. Approximately 43% of our trade pulp production capacity is in the U.S., and the remaining 57% is located in Canada.

Distribution Our Distribution business involves the purchasing, warehousing, sale and distribution of our various products and those of other manufacturers. These products include business, printing and publishing papers and certain industrial products. These products are sold to a wide and diverse customer base, which includes small, medium and large commercial printers, publishers, quick copy firms, catalog and retail companies and institutional entities.

Our Distribution business operates in the United States and Canada under a single banner and umbrella name, Ariva. Ariva operates throughout the Northeast, Mid-Atlantic and Midwest areas from 17 locations in the United States, including 13 distribution centers serving customers across North America. The Canadian business operates in two locations in Ontario, two locations in Quebec; and from two locations in Atlantic Canada.

Sales are executed by our sales force, based at branches strategically located in served markets. We distribute about 51% of our paper sales from our own warehouse distribution system and approximately 49% of our paper sales through mill-direct deliveries (i.e., deliveries directly from manufacturers, including ourselves, to our customers).

Personal Care Our Personal Care business sells and markets a complete line of high quality and innovative adult incontinence products and distributes disposable washcloths marketed primarily under the Attends® brand name. We are one of the leading suppliers of adult incontinence products sold into North American hospitals (acute care) and nursing homes (long-term care) and we have a strong and growing presence in the domestic homecare and retail channels. We operate nine different production lines to manufacture our products, with all nine lines having the ability to produce multiples items within each category.

Wood Before the sale of our Wood business on June 30, 2010, our Wood business comprised the manufacturing, marketing and distribution of lumber and wood-based value-added products, and the management of forest resources. We operated seven sawmills with a production capacity of approximately 900 million board feet of lumber and one remanufacturing facility.

40 CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENTS REVIEW The following table includes the consolidated financial results of Domtar Corporation for the years ended December 31, 2011, 2010 and 2009:

December 31, December 31, December 31, FINANCIAL HIGHLIGHTS 2011 2010 2009 (In millions of dollars, unless otherwise noted) Sales $5,612 $5,850 $5,465 Operating income 592 603 615 Net earnings 365 605 310 Net earnings per common share (in dollars) 1: Basic 9.15 14.14 7.21 Diluted 9.08 14.00 7.18 Operating income (loss) per segment: Pulp and Paper $ 581 $ 667 $ 650 Distribution — (3) 7 Personal Care 7 —— Wood — (54) (42) Corporate 4 (7) — Total $ 592 $ 603 $ 615

At December 31, At December 31, At December 31, 2011 2010 2009 Total assets $5,869 $6,026 $6,519 Total long-term debt, including current portion $ 841 $ 827 $1,712

1 Refer to Part II, Item 8, Financial Statements and Supplementary Data on this Annual Report on Form 10-K, under Note 6 “Earnings per Share”.

41 YEAR ENDED DECEMBER 31, 2011 VERSUS YEAR ENDED DECEMBER 31, 2010

Sales Sales for 2011 amounted to $5,612 million, a decrease of $238 million, or 4%, from sales of $5,850 million in 2010. The decrease in sales is mainly attributable to the closure of our Columbus, Mississippi paper mill, the sale of our Woodland, Maine market pulp mill in 2010 ($150 million) and the sale of our Wood business in 2010 ($139 million). In addition, volumes for our pulp and paper decreased ($29 million) and our Distribution segment decreased ($118 million) as a result of the sale of a business unit in the first quarter of 2011 and from difficult market conditions. This decrease was slightly offset by the increase in sales due to the acquisition of Attends Healthcare Inc., in 2011 ($71 million), and slightly higher selling prices in all our segments ($83 million).

Cost of Sales, excluding Depreciation and Amortization Cost of sales, excluding depreciation and amortization, amounted to $4,171 million in 2011, a decrease of $246 million, or 6%, compared to cost of sales, excluding depreciation and amortization, of $4,417 million in 2010. This decrease is mainly attributable to the impact of lower shipments in our Pulp and Paper ($140 million) due to the sale of our Woodland, Maine market pulp mill and Distribution segment ($113 million) due to the sale of a business unit, and the sale of our Wood business ($131 million). In addition, there were decreased maintenance costs ($34 million), lower costs for energy and fiber ($33 million and $12 million, respectively). These factors were offset by the acquisition of Attends Healthcare Inc., ($56 million), increased costs for chemicals and freight ($60 million and $33 million, respectively) and the negative impact of a stronger Canadian dollar on our Canadian denominated expenses, net of our hedging program ($37 million).

Depreciation and Amortization Depreciation and amortization amounted to $376 million in 2011, a decrease of $19 million, or 5%, compared to depreciation and amortization of $395 million in 2010. This decrease is primarily due to the sale of our Wood business in the second quarter of 2010, the sale of our Woodland, Maine market pulp mill in the third quarter of 2010 and the closure of a paper machine at our Ashdown, Arkansas pulp and paper mill in the third quarter of 2011, partially offset by the acquisition of Attends of $4 million.

Selling, General and Administrative Expenses SG&A expenses amounted to $340 million in 2011, an increase of $2 million, or 1%, compared to SG&A expenses of $338 million in 2010. This increase in SG&A is primarily due to a post-retirement curtailment gain of $10 million recorded in 2010, related to the harmonization of certain of our post-retirement benefit plans and the acquisition of Attends in 2011 ($4 million). This is offset by a decrease of $12 million related to our short- term incentive plan.

Other Operating (Income) Loss Other operating income amounted to $4 million in 2011, an increase of $24 million compared to other operating loss of $20 million in 2010. This increase in other operating income is primarily due to net gains of $6 million from the sale of property, plant and equipment and businesses compared to a $33 million net loss in 2010 which was driven by a gain on sale of our Woodland, Maine market pulp mill of $10 million, offset by a loss on sale of our wood business of $50 million. Also, in 2010, other operating loss included a refundable excise tax credit for the production and use of alternative bio fuel mixtures of $25 million which did not recur in 2011.

42 Operating Income Operating income in 2011 amounted to $592 million, a decrease of $11 million compared to operating income of $603 million in 2010, in part due to the factors mentioned above, as well as higher impairment and write-down of property, plant and equipment ($35 million), due to accelerated depreciation related to the announced closure of a paper machine at our Ashdown, Arkansas pulp and paper mill and the impairment of assets at our Lebel-sur-Quévillion, Quebec mill, and higher closure and restructuring costs ($25 million) in 2011 primarily due to the withdrawal from one of our U.S. multiemployer pension plans and a recorded loss from a pension curtailment associated with the conversion of certain of our U.S. defined benefit pension plans to defined contribution plans. Additional information about impairment and write-down charges is included under the section “Impairment of Long-Lived assets,” under the caption “Critical Accounting Policies” of this MD&A.

Interest Expense We incurred $87 million of net interest expense in 2011, a decrease of $68 million compared to interest expense of $155 million in 2010. This decrease in interest expense is primarily due to the repurchase of our 5.375%, 7.125% and 7.875% Notes and our term loan in the fourth quarter of 2010, on which we incurred tender offer premiums of $35 million, and a net loss on the reversal of a fair value decrement of $12 million.

Income Taxes For 2011, our income tax expense amounted to $133 million compared to a tax benefit of $157 million for 2010.

During 2011, we have a significantly larger manufacturing deduction in the U.S. than in prior years since we utilized our remaining federal net operating loss carryforward in 2010. This deduction resulted in a tax benefit of $12 million which impacted the effective tax rate for 2011. We also recorded a $16 million tax benefit related to federal, state, and provincial credits and special deductions which reduced the effective tax rate for 2011. Additionally, we recognized a state tax benefit of $3 million due to the U.S. restructuring cost that impacted the 2011 effective tax rate by reducing state income tax expense.

During 2010, we recorded $25 million of income related to alternative fuel tax credits in Other operating (income) loss on the Consolidated Statement of Earnings. The $25 million represented an adjustment to amounts presented as deferred revenue at December 31, 2009 and was released to income following guidance issued by the IRS in March 2010. This income resulted in an income tax benefit of $9 million and an additional liability for uncertain income tax positions of $7 million, both of which impacted the U.S. effective tax rate for 2010. Additionally, we recorded a net tax benefit of $127 million from claiming a CBPC in 2010 ($209 million of CBPC net of tax expense of $82 million), which also impacted the U.S. effective tax rate. Finally, we released the valuation allowance on its Canadian net deferred tax assets during the fourth quarter of 2010. The full $164 million valuation allowance balance that existed at January 1, 2010 was either utilized during 2010 or reversed at the end of 2010 based on future projected income, which impacted the Canadian and overall consolidated effective tax rate.

Equity Earnings We incurred a $7 million loss, net of taxes, with regards to our joint venture with Celluforce Inc.

Net Earnings Net earnings amounted to $365 million ($9.08 per common share on a diluted basis) in 2011, a decrease of $240 million compared to net earnings of $605 million ($14.00 per common share on a diluted basis) in 2010, mainly due to the factors mentioned above.

43 FOURTH QUARTER OVERVIEW

For the fourth quarter of 2011, we reported operating income of $99 million, a decrease of $56 million compared to operating income of $155 million in the fourth quarter of 2010. Overall, our core operating results for the fourth quarter of 2011 declined when compared to the fourth quarter of 2010, primarily due to our Pulp and Paper segment. Sales prices declined quarter over quarter for pulp. Volume for paper decreased in the fourth quarter and volumes for our Distribution segment decreased as a result of the sale of a business unit earlier in 2011. The overall cost of chemicals and fiber also increased. Other items significantly impacting our operating income comparability are increased impairment and write-down of property, plant and equipment of $12 million due to the write-off of assets at our Lebel-sur-Quévillon, Quebec mill and increased closure and restructuring costs of $37 million relating primarily to the restructuring of certain U.S. pension benefit plans. These factors were offset by lower costs for energy and maintenance and the positive impact of the weakening Canadian dollar.

Our effective tax rate in the fourth quarter of 2011 of 14% was primarily the result of additional federal, state, and provincial credits and special deductions, state income tax benefits due to U.S. restructuring activity, and the mix of income between U.S. and foreign jurisdictions being subject to different rates. All three of these items resulted in tax benefits which reduced the effective tax rate in the fourth quarter.

YEAR ENDED DECEMBER 31, 2010 VERSUS YEAR ENDED DECEMBER 31, 2009

Sales Sales for 2010 amounted to $5,850 million, an increase of $385 million, or 7%, from sales of $5,465 million in 2009. The increase in sales was mainly attributable to higher average selling prices for pulp and paper ($375 million and $145 million, respectively) as well as higher shipments for pulp ($68 million), reflecting stronger market demand for pulp for the first half of 2010. These factors were partially offset by lower shipments for paper ($151 million) reflecting a decrease of 4% when compared to 2009 mostly due to the closure of our Columbus, Mississippi paper mill and the conversion to 100% fluff pulp production of our Plymouth pulp and paper mill. The sale of our Wood business in the second quarter of 2010 also partially offset this increase in sales.

Cost of Sales, excluding Depreciation and Amortization Cost of sales, excluding depreciation and amortization, amounted to $4,417 million in 2010, a decrease of $55 million, or 1%, compared to cost of sales, excluding depreciation and amortization, of $4,472 million in 2009. This decrease was mainly attributable to lower shipments for paper ($151 million), lower chemical and energy costs ($55 million and $25 million, respectively) as well as due to the sale of our Wood business ($73 million) in the second quarter of 2010. These factors were partially offset by higher shipments for pulp ($68 million), higher maintenance costs ($83 million), higher fiber costs ($23 million), higher freight costs ($34 million) and the unfavorable impact of a stronger Canadian dollar on our Canadian denominated expenses, net of our hedging program ($46 million).

Depreciation and Amortization Depreciation and amortization amounted to $395 million in 2010, a decrease of $10 million, or 2%, compared to depreciation and amortization of $405 million in 2009. This decrease was primarily due to the sale of our Wood business in the second quarter of 2010 and by the write-down of property, plant and equipment due

44 to the permanent closure of a paper machine and manufacturing equipment in the first and last quarters of 2009 at our Plymouth pulp and paper mill. These factors were partially offset by the negative impact of a stronger Canadian dollar in 2010 when compared to 2009.

Selling, General and Administrative Expenses SG&A expenses amounted to $338 million in 2010, a decrease of $7 million, or 2%, compared to SG&A expenses of $345 million in 2009. This decrease in SG&A was primarily due to a post-retirement curtailment gain of $10 million related to the harmonization of certain of our post-retirement benefit plans. These factors were partially offset by the negative impact of a stronger Canadian dollar in 2010 when compared to 2009.

Other Operating (Income) Loss Other operating loss amounted to $20 million in 2010, a decrease in other operating income of $517 million compared to other operating income of $497 million in 2009. This decrease in other operating income was primarily due to a refundable excise tax credit for the production and use of alternative bio fuel mixtures of $25 million recognized in 2010 compared to $498 million recognized in 2009 as well as due to a loss on sale of our Wood business of $50 million recorded in 2010, partially offset by a gain on sale of our Woodland, Maine market pulp mill of $10 million recorded in 2010.

Operating Income Operating income in 2010 amounted to $603 million, a decrease of $12 million compared to operating income of $615 million in 2009, in part due to the factors mentioned above, partially offset by lower closure and restructuring costs due to the closure of one paper machine at our Plymouth pulp and paper mill in the first quarter of 2009 and the subsequent announcement in the fourth quarter of 2009 of its conversion to 100% fluff pulp production. The decrease in operating income was also partially offset by an aggregate $50 million charge in 2010 for impairment and write-down of property, plant and equipment, compared to a $62 million charge in 2009. Additional information about impairment and write-down charges is included under the section “Impairment of Long-Lived assets,” under the caption “Critical Accounting Policies” of this MD&A.

Interest Expense We incurred $155 million of interest expense in 2010, an increase of $30 million compared to interest expense of $125 million in 2009. This increase in interest expense was primarily due to a charge of $47 million incurred on the repurchase of the 5.375%, 7.125% and 7.875% Notes in 2010, which included tender premiums and fees of $35 million and a net loss on the reversal of a fair value decrement of $12 million, as compared to a gain of $15 million related to the repurchase of the 7.875% Notes in 2009. This increase was partially offset by a lower long-term debt balance outstanding in 2010 compared to 2009.

Income Taxes For 2010, our income tax benefit amounted to $157 million compared to a tax expense of $180 million for 2009.

During 2010, we recorded $25 million of income related to alternative fuel tax credits in Other operating (income) loss on the Consolidated Statement of Earnings. The $25 million represented an adjustment to amounts presented as deferred revenue at December 31, 2009 and was released to income following guidance issued by the IRS in March 2010. This income resulted in an income tax benefit of $9 million and an additional liability for uncertain income tax positions of $7 million, both of which impacted the U.S. effective tax rate for 2010. Additionally, we recorded a net tax benefit of $127 million from claiming a CBPC in 2010 ($209 million of CBPC net of tax expense of $82 million), which impacted the U.S. effective tax rate. Finally, we released the

45 valuation allowance on its Canadian net deferred tax assets during the fourth quarter of 2010. The full $164 million valuation allowance balance that existed at January 1st, 2010 was either utilized during 2010 or reversed at the end of 2010 based on future projected income, which impacted the Canadian and overall consolidated effective tax rate.

As of December 31, 2009, the Company had a valuation allowance of $164 million on its Canadian net deferred tax assets, which primarily consisted of net operating losses, scientific research and experimental development expenditures not previously deducted and un-depreciated tax basis of property, plant, and equipment. Evaluating the need for an amount of a valuation allowance for deferred tax assets often requires significant judgment. All available evidence, both positive and negative, is considered when determining whether, based on the weight of that evidence, a valuation allowance is needed. Specifically, we evaluated the following items: • Historical income / (losses)—particularly the most recent three-year period • Reversals of future taxable temporary differences • Projected future income / (losses) • Tax planning strategies • Divestitures

In our evaluation process, we give the most weight to historical income or losses. During the fourth quarter of 2010, after evaluating all available positive and negative evidence, although realization is not assured, we determined that it was more likely than not that the Canadian net deferred tax assets would be fully realized in the future prior to expiration. Key factors contributing to this conclusion that the positive evidence ultimately outweighed the existing negative evidence during the fourth quarter of 2010 included the fact that the Canadian operations, excluding the loss-generating Wood business (sold to a third party on June 30, 2010) and elements of other comprehensive income, went from a three-year cumulative loss position to a three-year cumulative income position during the fourth quarter of 2010; we were able to demonstrate continual profitability throughout 2010 and were projected to continue to be profitable in the coming years.

During 2009, we recorded a net liability of $162 million for unrecognized income tax benefits associated with the alternative fuel mixture tax credits income. If our income tax positions with respect to the alternative fuel mixture tax credits are sustained, either all or in part, then we would recognize a tax benefit in the future equal to the amount of the benefits sustained. Our tax treatment of the income related to the alternative fuel mixture tax credits resulted in the recognition of a tax benefit of $36 million which impacted the U.S. effective tax rate. This credit expired December 31, 2009. The Canadian effective tax rate was impacted by the additional valuation allowance recorded against new Canadian deferred tax assets in the amount of $29 million during 2009.

Net Earnings Net earnings amounted to $605 million ($14.00 per common share on a diluted basis) in 2010, an increase of $295 million compared to net earnings of $310 million ($7.18 per common share on a diluted basis) in 2009, mainly due to the factors mentioned above.

46 PULP AND PAPER

Year ended Year ended Year ended SELECTED INFORMATION December 31, 2011 December 31, 2010 December 31, 2009 (In millions of dollars, unless otherwise noted) Sales Total sales $4,953 $5,070 $4,632 Intersegment sales (193) (229) (231) $4,760 $4,841 $4,401 Operating income 581 667 650 Shipments Paper (in thousands of ST) 3,534 3,597 3,757 Pulp (in thousands of ADMT) 1,497 1,662 1,539

Sales and Operating Income Sales Sales in our Pulp and Paper segment amounted to $4,760 million in 2011, a decrease of $81 million, or 2%, compared to sales of $4,841 million in 2010. The decrease in sales is mostly attributable to lower shipments in both pulp and paper, due to the closure of our Columbus, Mississippi mill and the sale of our Woodland, Maine market pulp mill, partially offset by increased selling prices in pulp and paper.

Sales in our Pulp and Paper segment amounted to $4,841 million in 2010, an increase of $440 million, or 10%, compared to sales of $4,401 million in 2009. The increase in sales is mostly attributable to higher average selling prices for paper and higher average selling prices for pulp, as well as higher shipments for pulp of approximately 8%, reflecting stronger market demand for pulp in the first half of 2010. As a result of stronger market demand, we took lower lack-of-order downtime and machine slowdown in 2010 when compared to 2009. These factors were partially offset by lower shipments for paper of approximately 4%, due to the exit from the coated groundwood market with the closure of our Columbus, Mississippi paper mill and due to declining demand.

Operating Income Operating income in our Pulp and Paper segment amounted to $581 million in 2011, a decrease of $86 million, when compared to operating income of $667 million in 2010. Overall, our operating results declined when compared to 2010 primarily due to increased impairment and write-off of property, plant and equipment of $35 million resulting from the impairments at our Ashdown and Lebel-sur-Quévillon mills and increased closure and restructuring of $25 million mainly due to our withdrawal from a U.S. multi-employer plan, and from a pension curtailment loss associated with the conversion of certain of our U.S. defined benefit pension plans to defined contribution pension plans. Our operating results also declined due to the overall decrease in sales and shipments as a result of lower demand of 63,000 tons related to paper compared to 2010, higher costs for chemicals and freight ($60 million and $33 million, respectively), and the negative impact of a stronger Canadian dollar ($37 million), partially offset by lower fiber costs and energy usage ($12 million and $33 million, respectively).

Operating income in our Pulp and Paper segment amounted to $667 million in 2010, an increase of $17 million, when compared to operating income of $650 million in 2009. Overall, our operating results improved in 2010 when compared to 2009 primarily due to higher average selling prices for our pulp and paper products. Our strategy of maintaining our production levels in line with our customer demand resulted in taking lack-of-order downtime and machine slowdowns of 30,000 tons of paper and nil metric tons of pulp in 2010 compared to 467,000 tons of paper and 261,000 metric tons of pulp in 2009. We saw an improvement in our pulp

47 shipments, which experienced an 8% volume increase compared to 2009. In 2010, we also had lower chemicals and energy costs. These factors were partially offset by the $25 million in alternative fuel tax credits recorded in 2010, compared to the $498 million recorded in 2009 as well as by higher maintenance costs, higher fiber costs, higher freight costs and a negative impact of a stronger Canadian dollar (net of our hedging program). Other items significantly impacting our operating income comparability included net gains on disposals of property, plant and equipment and sale of businesses of $17 million recorded in 2010 compared to net losses of $4 million in 2009 and an aggregate $26 million charge in 2010 attributable to closure and restructuring costs compared to an aggregate $52 million charge in 2009.

Pricing Environment Overall average sales prices in our paper business experienced a small increase in 2011 when compared to 2010. Our overall average paper sales prices were higher by $17/ton, or 2%, in 2011 compared to 2010.

Our average pulp sales prices experienced a small increase in 2011 compared to 2010. Our sales price increased by $15/metric ton, or 2%, in 2011 compared to 2010.

Overall average sales prices in our paper business experienced a small increase in 2010 compared to 2009. Our overall average paper sales prices were higher by $44/ton, or 4%, in 2010 compared to 2009.

Our average pulp sales prices experienced a large increase in 2010 compared to 2009. Our sales price increased by $224/metric ton, or 43%, in 2010 compared to 2009.

Operations Shipments Our paper shipments decreased by 63,000 tons, or 2%, in 2011 compared to 2010, primarily due to the closure of our Columbus, Mississippi paper mill and the conversion of our Plymouth, North Carolina mill to 100% fluff pulp production.

Our pulp trade shipments decreased by 165,000 metric tons, or 10%, in 2011 compared to 2010. The decrease is primarily due to the sale of our hardwood market pulp mill in Woodland, Maine in the third quarter of 2010. Excluding shipments from our Woodland, Maine mill, our pulp trade shipments increased by 146,000 metric tons or 11% compared to 2010, which resulted from an increase in market demand.

Our paper shipments decreased by 160,000 tons, or 4%, in 2010 compared to 2009, primarily due to the closure of our Columbus, Mississippi paper mill.

Our pulp trade shipments increased by 123,000 metric tons, or 8%, in 2010 compared to 2009. The increase in pulp shipments resulted mostly from an increase in market demand for the first half of 2010.

Alternative Fuel Tax Credits The U.S. Internal Revenue Code of 1986, as amended (the “Code”) permitted a refundable excise tax credit, until the end of 2009, for the production and use of alternative bio fuel mixtures derived from biomass. We submitted an application with the IRS to be registered as an alternative fuel mixer and received notification that our registration had been accepted in late March 2009. We began producing and consuming alternative fuel mixtures in February 2009 at our eligible mills. Although the credit ended at the end of 2009, in 2010, we recorded $25 million of such credits in Other operating (income) loss on the Consolidated Statement of Earnings compared to $498 million in 2009. The $25 million represented an adjustment to amounts presented as deferred revenue at December 31, 2009 and was released to income following guidance issued by the IRS in March 2010. We recorded an income tax expense of $7 million in 2010 compared to $162 million in 2009 related to the

48 alternative fuel mixture income. The amounts for the refundable credits are based on the volume of alternative bio fuel mixtures produced and burned during that period.

In 2009, we received a $140 million cash refund and another $368 million cash refund, net of federal income tax offsets, in 2010. Additional information regarding unrecognized tax benefits is included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 10 “Income taxes.”

Although we do not expect a significant change in our unrecognized tax benefits associated with the alternative fuel tax credits from 2009 during the next 12 months, a favorable audit by the IRS or the issuance of authoritative guidance could result in the recognition of some or all of these previously unrecognized tax benefits. As of December 31, 2011, we have gross unrecognized tax benefits and interest of $192 million and related deferred tax assets of $15 million associated with the alternative fuel tax credits. The recognition of these benefits, $177 million net of deferred taxes, would impact the effective tax rate.

Labor A new umbrella agreement with the United Steelworkers Union (“USW”), expiring in 2015, and affecting approximately 2,900 employees at eight U.S. mills and one converting operation, was ratified effective December 1, 2011. This agreement only covers certain economic elements, and all other issues are negotiated at each operating location, as the related collective bargaining agreements become subject to renewal. The parties have agreed not to strike or lock-out during the terms of the respective local agreements. Should the parties fail to reach an agreement during the local negotiations, the related collective bargaining agreements are automatically renewed for another four years.

In Canada, the collective agreement expired in 2010 at our Windsor facility in Quebec, Canada, with the Confederation of National Trade Unions (“CNTU”). A new agreement was ratified in mid-November 2011. At the Espanola Mill facility, agreements have been reached with the Communication, Energy and Paperworkers Union of Canada (“CEP”), locals 74 and 156 and with the International Brotherhood of Electrical Workers (“IBEW”). Agreements that expired in 2009 at our Dryden facilities in Canada are being negotiated with the CEP and are on-going. These Canadian collective agreements are unrelated to the umbrella agreement with the USW covering our U.S. locations.

As of December 31, 2011, we have nine outstanding agreements; (including two agreements which are covered by the USW) affecting approximately 1,100 employees and twenty-eight ratified agreements affecting approximately 3,700 employees. The majority of employees are in the U.S. and Canada.

Closure and Restructuring In 2011, we incurred $136 million of closure and restructuring costs ($76 million in 2010), including the impairment and write-down of property, plant and equipment of $85 million in 2011, compared to $50 million in 2010. For more details on the closure and restructuring costs, refer to Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 16 “Closure and restructuring costs and liability.”

Closure and restructuring costs are based on management’s best estimates. Although we do not anticipate significant changes, actual costs may differ from these estimates due to subsequent developments such as the results of environmental studies, the ability to find a buyer for assets set to be dismantled and demolished and other business developments. As such, additional costs and further write-downs may be required in future periods.

49 2011 On March 29, 2011, we announced that on July 1, 2011, we would permanently shut down one paper machine at our Ashdown, Arkansas pulp and paper mill. We subsequently postponed the shut down of the paper machine until August 1, 2011. The closure resulted in an aggregate pre-tax charge to earnings of approximately $75 million, which included $74 million in non-cash charges relating to the accelerated depreciation of the carrying amounts of manufacturing equipment and the write-off of related spare parts and $1 million related to other costs. This closure reduced Domtar’s annual uncoated freesheet paper production capacity by approximately 125,000 short tons and the mill’s workforce by approximately 110 employees. Operations ceased on August 1, 2011.

During the fourth quarter of 2011, we decided to withdraw from one of our U.S. multiemployer pension plans and recorded an estimated withdrawal liability and a charge to earnings of $32 million. We also incurred, in the fourth quarter of 2011, a $9 million loss from a pension curtailment associated with the conversion of certain of our U.S. defined benefit pension plans to defined contribution pension plans.

Following the permanent closure announced on December 18, 2008 of our Lebel-sur-Quévillon pulp mill and sawmill, we recorded a $4 million loss related to pension curtailment in 2009. Operations at the pulp mill had been indefinitely idled since November 2005 due to unfavorable economic conditions and the sawmill had been indefinitely idled since 2006. At the time, the pulp mill and sawmill employed 425 and 140 employees, respectively. The Lebel-sur-Quévillon pulp mill had an annual production capacity of 300,000 metric tons. During 2011, we reversed $2 million of severance and termination provision and following the signing of a definitive agreement (see Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 27 “Subsequent events”) we recorded a $12 million write-down for the remaining fixed assets net book value, a component of Impairment and write-down of property, plant and equipment.

On February 1, 2011, we announced the closure of our Langhorne, Pennsylvania forms converting center. The closure resulted in a charge to earnings of $4 million for severance and termination costs. The closure affected 48 employees.

Our Prince Albert pulp and paper mill was closed in the first quarter of 2006 due to poor market conditions and had not been operated since. Our management determined that our Prince Albert facility was no longer a strategic fit, and would not be reopened. On May 3, 2011, we sold our Prince Albert pulp and paper mill to Paper Excellence, and recorded a loss on sale of $12 million in the second quarter of 2011.

2010 In November 2010, we announced the start up of our new fluff pulp machine in Plymouth, North Carolina, which had increased production capacity to approximately 444,000 metric tons. The conversion of our Plymouth pulp and paper mill in 2009 is discussed below.

In July 2010, we announced our decision to end all manufacturing activities at our forms converting plant in Cerritos, California. Operations ceased on July 16, 2010. Approximately 50 plant employees were impacted by this decision.

In March 2010, we announced the permanent closure of our coated groundwood paper mill in Columbus, Mississippi. Operations ceased in April 2010. This measure resulted in the permanent curtailment of approximately 238,000 tons of coated groundwood production capacity per year as well as approximately 70,000 metric tons of thermo-mechanical pulp, and affected approximately 219 employees.

2009 Our Prince Albert pulp and paper mill was closed in the first quarter of 2006 and has not been operated since. The dismantling of the paper machine and converting equipment was completed in 2008. In December 2009, we decided to dismantle the remaining facility. We removed machinery and equipment from the site and

50 continue to evaluate other options for the site. As a result of a review of options for the disposal of the assets of this facility in the fourth quarter of 2009, we revised the estimated net realizable values of the remaining assets and recorded a non-cash write-down of $14 million in the fourth quarter of 2009, related to fixed assets, mainly a turbine and a boiler. The write-down represented the difference between the new estimated liquidation or salvage value of the fixed assets and their carrying values.

In February 2009, we announced the permanent shut down of a paper machine at our Plymouth pulp and paper mill, effective at the end of February 2009. This measure resulted in the permanent curtailment of approximately 293,000 tons of paper production capacity per year and affected approximately 185 employees. In October 2009, we announced that we would convert our Plymouth pulp and paper mill to 100% fluff pulp production at a cost of $74 million. Our annual fluff pulp making capacity increased to 444,000 metric tons as a result. The mill conversion also resulted in the permanent shut down of Plymouth’s remaining paper machine with an annual production capacity of 199,000 tons. The mill conversion helped preserve approximately 360 positions. In connection with this announcement, we recognized $13 million of accelerated depreciation in the fourth quarter of 2009, and a further $39 million of accelerated depreciation over the first nine months of 2010 was recorded in relation to the assets that ceased productive use in October 2010. The remaining assets of this facility were tested for impairment at the time of this 2009 announcement, and no additional impairment charge was required.

Our Woodland pulp mill, which was indefinitely idled in May 2009, was reopened effective June 26, 2009, and substantially all employees were called back to work in June for the restart of pulp production. Our Woodland pulp mill has an annual hardwood production capacity of approximately 398,000 metric tons, and approximately 300 employees were reinstated. The timely benefits from the refundable tax credits for the production and use of alternative bio fuel mixtures, and other important conditions, such as stronger global demand, improving prices and favorable currency exchange rates made the reopening possible. We sold our Woodland pulp mill on September 30, 2010 for $60 million plus net working capital of $8 million.

In April 2009, we announced that we would idle our Dryden pulp facility for approximately ten weeks, effective April 25, 2009. This decision was taken in response to continued weak global demand for pulp and the need to manage inventory levels. Our Dryden pulp mill has an annual softwood pulp production capacity of 319,000 metric tons. Our Dryden pulp mill restarted its pulp production in July 2009.

Other Natural Resources Canada Pulp and Paper Green Transformation Program On June 17, 2009, the Government of Canada announced that it was developing a Pulp and Paper Green Transformation Program (“the Green Transformation Program”) to help pulp and paper companies make investments to improve the environmental performance of their Canadian facilities. The Green Transformation Program was capped at CDN$1 billion. The funding of capital investments at eligible mills must be completed no later than March 31, 2012 and all projects are subject to the approval of the Government of Canada.

Eligible projects must demonstrate an environmental benefit by either improving energy efficiency or increasing renewable energy production. Although amounts will not be received until qualifying capital expenditures have been made, we have been allocated $141 million (CDN$143 million) through this Green Transformation Program, of which all have been approved. The funds are to be spent on capital projects to improve energy efficiency and environmental performance in our Canadian pulp and paper mills and any amounts received will be accounted for as an offset to the applicable plant and equipment asset amount. As of December 31, 2011, we have received a total of $123 million (CDN$125 million) ($72 million in 2011 and $51 million in 2010), mostly related to eligible projects at our Kamloops, Dryden and Windsor pulp and paper mills.

51 DISTRIBUTION

Year ended Year ended Year ended SELECTED INFORMATION December 31, 2011 December 31, 2010 December 31, 2009 (In millions of dollars) Sales $781 $870 $873 Operating income (loss) — (3) 7

Sales and Operating Income Sales Sales in our Distribution segment amounted to $781 million in 2011, a decrease of $89 million compared to sales of $870 million in 2010. This decrease in sales is mostly attributable to a decrease in deliveries of 14%, resulting from the sale of a business unit at the end of the first quarter of 2011 and from difficult market conditions.

Sales in our Distribution segment amounted to $870 million in 2010, a decrease of $3 million compared to sales of $873 million in 2009. This decrease in sales was mostly attributable to a decrease in shipments of approximately 2%.

Operating Income (Loss) Operating income amounted to nil in 2011, an increase of $3 million when compared to operating loss of $3 million in 2010. The increase in operating income is attributable to the gain on sale of a business unit of $3 million at the end of the first quarter of 2011.

Operating loss amounted to $3 million in 2010, a decrease in operating income of $10 million when compared to operating income of $7 million in 2009. The decrease in operating income was attributable to margins temporarily contracting due to supplier price increases, as well as to a decrease in deliveries in 2010 when compared to 2009.

Operations Labor We have collective agreements covering six locations in the U.S., of which one expired in 2011, one will expire in 2012 and four will expire in 2013. We have four collective agreements covering four locations in Canada, of which one expired in 2008, one expired in 2009 and two will expire in 2013.

PERSONAL CARE

Year ended SELECTED INFORMATION December 31, 2011 (In millions of dollars) Sales $71 Operating income 7

52 Sales and Operating Income Sales Sales in our Personal Care segment amounted to $71 million for the year ended December 31, 2011, representing only four months of operations, following the completion of the acquisition on September 1, 2011.

Operating Income Operating income amounted to $7 million for the year ended December 31, 2011, representing only four months of operations, following the completion of the acquisition on September 1, 2011 and included the negative impact of purchase accounting fair value adjustments of $1 million.

Operations Labor We employ approximately 330 non-unionized employees, almost entirely in the United States. For more details on the acquisition, refer to Part II, Item 8, Financial Statement and Supplementary Data, of this Annual Report on Form 10-K, under Note 3 “ Acquisition of Business”.

WOOD

Year ended Year ended SELECTED INFORMATION December 31, 2010 December 31, 2009 (In millions of dollars, unless otherwise noted) Sales $150 $211 Intersegment sales (11) (20) 139 191 Operating loss (54) (42) Shipments (millions of FBM) 351 574 Benchmark prices1: Lumber G.L. 2x4x8 stud ($/MFBM) $348 $259 Lumber G.L. 2x4 R/L no. 1 & no. 2 ($/MFBM) 350 270

1 Source: Random Lengths. As such, these prices do not necessarily reflect our sales prices.

Sale of Wood business On June 30, 2010, we sold our Wood business to EACOM and exited the manufacturing and marketing of lumber and wood-based value-added products. We have fiber supply agreements in place with our former wood division at our Espanola facility. Since these continuing cash outflows are expected to be significant to the former Wood business, the sale of the Wood business did not qualify as a discontinued operation under ASC 205-20.

Sales Sales in our Wood segment amounted to $139 million in 2010, a decrease of $52 million, or 27%, compared to sales of $191 million in 2009. The decrease in sales was attributable to the sale of our Wood business at the end of the second quarter of 2010, partially offset by an increase in sales attributable to higher average selling prices for wood products.

53 Operating Loss Operating loss in the Wood segment amounted to $54 million in 2010, an increase of $12 million compared to an operating loss of $42 million in 2009, mostly attributable to the loss on sale of our Wood business of $50 million recorded in the second quarter of 2010, partially offset by higher margins.

STOCK-BASED COMPENSATION EXPENSE In February and September 2011, a number of new equity awards were granted, consisting of restricted stock units, non-qualified stock options and performance stock options, which are subject to service and performance conditions.

For the year ended December 31, 2011, compensation expense recognized in our results of operations was approximately $23 million, for all of the outstanding awards, compared to $25 million in 2010. Compensation costs not yet recognized amounted to approximately $16 million in 2011 (2010—$22 million), and will be recognized over the remaining service period. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

LIQUIDITY AND CAPITAL RESOURCES Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our contractually committed credit facility, of which $571 million is currently undrawn and available. Under extreme market conditions, there can be no assurance that this agreement would be available or sufficient. See “Capital Resources” below.

Our ability to make payments on and to refinance our indebtedness, including debt we could incur under the credit facility and outstanding Domtar Corporation notes, and for ongoing operating costs including pension contributions, working capital, capital expenditures, as well as principal and interest payments on our debt, will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our credit facility and debt indentures, as well as terms of any future indebtedness, impose, or may impose, various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

Operating Activities Cash flows provided from operating activities totaled $883 million in 2011, a $283 million decrease compared to $1,166 million in 2010. This decrease in cash flows provided from operating activities is primarily related to the $368 million cash received in the second quarter of 2010 with regards to the alternative fuel tax credits.

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.

Investing Activities Cash flows used for investing activities in 2011 amounted to $395 million, a $453 million decrease compared to cash flows provided from investing activities of $58 million in 2010. This decrease in cash flows provided from investing activities is primarily related to the acquisition of Attends Healthcare, Inc. for $288 million. In addition, there were lower proceeds from the sale of businesses and investments of $175 million due to the prior year sale of our Wood business and the sale of our Woodland, Maine market pulp mill in 2011. This was partially offset by lower capital spending of $9 million in 2011.

54 We intend to limit our annual capital expenditures to approximately 60% of annual depreciation expense in 2012.

Financing Activities Cash flows used for financing activities totaled $574 million in 2011 compared to $1,018 million in 2010. This $444 million decrease in cash flows used for financing activities is mainly attributable to the repurchase of our 10.75% Notes for $15 million in 2011 versus the repayment in full of our tranche B term loan for $336 million in 2010 and the repurchase of $560 million of our 5.375%, 7.125% and 7.875% Notes in 2010. These factors were partially offset by higher common stock repurchases of $494 million in 2011 when compared to $44 million in 2010 as well as dividend payments of $49 million in 2011 compared to $21 million in 2010.

Capital Resources Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $404 million at December 31, 2011, compared to $320 million at December 31, 2010. The $84 million increase in net indebtedness is primarily due to a lower cash level as a result of cash from operating activities net of cash used for investing and financing activities resulting in a reduction of cash and cash equivalents partially due to the purchase of Attends Healthcare, Inc., and increased activity under the common stock repurchase program.

On June 23, 2011, we entered into a new $600 million Credit Agreement (the “Credit Agreement”). The Credit Agreement replaced our existing $750 million revolving credit facility that was scheduled to mature March 7, 2012. We intend to use the new revolving Credit Agreement for general corporate purposes, including working capital, capital expenditures and acquisitions.

The Credit Agreement provides for a revolving credit facility (including a letter of credit sub-facility and a swingline sub-facility) that matures on June 23, 2015. The initial maximum aggregate amount of availability under the revolving Credit Agreement is $600 million. Borrowings may be made by us, by our U.S. subsidiary Domtar Paper Company, LLC, and, subject to a limit of $150 million, by our Canadian subsidiary Domtar Inc. We may increase the maximum aggregate amount of availability under the revolving Credit Agreement by up to $400 million, and the Borrowers may extend the final maturity of the Credit Agreement by one year, if, in each case, certain conditions are satisfied, including: (i) the absence of any event of default or default under the Credit Agreement, and (ii) the consent of the lenders participating in each such increase or extension, as applicable.

No amounts were borrowed at December 31, 2011 (December 31, 2010—nil). At December 31, 2011, we had outstanding letters of credit amounting to $29 million under this credit facility (December 31, 2010— $50 million).

Borrowings under the Credit Agreement will bear interest at a rate dependent on our credit ratings at the time of such borrowing and will be calculated at the Borrowers’ option according to a base rate, prime rate, Eurocurrency rate or the Canadian bankers’ acceptance rate plus an applicable margin, as the case may be. In addition, we must pay facility fees quarterly at rates dependent on our credit ratings.

The Credit Agreement contains customary covenants for transactions of this type, including two financial covenants: (i) an interest coverage ratio (as defined in the Credit Agreement) that must be maintained at a level of not less than 3.0 to 1 and (ii) a leverage ratio (as defined in the Credit Agreement) that must be maintained at a level of not greater than 3.75 to 1. At December 31, 2011, we were in compliance with our covenants.

All borrowings under the Credit Agreement are unsecured. Certain of our domestic subsidiaries will unconditionally guarantee any obligations from time to time arising under the Credit Agreement, and certain of our Canadian subsidiaries will unconditionally guarantee any obligations of Domtar Inc., the Canadian subsidiary borrower, under the Credit Agreement.

55 If there is a change of control, as defined under the Credit Agreement, the Credit Agreement will be terminated and any outstanding obligations under the Credit Agreement will automatically become immediately due and payable.

A significant or prolonged downturn in general business and economic conditions may affect our ability to comply with our covenants or meet those financial ratios and tests and could require us to take action to reduce our debt or to act in a manner contrary to our current business objectives.

A breach of any of our Credit Agreement covenants, including failure to maintain a required ratio or meet a required test, may result in an event of default under the Credit Agreement. This may allow the administrative agent under the Credit Agreement to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If this occurs, we may not be able to refinance the indebtedness on favorable terms, or at all, or repay the accelerated indebtedness.

Receivables Securitization We use securitization of certain receivables to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. Our securitization program consists of the sale of our domestic receivables to a bankruptcy remote consolidated subsidiary which, in turn, transfers a senior beneficial interest in them to a special purpose entity managed by a financial institution for multiple sellers of receivables. The program normally allows the daily sale of new receivables to replace those that have been collected. We retain a subordinated interest which is included in Receivables on the Consolidated Balance Sheets and will be collected only after the senior beneficial interest has been settled. The book value of the retained subordinated interest approximates fair value. Fair value is determined on a discounted cash flow basis. We retain responsibility for servicing the receivables sold but do not record a servicing asset or liability as the fees received by us for this service approximate the fair value of the services rendered.

The program contains certain termination events, which include, but are not limited to, matters related to receivable performance, certain defaults occurring under the credit facility, and certain judgments being entered against us or our subsidiaries that remain outstanding for 60 consecutive days.

In November 2010, the agreement governing this receivables securitization program was amended and extended to mature in November 2013. The available proceeds that may be received under the program are limited to $150 million. The agreement was subsequently amended in November 2011 to add a letter of credit sub-facility.

At December 31, 2011 we had no borrowings and $28 million of letters of credit outstanding under the program (2010—nil and nil). Sales of receivables under this program are accounted for as secured borrowings. Before 2010, gains and losses on securitization of receivables were calculated as the difference between the carrying amount of the receivables sold and the sum of the cash proceeds upon sale and the fair value of the retained subordinated interest in such receivables on the date of the transfer.

In 2011, a net charge of $1 million (2010—$2 million; 2009—$2 million) resulted from the programs described above and was included in Interest expense in the Consolidated Statements of Earnings. The net cash outflow in 2011, from the reduction of senior beneficial interest under the program was nil (2010—$20 million).

Domtar Canada Paper Inc. Exchangeable Shares Upon the consummation of the Transaction, Domtar Inc. shareholders had the option to receive either common stock of the Company or shares of Domtar (Canada) Paper Inc. that are exchangeable for common stock of the Company. As of December 31, 2011, there were 619,108 exchangeable shares issued and outstanding. The exchangeable shares of Domtar (Canada) Paper Inc. are intended to be substantially the economic equivalent to shares of the Company’s common stock. These shareholders may exchange the exchangeable shares for shares of Domtar Corporation common stock on a one-for-one basis at any time. The exchangeable shares may be

56 redeemed by Domtar (Canada) Paper Inc. on a redemption date to be set by the Board of Directors, which cannot be prior to July 31, 2023, or upon the occurrence of certain specified events, including, upon at least 60 days prior written notice to the holders, in the event less than 416,667 exchangeable shares (excluding any exchangeable shares held directly or indirectly by us) are outstanding at any time.

OFF BALANCE SHEET ARRANGEMENTS In the normal course of business, we finance certain of our activities off balance sheet through operating leases.

GUARANTEES Indemnifications In the normal course of business, we offer indemnifications relating to the sale of our 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 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. At December 31, 2011, we are 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 has been recorded. These indemnifications have not yielded significant expenses in the past.

Pension Plans We have indemnified and held harmless the trustees of our 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 from us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At December 31, 2011, 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, Domtar Inc. (now a 100% owned subsidiary of Domtar 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 Domtar Inc. in specified circumstances, Domtar Inc. may be required to pay an increase in consideration of up to a maximum of $118 million (CDN$120 million), an amount gradually declining over a 25-year period. At March 7, 2007, the maximum amount of the purchase price adjustment was approximately $108 million (CDN$110 million).

On March 14, 2007, we received a letter from George Weston Limited (the previous owner of E.B. Eddy and a party to the purchase agreement) demanding payment of $108 million (CDN$110 million) as a result of the consummation of the Transaction. On June 12, 2007, an action was commenced by George Weston Limited against Domtar Inc. in the Superior Court of Justice of the Province of Ontario, Canada, claiming that the consummation of the Transaction triggered the purchase price adjustment and sought a purchase price adjustment of $108 million (CDN$110 million) as well as additional compensatory damages. We do not believe that the consummation of the Transaction triggers an obligation to pay an increase in consideration under the purchase price adjustment and intend to defend ourselves vigorously against any claims with respect thereto. However, we may not be successful in our defense of such claims, and if we are ultimately required to pay an increase in consideration, such payment may have a material adverse effect on our financial position, results of operations or

57 cash flows. On March 31, 2011, George Weston Limited filed a motion for summary judgement which we expect to be resolved by the Court in due course. No provision is recorded for this potential purchase price adjustment.

CONTRACTUAL OBLIGATIONS AND 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 at December 31, 2011:

CONTRACTUAL OBLIGATIONS

CONTRACT TYPE 2012 2013 2014 2015 2016 THEREAFTER TOTAL (in million of dollars) Notes (excluding interest) — $ 74 — $213 $125 $385 $ 797 Capital leases 88765 3872 Long-term debt 8 82 7 219 130 423 869 Operating leases 27 22 18 11 7 5 90 Liabilities related to uncertain tax benefits (1) ————— — 253 Total obligations $ 35 $104 $ 25 $230 $137 $428 $1,212

COMMERCIAL OBLIGATIONS

COMMITMENT TYPE 2012 2013 2014 2015 2016 THEREAFTER TOTAL (in million of dollars) Other commercial commitments (2) $64 $4 $4 $3 $1 $3 $79 (1) We have recognized total liabilities related to uncertain tax benefits of $253 million as of December 31, 2011. The timing of payments, if any, related to these obligations is uncertain; however, none of this amount is expected to be paid within the next year. (2) Includes commitments to purchase property, plant and equipment, roundwood, wood chips, gas and certain chemicals. Purchase orders in the normal course of business are excluded.

In addition, we expect to contribute a minimum of $52 million to the pension plans in 2012.

For 2012 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.

RECENT ACCOUNTING PRONOUNCEMENTS Stock Compensation In April 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Compensation— Stock Compensation, which addresses the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying security trades. This update clarifies that those employee share-based payment awards should not be considered to contain a condition that is not a market, performance, or service condition and therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. We adopted the new requirement on January 1, 2011 with no impact on our consolidated financial statements.

Comprehensive Income In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the

58 components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. These changes become effective on January 1, 2012. We are currently evaluating these changes to determine which option will be chosen for the presentation of comprehensive income. Other than the change in presentation, we have determined these changes will not have an impact on the Consolidated Financial Statements.

Compensation—Retirement Benefits In September 2011, the FASB issued an update to Compensation—Retirement Benefits, which addresses the disclosures about an employer’s participation in a multiemployer plan. The new accounting guidance requires employers participating in multiemployer plans to provide additional quantitative and qualitative disclosures to provide users with more detailed information regarding an employer’s involvement in multiemployer plans.

We adopted this standard on December 31, 2011, with no impact on our consolidated financial position, results of operations or cash flows. The adoption expanded our consolidated financial statements’ footnote disclosures, see Part II, Item 8, Financial Statement and Supplementary Data of this Annual Report on Form 10-K, under Note 7 “Pension plans and other post-retirement benefit plans”.

Intangibles—Goodwill and other In September 2011, the FASB issued an update to Intangibles—Goodwill and Other, which simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The amended provisions are effective for reporting periods beginning on or after December 15, 2011, with early adoption permitted. We adopted this amendment as of its publication date. This amendment impacts impairment testing steps only, and therefore adoption did not have an impact on our consolidated financial position, results of operations or cash flows.

CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect our results of operations and financial position. On an ongoing basis, management reviews its estimates, including those related to environmental matters and other asset retirement obligations, useful lives, impairment of long-lived assets, pension plans and other post-retirement benefit plans and income taxes based on currently available information. Actual results could differ from those estimates.

Critical accounting policies reflect matters that contain a significant level of management estimates about future events, reflect the most complex and subjective judgments, and are subject to a fair degree of measurement uncertainty.

Environmental Matters and Other Asset Retirement Obligations Environmental expenditures for effluent treatment, air emission, landfill operation and closure, asbestos containment and removal, bark pile management, silvicultural activities and site remediation (together referred to as environmental matters) are expensed or capitalized depending on their future economic benefit. In the normal

59 course of business, we incur certain operating costs for environmental matters that are expensed as incurred. Expenditures for property, plant and equipment that prevent future environmental impacts are capitalized and amortized on a straight-line basis over 10 to 40 years. Provisions for environmental matters are not discounted, except for a portion which is discounted due to more certainty with respect to timing of expenditures, and is recorded when remediation efforts are probable and can be reasonably estimated.

We recognize asset retirement obligations, at fair value, in the period in which we incur a legal obligation associated with the retirement of an asset. Our asset retirement obligations are principally linked to landfill capping obligations, asbestos removal obligations and demolition of certain abandoned buildings. Conditional asset retirement obligations are recognized, at fair value, when the fair value of the liability can be reasonably estimated or on a probability weighted discounted cash flow estimate. The associated costs are capitalized as part of the carrying value of the related asset and depreciated over its remaining useful life. The liability is accreted using the credit adjusted risk-free interest rate used to discount the cash flow.

The estimate of fair value is based on the results of the expected future cash flow approach, in which multiple cash flow scenarios that reflect a range of possible outcomes are considered. We have established cash flow scenarios for each individual asset retirement obligation. Probabilities are applied to each of the cash flow scenarios to arrive at an expected future cash flow. There is no supplemental risk adjustment made to the expected cash flows. The expected cash flow for each of the asset retirement obligations are discounted using the credit adjusted risk-free interest rate for the corresponding period until the settlement date. The rates used vary, based on the prevailing rate at the moment of recognition of the liability and on its settlement period. The rates used vary between 5.5% and 12.0%.

Cash flow estimates incorporate either assumptions that marketplace participants would use in their estimates of fair value, whenever that information is available without undue cost and effort, or assumptions developed by internal experts.

In 2011, our operating expenses for environmental matters amounted to $62 million ($62 million in 2010, $71 million in 2009).

We made capital expenditures for environmental matters of $8 million in 2011 ($3 million in 2010, $2 million in 2009), excluding the $83 million spent under the Pulp and Paper Green Transformation Program, which was reimbursed by the Government of Canada, ($51 million in 2010, nil in 2009) for the improvement of air emissions and energy efficiency, effluent treatment and remedial actions to address environmental compliance.

On December 23, 2011, the EPA proposed a new set of standards related to emissions from boilers and process heaters included in the Company’s manufacturing processes. These standards are generally referred to as Boiler MACT. These proposed rules are open for comment and final versions of these Rules are expected in mid-2012. It is anticipated compliance will be required by in the fall of 2015. We expect that the capital cost required to comply with the Boiler MACT rules, as they were published in December 2011, is between $34 million to $52 million. We are currently assessing the associated increase in operating costs as well as alternate compliance strategies.

We are also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws. The EPA and/or various state agencies have notified us that we may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against us. We continue to take remedial action under our Care and Control Program, as such sites mostly relate to our former wood preserving operating sites, and a number of operating sites due to possible soil, sediment or groundwater contamination. The investigation and remediation process is lengthy and subject to the uncertainties of changes in legal requirements, technological developments and, if and when applicable, the allocation of liability among potentially responsible parties.

60 An action was commenced by Seaspan International Ltd. (“Seaspan”) in the Supreme Court of British Columbia, on March 31, 1999 against Domtar Inc. and others with respect to alleged contamination of Seaspan’s site bordering Burrard Inlet in North Vancouver, British Columbia, including contamination of sediments in Burrard Inlet, due to the presence of creosote and heavy metals. On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan and Domtar Inc. in order to define and implement an action plan to address soil, sediment and groundwater issues. This Order was appealed to the Environmental Appeal Board (“Board”) on March 17, 2010 but there is no suspension in the execution of this Order unless the Board orders otherwise. The appeal hearing has been scheduled for October 2012. The relevant government authorities selected a remediation plan on July 15, 2011. In the interim, no stay of execution has been granted or requested. We have recorded an environmental reserve to address our estimated exposure in this matter.

While we believe that we have determined the costs for environmental matters likely to be incurred, based on known information, our ongoing efforts to identify potential environmental concerns that may be associated with the properties may lead to future environmental investigations. These efforts may result in the determination of additional environmental costs and liabilities, which cannot be reasonably estimated at this time. For example, changes in climate change regulation – See Part I, Item 3, Legal Proceedings, under the caption “Climate change regulation.”

At December 31, 2011, we had a provision of $92 million ($107 million at December 31, 2010) for environmental matters and other asset retirement obligations. Certain of these amounts have been discounted due to more certainty of the timing of expenditures. Additional costs, not known or identifiable, could be incurred for remediation efforts. Based on policies and procedures in place to monitor environmental exposure, we believe that such additional remediation costs would not have a material adverse effect on our financial position, results of operations or cash flows.

At December 31, 2011, anticipated undiscounted payments in each of the next five years are as follows:

2012 2013 2014 2015 2016 THEREAFTER TOTAL (in millions of dollars) Environmental provision and other asset retirement obligations $24 $26 $8 $3 $2 $77 $140

Useful Lives Our property, plant and equipment are stated at cost less accumulated depreciation, including asset impairment write-downs. Interest costs are capitalized for significant capital projects. For timber limits and timberlands, amortization is calculated using the unit of production method. For deferred financing fees, amortization is calculated using the effective interest rate method. For all other assets, amortization is calculated using the straight-line method over the estimated useful lives of the assets.

Our intangible assets are stated at cost less accumulated amortization, including any applicable intangible asset impairment write-down. Water rights, customer relationships, certain trade names and a supplier agreement are amortized on a straight-line basis over their estimated useful lives of 40 years, 20 to 40 years, 7 years and 5 years, respectively. Power purchase agreements are amortized on a straight-line basis over the term of the contract. The weighted-average amortization period is 25 years for power purchase agreements. One trade name is considered to have an indefinite useful life and is therefore not amortized.

On a regular basis, we review the estimated useful lives of our property, plant and equipment as well as our intangible assets. Assessing the reasonableness of the estimated useful lives of property, plant and equipment and intangible assets requires judgment and is based on currently available information. Changes in circumstances such as technological advances, changes to our business strategy, changes to our capital strategy or changes in regulation can result in the actual useful lives differing from our estimates. Revisions to the estimated useful lives of property, plant and equipment and intangible assets constitute a change in accounting estimate and are dealt with prospectively by amending depreciation and amortization rates.

61 A change in the remaining estimated useful life of a group of assets, or their estimated net salvage value, will affect the depreciation or amortization rate used to depreciate or amortize the group of assets and thus affect depreciation or amortization expense as reported in our results of operations. In 2011, we recorded depreciation and amortization expense of $376 million compared to $395 million in 2010. At December 31, 2011, we had property, plant and equipment with a net book value of $3,459 million ($3,767 million in 2010) and intangible assets, net of amortization of $204 million ($56 million in 2010).

Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that, at the lowest level of determinable cash flows, the carrying value of the long-lived assets may not be recoverable. Step I of the impairment test assesses if the carrying value of the long-lived assets exceeds their estimated undiscounted future cash flows in order to assess if the assets are impaired. In the event the estimated undiscounted future cash flows are lower than the net book value of the assets, a Step II impairment test must be carried out to determine the impairment charge. In Step II, long-lived assets are written down to their estimated fair values. Given that there is generally no readily available quoted value for our long-lived assets, we determine fair value of our long-lived assets using the estimated discounted future cash flow (“DCF”) expected from their use and eventual disposition, and by using the liquidation or salvage value in the case of idled assets. The DCF in Step II is based on the undiscounted cash flows in Step I.

Ashdown, Arkansas pulp and paper mill—Closure of a paper machine As a result of the decision to permanently shut down one of four paper machines on March 29, 2011, we recognized $73 million of accelerated depreciation, under Impairment and write-down of property, plant and equipment, in 2011 and a charge of $1 million related to the write off of inventory. Given the substantial decline in the production capacity, at our Ashdown Facility, we conducted a quantitative Step I impairment test in the first quarter of 2011 and concluded that the recognition of an impairment loss for our Ashdown mill’s remaining long-lived assets was not required.

Lebel-sur-Quévillon Pulp Mill and Sawmill—Impairment of assets In the fourth quarter of 2008, we decided to permanently shut down our Lebel-sur-Quévillon pulp mill and sawmills. In 2011, following the signing of a definitive agreement (see Part II, Item 8, Financial Statements and Supplementary Data, Note 27 “Subsequent events”), we recorded a $12 million impairment and write-down of property, plant and equipment relating to the remaining assets net book value.

Plymouth Pulp and Paper Mill—Conversion to Fluff Pulp As a result of the decision to permanently shut down the remaining paper machine and convert our Plymouth facility to 100% fluff pulp production in the fourth quarter of 2009, we recognized, under Impairment and write-down of property, plant and equipment, $39 million of accelerated depreciation in 2010 in addition to $13 million in the fourth quarter of 2009 and a $1 million write-down for the related paper machine in 2010.

Given the substantial change in use of the mill, we conducted a Step I impairment test in the fourth quarter of 2009 and concluded that the recognition of an impairment loss for our Plymouth mill’s remaining long-lived assets was not required as the aggregate estimated undiscounted future cash flows exceeded the then carrying value of the asset group of $336 million by a significant amount.

Estimates of undiscounted future cash flows used to test the recoverability of the fixed assets included key assumptions related to trend prices, inflation-adjusted cost projections, and the estimated useful life of the fixed assets.

62 Plymouth Pulp and Paper Mill—Closure of Paper Machine In the first quarter of 2009, we announced that we would permanently reduce our paper manufacturing at our Plymouth pulp and paper mill, by closing one of the two paper machines comprising the mill’s paper production unit. As a result, at the end of February 2009, there was a curtailment of 293,000 tons of the mill’s paper production capacity and the closure affected approximately 185 employees. Also, $13 million of accelerated depreciation in the fourth quarter of 2009, and a further $39 million of accelerated depreciation over the first nine months of 2010, were recorded for the related plant and equipment. Given the closure of the paper machine, we conducted a Step I impairment test on our Plymouth mill operation’s fixed assets and concluded that the undiscounted estimated future cash flows associated with the remaining long-lived assets exceeded their carrying value and, as such, no additional impairment charge was required.

Columbus Paper Mill On March 16, 2010, we announced that we would permanently close our coated groundwood paper mill in Columbus, Mississippi. This measure resulted in the permanent curtailment of 238,000 tons of coated groundwood and 70,000 metric tons of thermo-mechanical pulp, as well as affected 219 employees. We recorded a $9 million write-down for the related fixed assets under Impairment and write-down of property, plant and equipment and $16 million of other charges under Closure and restructuring costs, refer to Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 16 “Closure and restructuring costs and liability.” Operations ceased in April 2010.

Cerritos During the second quarter of 2010, we decided to close our Cerritos, California forms converting plant, and recorded a $1 million write-down for the related assets under Impairment and write-down of property, plant and equipment and $1 million in severance and termination costs under Closure and restructuring costs, refer to Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 16 “Closure and restructuring costs and liability.” Operations ceased on July 16, 2010.

Prince Albert Pulp Mill As a result of a review of available options for the disposal of the assets of this facility in the fourth quarter of 2009, we revised the estimated net realizable values of the remaining assets and recorded a non-cash write- down of $14 million, related to fixed assets, primarily a turbine and a boiler. The write-down represented the difference between the new estimated liquidation or salvage value of the fixed assets and their carrying values.

Changes in our assumptions and estimates may affect our forecasts and may lead to an outcome where impairment charges would be required. In addition, actual results may vary from our forecasts, and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where our conclusions may differ in reflection of prevailing market conditions.

Impairment of Goodwill Goodwill is not amortized and may be subject to an impairment test in the fourth quarter of every year or more frequently if events or changes in circumstances indicate that it might be impaired. For purposes of determining whether it is necessary to perform the two-step goodwill impairment test, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the Step I of the two-step impairment test is unnecessary. The Step I goodwill impairment test determines whether the fair value of a reporting unit exceeds the net carrying amount of that reporting unit, including goodwill, as of the assessment date in order to assess if goodwill is impaired. If the fair value is greater than the net carrying amount, no impairment is necessary. In the event that the net carrying

63 amount exceeds the fair value, the Step II goodwill impairment test must be performed in order to determine the amount of the impairment charge. The implied fair value of goodwill in this test is estimated in the same way as goodwill was determined at the date of the acquisition in a business combination. That is, the excess of the fair value of the reporting unit over the fair value of the identifiable net assets of the reporting unit represents the implied value of goodwill. To accomplish this Step II test, the fair value of the reporting unit’s goodwill must be estimated and compared to its carrying value. The excess of the carrying value over the fair value is taken as an impairment charge in the period.

For purposes of impairment testing, goodwill must be assigned to one or more of our reporting units. We test goodwill at the reporting unit level. All goodwill as of December 31, 2011 resided in our Personal Care segment. The goodwill in the Personal Care segment originates from the acquisition of Attends in September 2011.

In the fourth quarter of 2011, we assessed qualitative factors to determine whether the existence of events or circumstances led to a determination that it was more likely than not that the fair value of the reporting unit was less than its carrying amount. After assessing the totality of events and circumstances, we determined it was not more likely than not that the fair value of the reporting unit was less than its carrying amount. Thus, performing the two-step impairment test was unnecessary and no impairment charge was recorded for goodwill.

Pension Plans and Other Post-Retirement Benefit Plans We have several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to our contribution. Defined contribution pension expense was $24 million for the year ended December 31, 2011 ($25 million in 2010 and $24 million in 2009).

We have several defined benefit pension plans covering a majority of employees. In the United States, this includes pension plans that are qualified under the Internal Revenue Code (“qualified”) as well as a plan that provides benefits in addition to those provided under the qualified plans for a select group of employees, which is not qualified under the Internal Revenue Code (“unqualified”). In Canada, plans are registered under the Income Tax Act and under their respective provincial pension acts (“registered”), or plans may provide additional benefits to a select group of employees, and not be registered under the Income Tax Act or provincial pension acts (“non-registered”). The defined benefit plans are generally contributory in Canada and non-contributory in the United States. We also provide post-retirement plans to eligible Canadian and U.S. employees; the plans are unfunded and include life insurance programs, medical and dental benefits and short-term and long-term disability programs. We also provide supplemental unfunded benefit plans to certain senior management employees. Related pension and other post-retirement plan expenses and the corresponding obligations are actuarially determined using management’s most probable assumptions.

We have several defined benefit pension plans covering a majority of employees. The defined benefit pension plans are generally contributory in Canada and non-contributory in the United States. Non-unionized employees in Canada joining our Company after June 1, 2000 participate in defined contribution pension plans. Salaried employees in the U.S. joining our Company after January 1, 2008 participate in a defined contribution pension plan. Also, starting on January 1, 2013, all unionized employees covered under the agreement with the United Steel Workers not grandfathered under the existing defined benefit pension plans will transition to a defined contribution pension plan for future service. We also provide other post-retirement plans to eligible Canadian and U.S. employees; the plans are unfunded and include life insurance programs, medical and dental benefits. We also provide supplemental unfunded defined benefit pension plans to certain senior management employees.

We account for pensions and other post-retirement benefits in accordance with Compensation-Retirement Benefits Topic of FASB ASC which requires employers to recognize the overfunded or underfunded status of defined benefit pension plans as an asset or liability in its Consolidated Balance Sheets. Pension and other post- retirement benefit assumptions include the discount rate, the expected long-term rate of return on plan assets, the rate of compensation increase, health care cost trend rates, mortality rates, employee early retirements and

64 terminations or disabilities. Changes in these assumptions result in actuarial gains or losses which we have amortized over the expected average remaining service life of the active employee group covered by the plans only to the extent that the unrecognized net actuarial gains and losses are in excess of 10% of the greater of the accrued benefit obligation and the market-related value of plan assets at the beginning of the year.

An expected rate of return on plan assets of 6.3% was considered appropriate by our management for the determination of pension expense for 2011. Effective January 1, 2012, we will use 6.0% as the expected return on plan assets, which reflects the current view of long-term investment returns. The overall expected long-term rate of return on plan assets is based on management’s best estimate of the long-term returns of the major asset classes (cash and cash equivalents, equities and bonds) weighted by the actual allocation of assets at the measurement date, net of expenses. This rate includes an equity risk premium over government bond returns for equity investments and a value-added premium for the contribution to returns from active management.

We set our discount rate assumption annually to reflect the rates available on high-quality, fixed income debt instruments, with a duration that is expected to match the timing and amount of expected benefit payments. High-quality debt instruments are corporate bonds with a rating of AA or better. The discount rates at December 31, 2011 for pension plans were estimated at 4.9% for the accrued benefit obligation and 5.3% for the net periodic benefit cost for 2011 and for post-retirement benefit plans were estimated at 5.0% for the accrued benefit obligation and 5.5% for the net periodic benefit cost for 2011.

The rate of compensation increase is another significant assumption in the actuarial model for pension (set at 2.7% for the accrued benefit obligation and 2.9% for the net periodic benefit cost) and for post-retirement benefits (set at 2.8% for the accrued benefit obligation and 2.8% for the net periodic benefit cost) and is determined based upon our long-term plans for such increases.

For measurement purposes, a 5.8% weighted-average annual rate of increase in the per capita cost of covered health care benefits was assumed for 2012. The rate was assumed to decrease gradually to 4.1% by 2032 and remain at that level thereafter.

The following table provides a sensitivity analysis of the key weighted average economic assumptions used in measuring the accrued pension benefit obligation, the accrued other post-retirement benefit obligation and related net periodic benefit cost for 2011. The sensitivity analysis should be used with caution as it is hypothetical and changes in each key assumption may not be linear. The sensitivities in each key variable have been calculated independently of each other.

Sensitivity Analysis PENSION OTHER POST-RETIREMENT BENEFIT ACCRUED ACCRUED PENSION AND OTHER POST-RETIREMENT BENEFIT NET PERIODIC BENEFIT NET PERIODIC BENEFIT PLANS OBLIGATION BENEFIT COST OBLIGATION BENEFIT COST (In millions of dollars) Expected rate of return on assets Impact of: 1% increase N/A ($ 15) N/A N/A 1% decrease N/A 15 N/A N/A Discount rate Impact of: 1% increase ($173) (13) ($12) — 1% decrease 201 17 15 1 Assumed overall health care cost trend Impact of: 1% increase N/A N/A 9 1 1% decrease N/A N/A (8) (1)

65 The assets of the pension plans are held by a number of independent trustees and are accounted for separately in our pension funds. Our investment strategy for the assets in the pension plans is to maintain a diversified portfolio of assets, invested in a prudent manner to maintain the security of funds while maximizing returns within the guidelines provided in the investment policy. The Company’s pension funds are not permitted to own any of the Company’s shares or debt instruments. The target asset allocation is based on the expected duration of the benefit obligation.

The following table shows the allocation of the plan assets, based on the fair value of the assets held and the target allocation for 2011:

PERCENTAGE PLAN PERCENTAGE PLAN TARGET ASSETS AT ASSETS AT ALLOCATION OF PLAN ASSETS at December 31 ALLOCATION DECEMBER 31, 2011 DECEMBER 31, 2010 (in %) Fixed income Cash and cash equivalents 0% –10% 5% 3% Bonds 53% – 63% 58% 58% Equity Canadian equity 7% –15% 10% 11% U.S. equity 7% –16% 12% 14% International equity 13% – 22% 15% 14% Total (1) 100% 100%

(1) Approximately 87% of the pension plan assets relate to Canadian plans and 13% relate to U.S. plans.

Our pension plan funding policy is to contribute annually the amount required to provide for benefits earned in the year, and to fund both solvency deficiencies and past service obligations over periods not exceeding those permitted by the applicable regulatory authorities. Past service obligations primarily arise from improvements to plan benefits. The other post-retirement benefit plans are not funded and contributions are made annually to cover benefit payments. We expect to contribute a minimum total amount of $52 million in 2012 compared to $95 million in 2011 (2010—$161 million) to the pension plans. The payments made in 2011 to the other post- retirement benefit plans amounted to $8 million (2010—$8 million).

The estimated future benefit payments from the plans for the next ten years at December 31, 2011 are as follows:

OTHER POST- RETIREMENT ESTIMATED FUTURE BENEFIT PAYMENTS FROM THE PLANS PENSION PLANS BENEFIT PLANS (in millions of dollars) 2012 $206 $ 7 2013 134 7 2014 99 7 2015 101 7 2016 105 6 2017 – 2021 576 34

Asset Backed Commercial Paper At December 31, 2011, our Canadian defined benefit pension funds held asset backed commercial paper investments (“ABCP”) valued at $205 million (CDN$208 million) representing 12% of the total fair value of assets held in the pension funds. At December 31, 2010, the plans held ABCP valued at $214 million (CDN$213 million). During 2011, the total value of the ABCP benefited from an increase in market value of

66 $3 million (CDN$3 million). A decrease in value of the Canadian dollar resulted in a decrease in the value of the ABCP of $4 million. Repayments in 2011 totalled $8 million (CDN$8 million).

Most of these ABCP (valued at $178 million (2010 – $193 million; 2009 – $186 million) were subject to restructuring under the court order governing the Montreal Accord that was completed in January 2009, while the remaining ABCP valued at $27 million (2010 – $21 million; 2009 – $19 million) were restructured separately.

While there is a market for the ABCP held by our pension plans, this market is not considered sufficiently liquid to use for valuation purposes. Accordingly, the value of the ABCP is mainly based on a financial model incorporating uncertainties regarding return, credit spreads, the nature and credit risk of underlying assets, and the amounts and timing of cash inflows.

The largest conduit owned by the pension plans in the Montreal Accord, representing 75% of the total value, consists mainly of investments that serve as collateral to back credit default derivatives that protect counterparties against credit defaults above a specified threshold on different portfolios of corporate credits. The valuation methodology was based upon determining an appropriate credit spread for each class of notes based upon the implied protection level provided by each class against potential credit defaults. This was done by comparison to spreads for an investment grade credit default index and the comparable tranches within the index for equivalent credit protection. In addition, a liquidity premium of 1.75% was added to this spread. The resulting spread was used to calculate the present value of all such notes, based upon the anticipated maturity date. An additional discount of 2.5% was applied to the value to reflect uncertainty over collateral values held to support the derivative transactions. The resulting interest rate was used to calculate the present value of this class of ABCP, based upon the anticipated maturity date in early 2017. An increase in the discount rate of 1% would reduce the value by $7 million (CDN$7 million) for these ABCP.

The value of the remaining ABCP that were subject to the Montreal Accord were sourced either from the asset manager of the ABCP, or from trading values for similar securities of similar credit quality. The remaining ABCP that were not subject to the Montreal Accord, which also provide protection to counterparties against credit defaults through derivatives, were valued based upon the value of the investment held in the conduit that serve as collateral for the derivative counterparties, net of the market value of the credit derivatives as provided by the sponsor of the conduit, with an additional discount (equivalent to 1.75% per annum) applied for illiquidity.

Possible changes that could materially impact the future value of the ABCP include (1) changes in the value of the underlying assets and the related derivative transactions, (2) developments related to the liquidity of the ABCP market, (3) a severe and prolonged economic slowdown in North America and the bankruptcy of referenced corporate credits, and (4) the passage of time, as most of the notes will mature in early 2017.

Multiemployer Plans We contribute to nine multiemployer defined benefit pension plans under the terms of collective agreements that cover certain Canadian union-represented employees (Canadian multiemployer plans) and U.S. union- represented employees (U.S. multiemployer plans). The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects: a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, b) for the U.S. multiemployer plans, if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and c) for the U.S. multiemployer plans, if we choose to stop participating in some of our multiemployer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

67 Our participation in these plans for the annual periods ended December 31 is outlined in the table below. The plan’s 2011 and 2010 actuarial status certification was completed as of January 1, 2011 and January 1, 2010 respectively, and is based on the plan’s actuarial valuation as of January 1, 2010 and January 1, 2009 respectively. This represents the most recent Pension Protection Act (“PPA”) zone status available. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Our significant plan is in the red zone, which means it is less than 65 percent funded. Pension Contributions Protection Act from Domtar to Zone Status Multiemployer (b) EIN / Pension FIP / RP Status Pending / Surcharge Pension Fund Plan Number 2011 2010 Implemented 2011 2010 2009 imposed? Expiration CBA U.S. Multiemployer Plans $$$ PACE Industry Union- Management Pension Fund 11-6166763-001 Red Red Yes - Implemented 3 3 3 Yes November 1, 2011 Canadian Multiemployer Plans Pulp and Paper Industry Pension Plan (a) N/A N/A N/A N/A 3 2 2 N/A April 30, 2012 Total 6 5 5 Total contributions made to all plans that are not individually significant 1 1 1 Total contributions made to all plans 7 6 6

(a) In the event that the Canadian multiemployer plans are underfunded, the monthly benefit amount can be reduced by the trustees of the plan. Moreover, we are not responsible for the underfunded status of the plan because the Canadian multiemployer plans do not require participating employers to pay a withdrawal liability or penalty upon withdrawal. (b) For each of the three years presented, our contributions to each multiemployer plan do not represent more than five percent of total contributions to each plan as indicated in the plan’s most recently available annual report. We will withdraw from participation in one of the multiemployer plans in 2012. The expected withdrawal liability, recorded in December 2011 (see Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 16 “Closure and restructuring costs and liability”) is $32 million. We are reviewing our participation in the remaining multiemployer pension plans. Income Taxes We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined according to differences between the carrying amounts and tax bases of the assets and liabilities. The change in the net deferred tax asset or liability is included in earnings. Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to apply in the years in which assets and liabilities are expected to be recovered or settled. For these years, a projection of taxable income and an assumption of the ultimate recovery or settlement period for temporary differences are required. The projection of future taxable income is based on management’s best estimate and may vary from actual taxable income. On a quarterly basis, we assess the need to establish a valuation allowance for deferred tax assets and, if it is deemed more likely than not that our deferred tax assets will not be realized based on these taxable income

68 projections, a valuation allowance is recorded. In general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or an increase in future taxes refundable from the deferred tax assets. Evaluating the need for an amount of a valuation allowance for deferred tax assets often requires significant judgment. All available evidence, both positive and negative, should be considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. In our evaluation process, we give the most weight to historical income or losses. After evaluating all available positive and negative evidence, although realization is not assured, we determined that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, with the exception of certain state credits for which a valuation allowance of $4 million has been recorded in 2011. Our short-term deferred tax assets are mainly composed of temporary differences related to various accruals, accounting provisions, as well as a portion of our net operating loss carry forwards and available tax credits. The majority of these items are expected to be utilized or paid out over the next year. Our long-term deferred tax assets and liabilities are mainly composed of temporary differences pertaining to plant, equipment, pension and post-retirement liabilities, the remaining portion of net operating loss carry forwards and other tax attributes, and other items. Estimating the ultimate settlement period requires judgment and our best estimates. The reversal of timing differences is expected at enacted tax rates, which could change due to changes in income tax laws or the introduction of tax changes through the presentation of annual budgets by different governments. As a result, a change in the timing and the income tax rate at which the components will reverse could materially affect deferred tax expense in our future results of operations. In addition, U.S. and foreign tax rules and regulations are subject to interpretation and require judgment that may be challenged by taxation authorities. To the best of our knowledge, we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. In accordance with Income Taxes Topic of FASB ASC 740, we evaluate new tax positions that result in a tax benefit to us and determine the amount of tax benefits that can be recognized. The remaining unrecognized tax benefits are evaluated on a quarterly basis to determine if changes in recognition or classification are necessary. Significant changes in the amount of unrecognized tax benefits expected within the next 12 months are disclosed quarterly. Future recognition of unrecognized tax benefits would impact the effective tax rate in the period the benefits are recognized. At December 31, 2011, we had gross unrecognized tax benefits of $253 million. If our income tax positions with respect to the alternative fuel mixture tax credits are sustained, either all or in part, then we would recognize a tax benefit in the future equal to the amount of the benefits sustained. Our tax treatment of the income related to the alternative fuel mixture tax credits resulted in the recognition of a tax benefit of $2 million in 2010, which impacted the effective tax rate. This credit expired December 31, 2009. Refer to Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 10 “Income taxes” for details on the unrecognized tax benefits.

Alternative Fuel Tax Credits The U.S. Internal Revenue Code of 1986, as amended (the “Code”) permitted a refundable excise tax credit, until the end of 2009, for the production and use of alternative bio fuel mixtures derived from biomass. We submitted an application with the IRS to be registered as an alternative fuel mixer and received notification that our registration had been accepted in late March 2009. We began producing and consuming alternative fuel mixtures in February 2009 at our eligible mills. Although the credit ended at the end of 2009, in 2010, we recorded $25 million of such credits in Other operating (income) loss on the Consolidated Statement of Earnings (Loss) compared to $498 million in 2009. The $25 million represented an adjustment to amounts presented as deferred revenue at December 31, 2009 and was released to income following guidance issued by the IRS in March 2010. We recorded an income tax expense of $7 million in 2010 compared to $162 million in 2009 related to the alternative fuel mixture income. The amounts for the refundable credits are based on the volume of alternative bio fuel mixtures produced and burned during that period. In 2009, we received a $140 million cash refund and another $368 million cash refund, net of federal income tax offsets, in 2010. Additional information regarding unrecognized tax benefits is included in Part II,

69 Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under Note 10 “Income taxes.”

Although we do not expect a significant change in our unrecognized tax benefits associated with the alternative fuel tax credits from 2009 during the next 12 months, a favorable audit by the IRS or the issuance of authoritative guidance could result in the recognition of some or all of these previously unrecognized tax benefits. As of December 31, 2011, we have gross unrecognized tax benefits and interest of $192 million and related deferred tax assets of $15 million associated with the alternative fuel tax credits. The recognition of these benefits, $177 million net of deferred taxes, would impact the effective tax rate.

Cellulosic Biofuel Credit In July 2010, the IRS Office of Chief Counsel released an Advice Memorandum concluding that qualifying cellulosic biofuel sold or used before January 1, 2010, is eligible for the cellulosic biofuel producer credit (“CBPC”) and would not be required to be registered by the Environmental Protection Agency. Each gallon of qualifying cellulose biofuel produced by any taxpayer operating a pulp and paper mill and used as a fuel in the taxpayer’s trade or business during calendar year 2009 would qualify for the $1.01 non-refundable CBPC. A taxpayer could be able to claim the credit on its federal income tax return for the 2009 tax year upon the receipt of a letter of registration from the IRS and any unused CBPC may be carried forward until 2015 to offset a portion of federal taxes otherwise payable.

We had approximately 207 million gallons of cellulose biofuel that qualifies for this CBPC for which we had not previously claimed under the Alternative Fuel Mixture Credit (“AFMC”) that represents approximately $209 million of CBPC or approximately $127 million of after tax benefit to the Corporation. In July 2010, we submitted an application with the IRS to be registered for the CBPC and on September 28, 2010, we received our notification from the IRS that we were successfully registered. On October 15, 2010 the IRS Office of Chief Counsel issued an Advice Memorandum concluding that the AFMC and CBPC could be claimed in the same year for different volumes of biofuel. In November 2010, we filed an amended 2009 tax return with the IRS claiming a cellulosic biofuel producer credit of $209 million and recorded a net tax benefit of $127 million in Income tax expense (benefit) on the Consolidated Statement of Earnings for December 31, 2010. As of December 31, 2011, approximately $25 million of this credit remains to offset future U.S. federal income tax liability.

Closure and Restructuring Costs Closure and restructuring costs are recognized as liabilities in the period when they are incurred and are measured at their fair value. For such recognition to occur, management, with the appropriate level of authority, must have approved and committed to a firm plan and appropriate communication to those affected must have occurred. These provisions may require an estimation of costs such as severance and termination benefits, pension and related curtailments, environmental remediation, and may also include expenses related to demolition, training and outplacement. Actions taken may also require an evaluation of any remaining assets to determine the required write-downs, if any, and a review of estimated remaining useful lives which may lead to accelerated depreciation expense.

Estimates of cash flows and fair value relating to closures and restructurings require judgment. Closure and restructuring costs are based on management’s best estimates of future events at December 31, 2011. Although we do not anticipate significant changes, the actual costs may differ from these estimates due to subsequent developments such as the results of environmental studies, the ability to find a buyer for assets set to be dismantled and demolished and other business developments. As such, additional costs and further working capital write-downs may be required in future periods.

70 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our income can be impacted by the following sensitivities:

SENSITIVITY ANALYSIS (In millions of dollars, unless otherwise noted) Each $10/unit change in the selling price of the following products: 1 Papers 20-lb repro bond, 92 bright (copy) $11 50-lb offset, rolls 1 Other 22 Pulp—net position 15 Foreign exchange, excluding depreciation and amortization (US $0.01 change in relative value to the Canadian dollar before hedging) 9 Energy 2 Natural gas: $0.25/MMBtu change in price before hedging 4 Crude oil: $10/barrel change in price before hedging 12 1 Based on estimated 2012 capacity (ST or ADMT). 2 Based on estimated 2012 consumption levels. The allocation between energy sources may vary during the year in order to take advantage of market conditions.

Note that we may, from time to time, hedge part of our foreign exchange, pulp, interest rate and energy positions, which may therefore impact the above sensitivities.

In the normal course of business, we are exposed to certain financial risks. We do not use derivative instruments for speculative purposes; although all derivative instruments purchased to minimize risk may not qualify for hedge accounting.

INTEREST RATE RISK We are exposed to interest rate risk arising from fluctuations in interest rates on our cash and cash equivalents, bank indebtedness, bank credit facility and long-term debt. We may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts.

CREDIT RISK We are exposed to credit risk on the accounts receivable from our customers. In order to reduce this risk, we review new customers’ credit history before granting credit and conduct regular reviews of existing customers’ credit performance. As of December 31, 2011 and December 31, 2010, we did not have any customers that represented more than 10% of our receivables.

We are also exposed to credit risk in the event of non-performance by counterparties to our financial instruments. We minimize this exposure by entering into contracts with counterparties that we believe to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. We regularly monitor the credit standing of counterparties. Additionally, we are exposed to credit risk in the event of non-performance by our insurers. We minimize our exposure by doing business only with large reputable insurance companies.

COST RISK Cash flow hedges We purchase natural gas and oil at the prevailing market price at the time of delivery. In order to manage the cash flow risk associated with purchases of natural gas and oil, we may utilize derivative financial instruments or

71 physical purchases to fix the price of forecasted natural gas and oil purchases. We formally document the hedge relationships, including identification of the hedging instruments and the hedged items, the risk management objectives and strategies for undertaking the hedge transactions, and the methodologies used to assess effectiveness and measure ineffectiveness. Current contracts are used to hedge forecasted purchases over the next three years. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Accumulated other comprehensive loss within Shareholders’ equity, and is recognized in Cost of sales in the period in which the hedged transaction occurs.

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of December 31, 2011 to hedge forecasted purchases:

Notional contractual Notional contractual value Percentage of forecasted quantity under derivative under derivative contracts purchases under Commodity contracts (in millions of dollars) derivative contracts for 2012 2013 2014 Natural gas 7,920,000 MMBTU (1) $39 31% 20% 3% (1) MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective for accounting purposes as of December 31, 2011. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in our Consolidated Statements of Earnings for the year ended December 31, 2011 resulting from hedge ineffectiveness (2010 and 2009—nil).

FOREIGN CURRENCY RISK Cash flow hedges We have manufacturing operations in the United States and Canada. As a result, we are exposed to movements in the foreign currency exchange rate in Canada. Also, certain assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. As a result, our earnings are affected by increases or decreases in the value of the Canadian dollar relative to the U.S. dollar. Our risk management policy allows us to hedge a significant portion of our exposure to fluctuations in foreign currency exchange rates for periods up to three years. We may use derivative instruments (currency options and foreign exchange forward contracts) to mitigate our exposure to fluctuations in foreign currency exchange rates. Foreign exchange forward contracts are contracts whereby we have the obligation to buy Canadian dollars at a specific rate. Currency options purchased are contracts whereby we have the right, but not the obligation, to buy Canadian dollars at the strike rate if the Canadian dollar trades above that rate. Currency options sold are contracts whereby we have the obligation to buy Canadian dollars at the strike rate if the Canadian dollar trades below that rate.

We formally document the relationship between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking the hedge transactions. Foreign exchange forward contracts and currency options contracts used to hedge forecasted purchases in Canadian dollars are designated as cash flow hedges. Current contracts are used to hedge forecasted purchases over the next 12 months. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Accumulated other comprehensive loss within Shareholders’ equity, and is recognized in Cost of sales in the period in which the hedged transaction occurs.

72 The following table presents the currency values under contracts pursuant to currency options outstanding as of December 31, 2011 to hedge forecasted purchases:

Percentage of CDN denominated forecasted expenses, net of revenues, under contracts for Contract Notional contractual value 2012 Currency options purchased CDN $400 50% Currency options sold CDN $400 50%

The currency options are fully effective as at December 31, 2011. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in our Consolidated Statements of Earnings for the year ended December 31, 2011 resulting from hedge ineffectiveness (2010 and 2009—nil).

73 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Reports to Shareholders of Domtar Corporation

Management’s Report on Financial Statements and Practices The accompanying Consolidated Financial Statements of Domtar Corporation and its subsidiaries (the “Company”) were prepared by management. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s best judgments and estimates. Management is responsible for the completeness, accuracy and objectivity of the financial statements. The other financial information included in the annual report is consistent with that in the financial statements.

Management has established and maintains a system of internal accounting and other controls for the Company and its subsidiaries. This system and its established accounting procedures and related controls are designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect all transactions, that policies and procedures are implemented by qualified personnel, and that published financial statements are properly prepared and fairly presented. The Company’s system of internal control is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified.

Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, management has conducted an assessment, including testing, using the criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2011, based on criteria in Internal Control – Integrated Framework issued by the COSO.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

74 Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Domtar Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Domtar Corporation and its subsidiaries at December 31, 2011 and December 31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Attends, Inc. from its assessment of internal control over financial reporting as of December 31, 2011 because the entity was acquired by the Company in a purchase business combination during the year ended December 31, 2011. We have also excluded Attends, Inc. from our audit of internal control over financial reporting. Attends, Inc. is a wholly-owned subsidiary whose total assets and total revenues represent 8% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011.

/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Charlotte, North Carolina February 24, 2012

75 DOMTAR CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 $$$ Sales 5,612 5,850 5,465 Operating expenses Cost of sales, excluding depreciation and amortization 4,171 4,417 4,472 Depreciation and amortization 376 395 405 Selling, general and administrative 340 338 345 Impairment and write-down of property, plant and equipment (NOTE 4) 85 50 62 Closure and restructuring costs (NOTE 16) 52 27 63 Other operating (income) loss, net (NOTE 8) (4) 20 (497) 5,020 5,247 4,850 Operating income 592 603 615 Interest expense, net (NOTE 9) 87 155 125 Earnings before income taxes and equity earnings 505 448 490 Income tax expense (benefit) (NOTE 10) 133 (157) 180 Equity loss, net of taxes 7 —— Net earnings 365 605 310 Per common share (in dollars) (NOTE 6) Net earnings Basic 9.15 14.14 7.21 Diluted 9.08 14.00 7.18 Weighted average number of common and exchangeable shares outstanding (millions) Basic 39.9 42.8 43.0 Diluted 40.2 43.2 43.2

The accompanying notes are an integral part of the consolidated financial statements.

76 DOMTAR CORPORATION CONSOLIDATED BALANCE SHEETS (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

December 31, December 31, 2011 2010 $$ Assets Current assets Cash and cash equivalents 444 530 Receivables, less allowances of $5 and $7 644 601 Inventories (NOTE 11) 652 648 Prepaid expenses 22 28 Income and other taxes receivable 47 78 Deferred income taxes (NOTE 10) 125 115 Total current assets 1,934 2,000 Property, plant and equipment, at cost 8,448 9,255 Accumulated depreciation (4,989) (5,488) Net property, plant and equipment (NOTE 13) 3,459 3,767 Goodwill (NOTE 12) 163 — Intangible assets, net of amortization (NOTE 14) 204 56 Other assets (NOTE 15) 109 203 Total assets 5,869 6,026 Liabilities and shareholders’ equity Current liabilities Bank indebtedness 7 23 Trade and other payables (NOTE 18) 688 678 Income and other taxes payable 17 22 Long-term debt due within one year (NOTE 19) 4 2 Total current liabilities 716 725 Long-term debt (NOTE 19) 837 825 Deferred income taxes and other (NOTE 10) 927 924 Other liabilities and deferred credits (NOTE 20) 417 350 Commitments and contingencies (NOTE 22) Shareholders’ equity Common stock (NOTE 21) $0.01 par value; authorized 2,000,000,000 shares; issued: 42,506,732 and 42,300,031 shares — — Treasury stock (NOTE 21) $0.01 par value; 6,375,532 and 664,857 shares — — Exchangeable shares (NOTE 21) No par value; unlimited shares authorized; issued and held by nonaffiliates: 619,108 and 812,694 shares 49 64 Additional paid-in capital 2,326 2,791 Retained earnings 671 357 Accumulated other comprehensive loss (74) (10) Total shareholders’ equity 2,972 3,202 Total liabilities and shareholders’ equity 5,869 6,026

The accompanying notes are an integral part of the consolidated financial statements.

77 DOMTAR CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

Issued and outstanding common and exchangeable Retained Accumulated shares Common Additional earnings other Total (millions of stock, Exchangeable paid-in (Accumulated comprehensive shareholders’ shares) at par shares capital deficit) loss equity $$ $ $ $ $ Balance at December 31, 2008 515.5 5 138 2,743 (526) (217) 2,143 Conversion of exchangeable shares — — (60) 60 — — — Reverse stock split (12:1) (472.5) (5) — 5 — — — Stock-based compensation — — — 8 — — 8 Net earnings — — — — 310 — 310 Net derivative gains on cash flow hedges: Net gain arising during the period, net of tax of $2 — — — — — 51 51 Less: Reclassification adjustments for losses included in net earnings, net of tax of $1 — — — — — 18 18 Foreign currency translation adjustments — — — — — 206 206 Change in unrecognized losses and prior service cost related to pension and post-retirement benefit plans, net of tax of $(6) — — — — — (74) (74) Balance at December 31, 2009 43.0 — 78 2,816 (216) (16) 2,662 Conversion of exchangeable shares — — (14) 14 — — — Stock-based compensation 0.1 — — 5 — — 5 Net earnings — — — — 605 — 605 Net derivative losses on cash flow hedges: Net loss arising during the period, net of tax of $3 ————— (4) (4) Less: Reclassification adjustments for gains included in net earnings, net of tax of $(1) ————— (2) (2) Foreign currency translation adjustments — — — — — 66 66 Change in unrecognized losses and prior service cost related to pension and post-retirement benefit plans, net of tax of $19 ————— (54) (54) Stock repurchase (0.7) — — (42) — — (42) Cash dividends — — — — (32) — (32) Other ——— (2) — — (2) Balance at December 31, 2010 42.4 — 64 2,791 357 (10) 3,202 Conversion of exchangeable shares — — (15) 15 — — — Stock-based compensation 0.3 — — 14 — — 14 Net earnings — — — — 365 — 365 Net derivative losses on cash flow hedges: Net loss arising during the period, net of tax of $7 ————— (13) (13) Less: Reclassification adjustments for gains included in net earnings, net of tax of $(2) ————— (1) (1) Foreign currency translation adjustments — — — — — (25) (25) Change in unrecognized losses and prior service cost related to pension and post-retirement benefit plans, net of tax of $15 ————— (25) (25) Stock repurchase (5.9) — — (494) — — (494) Cash dividends — — — — (51) — (51) Balance at December 31, 2011 36.8 — 49 2,326 671 (74) 2,972

The accompanying notes are an integral part of the consolidated financial statements.

78 DOMTAR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS OF DOLLARS)

December 31, December 31, December 31, 2011 2010 2009 $$$ Operating activities Net earnings 365 605 310 Adjustments to reconcile net earnings to cash flows from operating activities Depreciation and amortization 376 395 405 Deferred income taxes and tax uncertainties (NOTE 10) 40 (174) 157 Impairment and write-down of property, plant and equipment (NOTE 4) 85 50 62 Loss (gain) on repurchase of long-term debt 4 47 (12) Net losses (gains) on disposals of property, plant and equipment and sale of businesses and trademarks (6) 33 (7) Stock-based compensation expense 3 58 Equity loss, net 7 —— Other — (2) 16 Changes in assets and liabilities, excluding the effects of acquisition and sale of businesses Receivables (12) (73) (55) Inventories 2 39 261 Prepaid expenses 2 6 (3) Trade and other payables (17) (11) 38 Income and other taxes 33 344 (357) Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense (18) (120) (61) Other assets and other liabilities 19 22 30 Cash flows provided from operating activities 883 1,166 792 Investing activities Additions to property, plant and equipment (144) (153) (106) Proceeds from disposals of property, plant and equipment and sale of trademarks 34 26 21 Proceeds from sale of businesses and investments 10 185 — Acquisition of business, net of cash acquired (288) —— Other (7) —— Cash flows (used for) provided from investing activities (395) 58 (85) Financing activities Dividend payments (49) (21) — Net change in bank indebtedness (16) (19) — Change of revolving bank credit facility — — (60) Issuance of long-term debt — — 385 Repayment of long-term debt (18) (898) (725) Premium paid on debt repurchases and tender offer costs (7) (35) (14) Stock repurchase (494) (44) — Prepaid on structured stock repurchase, net — 2— Other 10 (3) — Cash flows used for financing activities (574) (1,018) (414) Net (decrease) increase in cash and cash equivalents (86) 206 293 Translation adjustments related to cash and cash equivalents — —15 Cash and cash equivalents at beginning of year 530 324 16 Cash and cash equivalents at end of year 444 530 324 Supplemental cash flow information Net cash payments for: Interest 74 107 125 Income taxes paid (refund) 60 28 (20)

The accompanying notes are an integral part of the consolidated financial statements.

79 INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 81 NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS 88 NOTE 3 ACQUISITION OF BUSINESS 89 NOTE 4 IMPAIRMENT AND WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT 90 NOTE 5 STOCK-BASED COMPENSATION 92 NOTE 6 EARNINGS PER SHARE 97 NOTE 7 PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS 98 NOTE 8 OTHER OPERATING (INCOME) LOSS, NET 110 NOTE 9 INTEREST EXPENSE, NET 110 NOTE 10 INCOME TAXES 111 NOTE 11 INVENTORIES 116 NOTE 12 GOODWILL 116 NOTE 13 PROPERTY, PLANT AND EQUIPMENT 117 NOTE 14 INTANGIBLE ASSETS 118 NOTE 15 OTHER ASSETS 119 NOTE 16 CLOSURE AND RESTRUCTURING COSTS AND LIABILITY 119 NOTE 17 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 123 NOTE 18 TRADE AND OTHER PAYABLES 123 NOTE 19 LONG-TERM DEBT 124 NOTE 20 OTHER LIABILITIES AND DEFERRED CREDITS 127 NOTE 21 SHAREHOLDERS’ EQUITY 128 NOTE 22 COMMITMENTS AND CONTINGENCIES 131 NOTE 23 DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT 135 NOTE 24 SEGMENT DISCLOSURES 141 NOTE 25 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION 144 NOTE 26 SALE OF WOOD BUSINESS AND WOODLAND MILL 152 NOTE 27 SUBSEQUENT EVENTS 152

80 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS Domtar designs, manufactures, markets and distributes a wide variety of fiber-based products including communications papers, specialty and packaging papers and adult incontinence products. Domtar is the largest integrated marketer and manufacturer of uncoated freesheet paper in North America. Domtar is also a marketer and manufacturer of adult incontinence products and distributes washcloths marketed primarily under the Attends® brand name. Domtar owns and operates ArivaTM, an extensive network of strategically located paper distribution facilities. The foundation of its business is the efficient operation of pulp mills, converting fiber into papergrade, fluff and specialty pulp. The majority of this pulp production is consumed internally to make communication and specialty paper with the balance being sold as a market pulp. The Company also produced lumber and other speciality and industrial wood products up until the sale of the Wood business on June 30, 2010.

ACCOUNTING PRINCIPLES The Company’s Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Domtar Corporation and its controlled subsidiaries. Significant intercompany transactions have been eliminated on consolidation.

Investment in an affiliated company where the Company has significant influence over their operations, is accounted for by the equity method. The Company’s share of equity earnings totaled a loss, net of taxes, of $7 million, the carrying value of the investment in Celluforce Inc. being nil, at December 31, 2011.

To conform with the basis of presentation adopted in the current period, certain figures previously reported in Note 24 and Note 25, have been reclassified.

USE OF ESTIMATES The consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the year, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. On an ongoing basis, management reviews the estimates and assumptions, including but not limited to those related to environmental matters, useful lives, impairment of long-lived assets, pension and other employee benefit plans, income taxes, closure and restructuring costs, commitments and contingencies and asset retirement obligations, based on currently available information. Actual results could differ from those estimates.

TRANSLATION OF FOREIGN CURRENCIES The local currency is considered the functional currency for the Company’s operations outside the United States. Foreign currency denominated assets and liabilities are translated into U.S. dollars at the rate in effect at the

81 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) balance sheet date and revenues and expenses are translated at the average exchange rates during the year. All gains and losses arising from the translation of the financial statements of these foreign subsidiaries are included in Accumulated other comprehensive loss, a component of Shareholders’ equity. Foreign currency transaction gain and losses are included in operations in the period they occur.

REVENUE RECOGNITION Domtar Corporation recognizes revenues when the customer takes title, assumes the risks and rewards of ownership and when collection is reasonably assured. Revenue is recorded at the time of shipment for terms designated free on board (“f.o.b.”) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site, when the title and risk of loss are transferred.

SHIPPING AND HANDLING COSTS The Company classifies shipping and handling costs as a component of Cost of sales in the Consolidated Statements of Earnings.

CLOSURE AND RESTRUCTURING COSTS Closure and restructuring costs are recognized as liabilities in the period when they are incurred and are measured at their fair value. For such recognition to occur, management, with the appropriate level of authority, must have approved and committed to a firm plan and appropriate communication to those affected must have occurred. These provisions may require an estimation of costs such as severance and termination benefits, pension and related curtailments, environmental remediation and may also include expenses related to demolition, training and outplacement. Actions taken may also require an evaluation of any remaining assets to determine required write-downs, if any, and a review of estimated remaining useful lives which may lead to accelerated depreciation expense.

Estimates of cash flows and fair value relating to closures and restructurings require judgment. Closure and restructuring liabilities are based on management’s best estimates of future events at December 31, 2011. Closure and restructuring cost estimates are dependent on future events. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates due to subsequent developments such as the results of environmental studies, the ability to find a buyer for assets set to be dismantled and demolished and other business developments. As such, additional costs and further working capital adjustments may be required in future periods.

INCOME TAXES Domtar Corporation uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined according to differences between the carrying amounts and tax bases of the assets and liabilities. The change in the net deferred tax asset or liability is included in Net earnings in the Consolidated Statements of Earnings or Accumulated other comprehensive loss in the Consolidated Balance Sheets. Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to

82 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) apply in the years in which the assets and liabilities are expected to be recovered or settled. Uncertain tax positions are recorded based upon the Company’s evaluation of whether it is “more likely than not” (a probability level of more than 50 percent) that, based upon its technical merits, the tax position will be sustained upon examination by the taxing authorities. The Company establishes a valuation allowance for deferred tax assets when it is more likely than not that they will not be realized. In general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or an increase in future taxes refundable from the deferred tax assets.

The Company recognizes interest and penalties related to income tax matters as a component of Income tax expense (benefit) in the Consolidated Statements of Earnings.

CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and short-term investments with original maturities of less than three months and are presented at cost which approximates fair value.

RECEIVABLES Receivables are recorded net of a provision for doubtful accounts that is based on expected collectability. The securitization of receivables is accounted for as secured borrowings. Gains or losses on securitization of receivables are calculated as the difference between the carrying amount of the receivables sold and the sum of the cash proceeds upon sale and the fair value of the retained subordinate interest in such receivables on the date of transfer. Fair value is determined on a discounted cash flow basis. Gains or losses related to the securitization of receivables are recognized in earnings as a component of Interest expense in the Consolidated Statements of Earnings in the period when the sale occurs.

INVENTORIES Inventories are stated at the lower of cost or market. Cost includes labor, materials and production overhead. The last-in, first-out (“LIFO”) method is used to cost certain U.S. raw materials, in process and finished goods inventories. LIFO inventories were $267 million and $296 million at December 31, 2011 and 2010, respectively. The balance of U.S. raw material inventories, all materials and supplies inventories and all foreign inventories are costed at either the first-in, first-out (“FIFO”) or average cost methods. Had the inventories for which the LIFO method is used been valued under the FIFO method, the amounts at which product inventories are stated would have been $56 million and $52 million greater at December 31, 2011 and 2010, respectively.

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation including asset impairment write-downs. Interest costs are capitalized for significant capital projects. For timber limits and timberlands, amortization is calculated using the units of production method. For all other assets, amortization is calculated using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are amortized over periods of 10 to 40 years and machinery and equipment over periods of 3 to 20 years. No depreciation is recorded on assets under construction.

83 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that the carrying value of the assets may not be recoverable, as measured by comparing their net book value to their estimated undiscounted future cash flows. Impaired assets are recorded at estimated fair value, determined principally by using discounted future cash flows expected from their use and eventual disposition.

GOODWILL AND INTANGIBLE ASSETS Goodwill is not amortized and may be subject to an impairment test in the fourth quarter of every year or more frequently if events or changes in circumstances indicate that it might be impaired. For purposes of determining whether it is necessary to perform the two-step goodwill impairment test, the Company may first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, then it performs Step I of the two-step impairment test.

A Step I impairment test of goodwill of one or more reporting units is accomplished mainly by determining whether the fair value of a reporting unit, based upon discounted estimated cash flows, exceeds the net carrying amount of that reporting unit as of the assessment date. If the fair value is greater than the net carrying amount, no impairment is necessary. In the event that the net carrying amount exceeds the sum of the discounted estimated cash flows, a Step II test must be performed whereby the fair value of the reporting unit’s goodwill must be estimated to determine if it is less than its net carrying amount. Fair value of goodwill in the Step II impairment test is estimated in the same way as goodwill was determined at the date of the acquisition in a business combination, that is, the excess of the fair value of the reporting unit over the fair value of the identifiable net assets of the reporting unit.

All goodwill as of December 31, 2011 resides in the Personal Care segment, and originates from the acquisition of Attends on September 1, 2011. Please refer to Note 3 “Acquisition of business” for additional information regarding the acquisition.

Intangible assets include water rights, customer relationships, trade names and supplier agreements which are being amortized using the straight-line method over their estimated useful lives. Power purchase agreements are amortized using the straight-line method over the term of the respective contract. Cutting rights were amortized using the units of production method and were sold June 30, 2010 as part of the sale of the Wood business (see Note 26). Any potential impairment for definitive lived intangible assets will be calculated in the same manner as that disclosed under impairment of long-lived assets.

84 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Amortization is based mainly on the following useful lives:

Useful life Water rights 40 years Customer relationships 20 to 40 years Trade names 7 years Supplier agreements 5 years Power purchase agreements 25 years

One trade name is considered to have an indefinite useful life and is therefore not amortized. The Company evaluates the intangible assets that are not being amortized each reportable period to determine whether events and circumstances continue to support indefinite useful lives. Intangible assets not subject to amortization are tested for impairment annually, in the fourth quarter, or more frequently if events or changes in circumstances indicate that the assets might be impaired.

OTHER ASSETS Other assets are recorded at cost. Direct financing costs related to the issuance of long-term debt are deferred and amortized using the effective interest rate method.

ENVIRONMENTAL COSTS Environmental expenditures for effluent treatment, air emission, landfill operation and closure, asbestos containment and removal, bark pile management, silvicultural activities and site remediation (together referred to as environmental matters) are expensed or capitalized depending on their future economic benefit. In the normal course of business, Domtar Corporation incurs certain operating costs for environmental matters that are expensed as incurred. Expenditures for property, plant and equipment that prevent future environmental impacts are capitalized and amortized on a straight-line basis over 10 to 40 years. Provisions for environmental matters are not discounted, except for a portion which is discounted due to more certainty with respect to timing of expenditures, and are recorded when remediation efforts are probable and can be reasonably estimated.

ASSET RETIREMENT OBLIGATIONS Asset retirement obligations are recognized, at fair value, in the period in which Domtar Corporation incurs a legal obligation associated with the retirement of an asset. Conditional asset retirement obligations are recognized, at fair value, when the fair value of the liability can be reasonably estimated or on a probability- weighted discounted cash flow estimate. The associated costs are capitalized as part of the carrying value of the related asset and depreciated over its remaining useful life. The liability is accreted using the credit adjusted risk- free interest rate used to discount the cash flow.

STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS Domtar Corporation recognizes the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards over the requisite service period for award

85 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) accounted for as equity award and based on the fair value of each reporting period for awards accounted for as liability awards. The Company awards are accounted for as compensation expense and presented in Additional paid-in-capital on the Consolidated Balance Sheets for Equity type awards and presented in Other long-term liabilities and deferred credits on the Consolidated Balance Sheets for Liability type awards.

The Company’s awards may be subject to market condition, performance and/or time based vesting. Any consideration paid by plan participants on the exercise of stock options or the purchase of shares is credited to Additional paid-in-capital on the Consolidated Balance Sheets. The par value included in the Additional paid-in- capital component of stock-based compensation is transferred to Common shares upon the issuance of shares of common stock.

Unless otherwise determined at the time of the grant, time-based awards vest in approximately equal installments over three years beginning on the first anniversary of the grant date and performance-based awards vest based on achievement of pre-determined performance goals over performance periods of three years. The majority of non-qualified stock options and performance stock options expire at various dates no later than seven years from the date of grant. Deferred Share Units vest immediately at the grant date and are remeasured at each reporting period, until settlement, using the quoted market value.

Under the 2007 Omnibus Plan, a maximum of 1,307,366 shares are reserved for issuance in connection with awards granted or to be granted.

DERIVATIVE INSTRUMENTS Derivative instruments are utilized by Domtar Corporation as part of the overall strategy to manage exposure to fluctuations in foreign currency and price on certain purchases. As a matter of policy, derivatives are not used for trading or speculative purposes. All derivatives are recorded at fair value either as assets or liabilities. When derivative instruments have been designated within a hedge relationship and are highly effective in offsetting the identified risk characteristics of specific financial assets and liabilities or group of financial assets and liabilities, hedge accounting is applied.

In a fair value hedge, changes in fair value of derivatives are recognized in the Consolidated Statements of Earnings. The change in fair value of the hedged item attributable to the hedged risk is also recorded in the Consolidated Statements of Earnings by way of a corresponding adjustment of the carrying amount of the hedged item recognized in the Consolidated Balance Sheets. In a cash flow hedge, changes in fair value of derivative instruments are recorded in Other comprehensive income. These amounts are reclassified in the Consolidated Statements of Earnings in the periods in which results are affected by the cash flows of the hedged item within the same line item. Any hedge ineffectiveness is recorded in the Consolidated Statements of Earnings when incurred.

86 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PENSION PLANS Domtar Corporation’s plans include funded and unfunded defined benefit pension plans and defined contribution plans. Domtar Corporation recognizes the overfunded or underfunded status of defined benefit pension plans as an asset or liability in the Consolidated Balance Sheets. The net periodic benefit cost includes the following: • The cost of pension benefits provided in exchange for employees’ services rendered during the period, • The interest cost of pension obligations, • The expected long-term return on pension fund assets based on a market value of pension fund assets, • Gains or losses on settlements and curtailments, • The straight-line amortization of past service costs and plan amendments over the average remaining service period of approximately 11 years of the active employee group covered by the plans and • The amortization of cumulative net actuarial gains and losses in excess of 10% of the greater of the accrued benefit obligation or market value of plan assets at the beginning of the year over the average remaining service period of approximately 11 years of the active employee group covered by the plans.

The defined benefit plan obligations are determined in accordance with the projected unit credit actuarial cost method.

OTHER POST-RETIREMENT BENEFIT PLANS Domtar Corporation recognizes the unfunded status of other post-retirement benefit plans (other than multiemployer plans) as a liability in the Consolidated Balance Sheets. These benefits, which are funded by Domtar Corporation as they become due, include life insurance programs, medical and dental benefits and short- term and long-term disability programs. Domtar Corporation amortizes the cumulative net actuarial gains and losses in excess of 10% of the accrued benefit obligation at the beginning of the year over the average remaining service period of approximately 13 years of the active employee group covered by the plans.

GUARANTEES A guarantee is a contract or an indemnification agreement that contingently requires Domtar Corporation to make payments to the other party of the contract or agreement, based on changes in an underlying item that is related to an asset, a liability or an equity security of the other party or on a third party’s failure to perform under an obligating agreement. It could also be an indirect guarantee of the indebtedness of another party, even though the payment to the other party may not be based on changes in an underlying item that is related to an asset, a liability or an equity security of the other party. Guarantees, when applicable, are accounted for at fair value.

ALTERNATIVE FUEL MIXTURE TAX CREDITS The U.S. Internal Revenue Code of 1986, as amended (the “Code”) permitted a refundable excise tax credit, until the end of 2009, for the production and use of alternative fuel mixtures derived from biomass. The Company submitted an application with the U.S. Internal Revenue Service (“IRS”) to be registered as an

87 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) alternative fuel mixer and received notification that its registration had been accepted in March 2009. The Company began producing and consuming alternative fuel mixtures in February 2009 at its eligible mills.

The Company recorded nil for such credits in 2011 (2010 – $25 million; 2009 – $498 million) in Other operating (income) loss on the Consolidated Statements of Earnings based on the volume of alternative mixtures produced and burned during 2009. The $25 million recorded in 2010 represented an adjustment to amounts presented as deferred revenue at December 31, 2009. The $25 million was released to income following guidance issued by the IRS in March 2010. The Company did not record any income tax expense in 2011 (2010 – $7 million; 2009 – $162 million) related to the alternative fuel mixture income. According to the Code, the tax credit expires at the end of 2009. Please refer to Note 10 “Income Taxes,” for additional information regarding unrecognized tax benefits. In 2010, the Company also received a $368 million refund (2009 – $140 million refund), net of federal income tax offsets.

NOTE 2.

RECENT ACCOUNTING PRONOUNCEMENTS STOCK COMPENSATION In April 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Compensation – Stock Compensation, which addresses the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying security trades. This update clarifies that those employee share-based payment awards should not be considered to contain a condition that is not a market, performance, or service condition and therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The Company adopted the new requirement on January 1, 2011 with no impact on the Company’s consolidated financial statements.

COMPREHENSIVE INCOME In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. These changes become effective on January 1, 2012. The Company is currently evaluating these changes to determine which option will be chosen for the presentation of comprehensive income. Other than the change in presentation, the Company has determined these changes will not have an impact on the Consolidated Financial Statements.

88 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

COMPENSATION—RETIREMENT BENEFITS In September 2011, the FASB issued an update to Compensation – Retirement Benefits, which addresses the disclosures about an employer’s participation in a multiemployer plan. The new accounting guidance requires employers participating in multiemployer plans to provide additional quantitative and qualitative disclosures to provide users with more detailed information regarding an employer’s involvement in multiemployer plans.

The Company adopted this standard on December 31, 2011 with no impact on the Company’s consolidated financial position, results of operations or cash flows. The adoption expanded the Company’s consolidated financial statements’ footnote disclosures (see Note 7).

INTANGIBLES—GOODWILL AND OTHER In September 2011, the FASB issued an update to Intangibles – Goodwill and Other, which simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The amended provisions are effective for reporting periods beginning on or after December 15, 2011 with early adoption permitted. The Company adopted this amendment as of its publication date. This amendment impacts impairment testing steps only, and therefore adoption did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

NOTE 3.

ACQUISITION OF BUSINESS

On September 1, 2011, Domtar Corporation completed the acquisition of 100% of the outstanding shares of Attends Healthcare Inc. (“Attends”). Attends sells and markets a complete line of adult incontinence care products and distributes washcloths marketed primarily under the Attends® brand name. The company has a wide product offering and it serves a diversified customer base in multiple channels throughout the United States and Canada. Attends has approximately 330 employees and the production facility is located in Greenville, North Carolina. The results of Attends’ operations have been included in the consolidated financial statements since September 1, 2011, and are presented in the Personal Care reportable segment. The purchase price was $288 million in cash, including working capital, net of acquired cash of $12 million. The acquisition was accounted for as a business combination under the acquisition method of accounting, in accordance with the Business Combinations Topic of FASB Accounting Standards Codification (“ASC”).

The total purchase price is allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which are based on information currently available. During the fourth quarter of 2011, the Company completed the evaluation of all assets and liabilities.

89 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 3. ACQUISITION OF BUSINESS (CONTINUED)

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition Receivables $12 Inventory 17 Property, plant and equipment 54 Intangible assets (Note 14) Trade names (1) 61 Customer relationships (2) 93 154 Goodwill (Note 12) 163 Other assets 4 Total assets 404

Less: Liabilities Trade and other payables 15 Income and other taxes payable 2 Capital lease obligation 31 Deferred income tax liabilities and unrecognized tax benefits 66 Other liabilities 2 Total liabilities 116 Fair value of net assets acquired at the date of acquisition 288

(1) Indefinite useful life. (2) The useful life of the Customer relationships acquired is 40 years.

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is attributable to the general reputation of the business, the assembled workforce, and the expected future cash flows of the business. Disclosed goodwill is not deductible for tax purposes. Pro forma results have not been provided, as the acquisition had no material impact on the Company.

NOTE 4.

IMPAIRMENT AND WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT

IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that, at the lowest level of determinable cash flows, the carrying value of the long-lived assets may not be recoverable. Step I of the impairment test assesses if the carrying value of the long-lived assets exceeds their

90 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 4. IMPAIRMENT AND WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT (CONTINUED) estimated undiscounted future cash flows in order to assess if the assets are impaired. In the event the estimated undiscounted future cash flows are lower than the net book value of the assets, a Step II impairment test must be carried out to determine the impairment charge. In Step II, long-lived assets are written down to their estimated fair values. Given that there is generally no readily available quoted value for the Company’s long-lived assets, the Company determines fair value of its long-lived assets using the estimated discounted future cash flow (“DCF”) expected from their use and eventual disposition, and by using the liquidation or salvage value in the case of idled assets. The DCF in Step II is based on the undiscounted cash flows in Step I.

Ashdown, Arkansas pulp and paper mill—Closure of a paper machine As a result of the decision to permanently shut down one of four paper machines on March 29, 2011, the Company recognized $73 million of accelerated depreciation, under Impairment and write-down of property, plant and equipment, in 2011. Given the substantial decline in the production capacity, at its Ashdown facility, the Company conducted a quantitative Step I impairment test in the fourth quarter of 2011 and concluded that the recognition of an impairment loss for the Ashdown mill’s remaining long-lived assets was not required.

Lebel-sur-Quévillon Pulp Mill and Sawmill—Impairment of assets In the fourth quarter of 2008, the Company decided to permanently shut down the Lebel-sur-Quévillon pulp mill and sawmills. In 2011, following the signing of a definitive agreement (see Note 27), the Company recorded a $12 million impairment and write-down of property, plant and equipment relating to the remaining assets net book value.

Plymouth Pulp and Paper Mill—Conversion to Fluff Pulp As a result of the decision to permanently shut down the remaining paper machine and convert the Plymouth facility to 100% fluff pulp production in the fourth quarter of 2009, the Company recognized, under Impairment and write-down of property, plant and equipment, $39 million of accelerated depreciation in 2010 in addition to $13 million in the fourth quarter of 2009 and a $1 million write-down for the related paper machine in 2010.

Given the substantial change in use of the mill, the Company conducted a Step I impairment test in the fourth quarter of 2009 and concluded that the recognition of an impairment loss for the Plymouth mill’s remaining long-lived assets was not required as the aggregate estimated undiscounted future cash flows exceeded the then carrying value of the asset group of $336 million by a significant amount.

Estimates of undiscounted future cash flows used to test the recoverability of the fixed assets included key assumptions related to trend prices, inflation-adjusted cost projections, and the estimated useful life of the fixed assets.

Plymouth Pulp and Paper Mill—Closure of Paper Machine In the first quarter of 2009, the Company announced that it would permanently reduce its paper manufacturing at its Plymouth pulp and paper mill, by closing one of the two paper machines comprising the mill’s paper production unit. As a result, at the end of February 2009, there was a curtailment of 293,000 tons of the mill’s paper production capacity and the closure affected approximately 185 employees. Also, $13 million of

91 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 4. IMPAIRMENT AND WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT (CONTINUED) accelerated depreciation in the fourth quarter of 2009, and a further $39 million of accelerated depreciation over the first nine months of 2010, were recorded for the related plant and equipment. Given the closure of the paper machine, the Company conducted a Step I impairment test on the Plymouth mill operation’s fixed assets and concluded that the undiscounted estimated future cash flows associated with the remaining long-lived assets exceeded their carrying value and, as such, no additional impairment charge was required.

Columbus Paper Mill On March 16, 2010, the Company announced that it would permanently close its coated groundwood paper mill in Columbus, Mississippi. This measure resulted in the permanent curtailment of 238,000 tons of coated groundwood and 70,000 metric tons of thermo-mechanical pulp, as well as affected 219 employees. The Company recorded a $9 million write-down for the related fixed assets under Impairment and write-down of property, plant and equipment and $16 million of other charges under Closure and restructuring costs (see Note 16). Operations ceased in April 2010.

Cerritos During the second quarter of 2010, the Company decided to close the Cerritos, California forms converting plant, and recorded a $1 million write-down for the related assets under Impairment and write-down of property, plant and equipment and $1 million in severance and termination costs under Closure and restructuring costs (see Note 16). Operations ceased on July 16, 2010.

Prince Albert Pulp Mill As a result of a review of available options for the disposal of the assets of this facility in the fourth quarter of 2009, the Company revised the estimated net realizable values of the remaining assets and recorded a non-cash write-down of $14 million, related to fixed assets, primarily a turbine and a boiler. The write-down represented the difference between the new estimated liquidation or salvage value of the fixed assets and their carrying values.

Changes in the assumptions and estimates may affect the Company’s forecasts and may lead to an outcome where impairment charges would be required. In addition, actual results may vary from the Company’s forecasts, and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where the Company’s conclusions may differ in reflection of prevailing market conditions.

NOTE 5.

STOCK-BASED COMPENSATION

2007 OMNIBUS INCENTIVE PLAN Under the Omnibus Incentive Plan (the “Omnibus Plan”), the Company may award to executives and other key employees non-qualified stock options, incentive stock options, stock appreciation rights, shares of restricted stock, restricted stock units, performance conditioned restricted stock units, performance shares, deferred share units and other stock-based awards.

92 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)

The exercise price of options and stock appreciation rights is equal to the closing price per share of the Company’s common stock on the New York Stock Exchange on the date of grant.

Performance Conditioned Restricted Stock Units (“PCRSUs”) AND PERFORMANCE STOCK UNITS (“PSUs”) The PSU’s granted in 2011 were to management and non-management committee members. Management committee members will be settled in shares based on certain performance and market conditions and non-management committee members will be settled in cash, based on certain performance and market conditions.

In 2011, the Company granted 88,528 PSUs (2010 and 2009—nil) under the Omnibus Plan. As a result of previously granted PSUs and PCRSUs having achieved their target, the Company issued 9,150 PSUs in 2011 (2010—22,645 PCRSUs; 2009—86,555 PCRSUs). The overall weighted average grant date fair value of PSUs granted in 2011 is $89.02. Each PCRSU is equivalent in value to one common share and is subject to a service condition as well as a performance or market condition. These awards have an additional feature where the ultimate number of units that vest will be determined by the Company’s performance results or shareholder return in relation to a predetermined target over the period to vesting. No awards vest when the minimum thresholds are not achieved. Upon vesting, the participants will receive common shares of the Company or in certain instances cash of an equivalent value.

On December 31, 2010, the 2008 grant cliff vested and as such these portions of the PCRSU grant as well as a portion issued in 2010 representing 67,848 units (2010—79,421; 2009—15,890), were settled in February 2011.

At December 31, 2009, one market condition and one performance condition for various measurement periods (2008—nil), related to the 2007 grant, were achieved. As such, these portions of the PCRSU grant as well as a portion issued in 2009 representing 51,642 units (2008—nil), cliff vested on December 31, 2009. On March 31, 2009, PCRSUs granted in 2007 as well as a portion issued in 2009 representing 88,082 units, vested based on the attainment of a variety of business integration and synergy achievement goals.

As at December 31, 2011, out of the total outstanding PSU’s, 77,332 will be settled in shares and 63,167 will be settled in cash.

RESTRICTED STOCK UNITS (“RSUs”) The RSU’s granted are to management and non-management committee members. Upon completing service conditions, management committee members will be settled in shares and non-management committee members will be settled in cash.

On February 22, 2011, the Company granted 40,978 RSUs (2010—110,965; 2009—436,575) having a weighted average grant date fair value of $86.19 (2010—$66.81; 2009—$12.60) and a weighted average remaining contractual life of approximately 26 months (2010—28 months; 2009—27 months). The Company

93 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 5. STOCK-BASED COMPENSATION (CONTINUED) will deliver one share of common stock in settlement of each outstanding RSU that has vested in accordance with the stipulated service conditions. The awards cliff vest at various dates up to February 22, 2014 (2010—May 10, 2013; 2009—April 8, 2012). As a result of quarterly dividends, on January 17, April 15, July 15 and October 17, 2011, the Company granted a total of 9,039 RSUs (2010—5,372) to participants of the Omnibus Plan. Additionally, as part of the long-term incentive plan, the Company also granted 57,284 RSUs (2010— 76,850) on February 22, 2011.

On September 22, 2011, the Company granted 15,446 RSUs having a weighted average grant date fair value of $71.84 and a weighted average remaining contractual life of approximately 24 months. The Company will settle each unit in cash. The awards cliff vest on December 31, 2013.

As at December 31, 2011, out of the total outstanding RSU’s, 116,546 will be settled in shares and 509,003 will be settled in cash.

DEFERRED STOCK UNITS (“DSUs”) In 2011 and 2010 the Company did not issue any new DSU plan to its employees under the Omnibus Plan. As a result of quarterly dividends, on January 17, April 15, July 15 and October 17, 2011, the Company granted a total of 389 DSUs (2010—231) to participants of the Omnibus Plan. On April 8, 2009, the Company granted 26,667 DSUs having a weighted average grant date fair value of $12.60 that vested in three equal annual installments on April 8, 2009, 2010 and 2011.

The Company delivers, on a quarterly basis, DSUs to its Directors that vest immediately on the grant date. The Company will deliver at the option of the holder either one share of common stock or the cash equivalent of the fair market value on settlement of each outstanding DSU (including dividend equivalents accumulated) upon termination of service. In 2011, the Company granted 15,760 DSUs (2010—15,365; 2009—47,156) to its Directors.

NON-QUALIFIED STOCK OPTIONS In 2011, the Company did not grant any non-qualified stock options (2010—2,100; 2009 – 120,646). The stock options vest at various dates up to May 10, 2013 subject to service conditions. Upon exercise, the option holders may elect to proceed with a cashless exercise and receive common shares net of the deduction for cashless exercise. The options expire at various dates no later than seven years from the date of grant.

PERFORMANCE STOCK OPTIONS In 2011, the Company did not grant any performance stock options (2010—46,780; 2009—151,831). The stock options vest at various dates up to May 10, 2013 if certain market conditions are met in addition to a service period. Upon exercise, the option holders may elect to proceed with a cashless exercise and receive common shares net of the deduction for cashless exercise. The options expire at various dates no later than seven years from the date of grant.

94 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)

CLAWBACK FOR FINANCIAL REPORTING MISCONDUCT If a participant in the Omnibus Plan knowingly or grossly negligently engages in financial reporting misconduct, then all awards and gains from the exercise of options or stock appreciation rights in the 12 months prior to the date the misleading financial statements were issued as well as any awards that vested based on the misleading financial statements will be disgorged to the Company.

SUMMARY OF OUTSTANDING AWARDS Details regarding Domtar Corporation outstanding awards are presented in the following tables:

NUMBER OF AWARDS PCRSU/PSU RSU/RSA DSU Total outstanding at December 31, 2010 131,038 618,382 140,104 Granted/issued 97,678 122,747 16,149 Forfeited/expired (14,452) (33,895) — Exercised/settled (73,765) (81,685) (18,688) Total outstanding at December 31, 2011 140,499 625,549 137,565

Weighted Weighted Aggregate average average intrinsic Number of exercise remaining life value OPTIONS (including Performance options) options price (in years) (in millions) $$ Outstanding at December 31, 2008 432,164 91.08 4.7 — Granted 272,477 12.60 2.3 11.0 Forfeited/expired (46,058) 97.67 — — Outstanding at December 31, 2009 658,583 58.15 3.3 — Options exercisable at December 31, 2009 325,736 92.64 3.1 — Outstanding at December 31, 2009 658,583 58.15 3.3 — Granted 48,880 66.81 6.4 0.4 Exercised (86,573) 20.37 — — Forfeited/expired (29,574) 62.36 — — Outstanding at December 31, 2010 591,316 64.19 4.0 12.1 Options exercisable at December 31, 2010 272,799 81.78 2.9 0.9 Outstanding at December 31, 2010 591,316 64.19 4.0 12.1 Exercised (182,480) 45.63 — — Forfeited/expired (55,175) 95.36 — — Outstanding at December 31, 2011 353,661 68.90 3.1 7.0 Options exercisable at December 31, 2011 160,590 80.79 2.4 0.7

95 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)

In addition to the above noted outstanding options, the Company has 3,738 outstanding and exercisable stock appreciation rights at December 31, 2011 with a weighted average exercise price of $79.95.

Due to conditions implicit in the performance stock units granted in 2011, the fair value was estimated at the grant date using a Monte Carlo simulation methodology. The Monte Carlo simulation creates artificial futures by generating numerous sample paths of potential outcomes. The following assumptions were used in calculating the fair value of the units granted.

2011 Dividend yield 0.870% Expected volatility 1 year 36% Expected volatility 3 years 86% Risk-free interest rate December 31, 2011 0.411% Risk-free interest rate December 31, 2012 0.869% Risk-free interest rate December 31, 2013 1.388%

The fair value of the stock options granted in 2010 and 2009 was estimated at the grant date using a Black- Scholes based option pricing model or an option pricing model that incorporated the market conditions when applicable. The following assumptions were used in calculating the fair value of the options granted.

2010 2009 Dividend yield 0% 0% Expected volatility 75% 77% Risk-free interest rate 3% 3% Expected life 7 years 7 years

For the year ended December 31, 2011, compensation expense recognized in the Company’s results of operations was approximately $23 million (2010—$25 million; 2009—$27 million) for all of the outstanding awards. Compensation costs not yet recognized amount to approximately $16 million (2010—$22 million; 2009—$21 million) and will be recognized over the remaining service period. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

96 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 6.

EARNINGS PER SHARE

The following table provides the reconciliation between basic and diluted earnings per share:

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 Net earnings $ 365 $ 605 $ 310 Weighted average number of common and exchangeable shares outstanding (millions) 39.9 42.8 43.0 Effect of dilutive securities (millions) 0.3 0.4 0.2 Weighted average number of diluted common and exchangeable shares outstanding (millions) 40.2 43.2 43.2 Basic net earnings per share (in dollars) $9.15 $14.14 $7.21 Diluted net earnings per share (in dollars) $9.08 $14.00 $7.18

The following table provides the securities that could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive:

December 31, December 31, December 31, 2011 2010 2009 Restricted stock units — — 6,586 Options 168,692 380,214 386,106 Performance-based awards — — 33,764

The calculation of basic earnings per common share for the year ended December 31, 2011 is based on the weighted average number of Domtar common shares outstanding during the year. The calculation for diluted earnings per common share recognizes the effect of all potential dilutive common stock. A portion of the stock options to purchase common shares is excluded in the computation of diluted net earnings per share in periods because to do so would have been anti-dilutive.

97 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7.

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

DEFINED CONTRIBUTION PLANS The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the year ended December 31, 2011, the related pension expense was $24 million (2010—$25 million; 2009—$24 million).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company has several defined benefit pension plans covering a majority of employees. The defined benefit pension plans are generally contributory in Canada and non-contributory in the United States. Non- unionized employees in Canada joining the Company after June 1, 2000 participate in defined contribution pension plans. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Also, starting on January 1, 2013, all unionized employees covered under the agreement with the United Steel Workers not grandfathered under the existing defined benefit pension plans will transition to a defined contribution pension plan for future service. The Company also provides other post- retirement plans to eligible Canadian and U.S. employees; the plans are unfunded and include life insurance programs, medical and dental benefits. The Company also provides supplemental unfunded defined benefit pension plans to certain senior management employees.

Related pension and other post-retirement plan expenses and the corresponding obligations are actuarially determined using management’s most probable assumptions.

The Company’s pension plan funding policy is to contribute annually the amount required to provide for benefits earned in the year, and to fund both solvency deficiencies and past service obligations over periods not exceeding those permitted by the applicable regulatory authorities. Past service obligations primarily arise from improvements to plan benefits. The other post-retirement benefit plans are not funded and contributions are made annually to cover benefits payments.

The Company expects to contribute a minimum total amount of $52 million in 2012 compared to $95 million in 2011 (2010—$161 million; 2009—$130 million) to the pension plans. The payments made in 2011 to the other post-retirement benefit plans amounted to $8 million (2010—$8 million; 2009—$8 million).

98 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

CHANGE IN ACCRUED BENEFIT OBLIGATION The following table represents the change in the accrued benefit obligation as of December 31, 2011 and December 31, 2010, the measurement date for each year:

December 31, 2011 December 31, 2010 Other Other Pension post-retirement Pension post-retirement plans benefit plans plans benefit plans $$$$ Accrued benefit obligation at beginning of year 1,636 114 1,442 122 Service cost for the year 35 3 32 3 Interest expense 87 6 87 7 Plan participants’ contributions 7— 7— Actuarial loss 99 3 152 12 Plan amendments 17 (3) 1— Benefits paid (98) (1) (96) — Direct benefit payments (4) (7) (4) (8) Settlement (4) — (64) — Curtailment 13 — 9 (27) Effect of foreign currency exchange rate change (33) (2) 70 5 Accrued benefit obligation at end of year 1,755 113 1,636 114

CHANGE IN FAIR VALUE OF ASSETS The following table represents the change in the fair value of assets reflecting the actual return on plan assets, the contributions and the benefits paid during the year:

December 31, December 31, 2011 2010 Pension plans Pension plans $$ Fair value of assets at beginning of year 1,572 1,362 Actual return on plan assets 130 143 Employer contributions 95 161 Plan participants’ contributions 7 7 Benefits paid (102) (100) Settlement (4) (64) Effect of foreign currency exchange rate change (33) 63 Fair value of assets at end of year 1,665 1,572

INVESTMENT POLICIES AND STRATEGIES OF THE PLAN ASSETS The assets of the pension plans are held by a number of independent trustees and are accounted for separately in the Company’s pension funds. The investment strategy for the assets in the pension plans is to

99 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED) maintain a diversified portfolio of assets, invested in a prudent manner to maintain the security of funds while maximizing returns within the guidelines provided in the investment policy. Diversification of the pension plans’ holdings is maintained in order to reduce the pension plans’ annual return variability, reduce market exposure and credit exposure to any single issuer and to any single component of the capital markets, to reduce exposure to unexpected inflation, to enhance the long-term risk-adjusted return potential of the pension plans and to reduce funding risk.

In the long run, the performance of the pension plans is primarily determined by the long-term asset mix decisions. To manage the long-term risk of not having sufficient funds to match the obligations of the pension plans, the Company conducts asset/liability studies. These studies lead to the recommendation and adoption of a long-term asset mix target that sets the expected rate of return and reduces the risk of adverse consequences to the plan from increases in liabilities and decreases in assets. In identifying the asset mix target that would best meet the investment objectives, consideration is given to various factors, including (a) each plan’s characteristics, (b) the duration of each plan’s liabilities, (c) the solvency and going concern financial position of each plan and their sensitivity to changes in interest rates and inflation, and (d) the long-term return and risk expectations for key asset classes.

The investments of each plan can be done directly through cash investments in equities or bonds or indirectly through derivatives or pooled funds. The use of derivatives must be in accordance with an approved mandate and cannot be used for speculative purposes.

The Company’s pension funds are not permitted to own any of the Company’s shares or debt instruments.

The following table shows the allocation of the plan assets, based on the fair value of the assets held and the target allocation for 2011:

Percentage of plan Percentage of plan Target assets at assets at allocation December 31, 2011 December 31, 2010 Fixed income Cash and cash equivalents 0% - 10% 5% 3% Bonds 53% - 63% 58% 58%

Equity Canadian Equity 7% - 15% 10% 11% US Equity 7% - 16% 12% 14% International Equity 13% - 22% 15% 14% Total (1) 100% 100%

(1) Approximately 87% of the pension plan assets relate to Canadian plans and 13% relate to U.S. plans.

100 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

RECONCILIATION OF FUNDED STATUS TO AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS The following table presents the difference between the fair value of assets and the actuarially determined accrued benefit obligation. This difference is also referred to as either the deficit or surplus, as the case may be, or the funded status of the plans. The table further reconciles the amount of the surplus or deficit (funded status) to the net amount recognized in the Consolidated Balance Sheets.

December 31, 2011 December 31, 2010 Other Other Pension post-retirement Pension post-retirement plans benefit plans plans benefit plans $$$$ Accrued benefit obligation at end of year (1,755) (113) (1,636) (114) Fair value of assets at end of year 1,665 — 1,572 — Funded status (90) (113) (64) (114)

The funded status includes $47 million of accrued benefit obligation ($46 million at December 31, 2010) related to supplemental unfunded benefit plans.

December 31, 2011 December 31, 2010 Other Other Pension post-retirement Pension post-retirement plans benefit plans plans benefit plans $$$$ Trade and other payables (Note 18) — (2) — (4) Other liabilities and deferred credits (Note 20) (143) (111) (100) (110) Other assets (Note 15) 53 — 36 — Net amount recognized in the Consolidated Balance Sheets (90) (113) (64) (114)

The following table presents the amount not yet recognized in net periodic benefit cost and included in Accumulated other comprehensive loss.

December 31, 2011 December 31, 2010 Other Other Pension post-retirement Pension post-retirement plans benefit plans plans benefit plans $$$$ Prior year service cost (28) 11 (22) 9 Accumulated loss (298) (11) (264) (9) Accumulated other comprehensive loss (326) — (286) —

101 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

The following table presents the pre-tax amounts included in other comprehensive income. Year ended Year ended Year ended December 31, 2011 December 31, 2010 December 31, 2009 Other Other Other Pension post-retirement Pension post-retirement Pension post-retirement plans benefit plans plans benefit plans plans benefit plans $$$$$$ Prior year service cost (17) 3 (1) — — 10 Amortization of prior year service cost 11 (1) 4 (1) 10 — Net gain (loss) (48) (2) (100) 1 (79) (19) Amortization of net actuarial loss 14 — 24 — 10 — Net amount recognized in other comprehensive income (pre-tax) (Note 17) (40) — (73) — (59) (9)

An estimated amount of $21 million for pension plans and $1 million for other post-retirement benefit plans will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2012. At December 31, 2011, the accrued benefit obligation and the fair value of defined benefit plan assets with an accrued benefit obligation in excess of fair value of plan assets were $1,160 million and $1,020 million, respectively (2010—$1,020 million and $921 million, respectively). Year ended Year ended Year ended December 31, December 31, December 31, Components of net periodic benefit cost for pension plans 2011 2010 2009 $$$ Service cost for the year 35 32 35 Interest expense 87 87 84 Expected return on plan assets (103) (92) (74) Amortization of net actuarial loss 14 10 4 Curtailment loss (a) 22 12 6 Settlement loss (b) 23 16 6 Amortization of prior year service costs 2 33 Special termination benefits — —1 Net periodic benefit cost 80 68 65

Year ended Year ended Year ended December 31, December 31, December 31, Components of net periodic benefit cost for other post-retirement benefit plans 2011 2010 2009 $$$ Service cost for the year 3 34 Interest expense 6 77 Amortization of net actuarial loss — 1— Curtailment gain (c) — (13) — Amortization of prior year service costs (1) (1) — Settlement gain — (1) — Net periodic benefit cost 8 (4) 11

(a) The curtailment loss for the year ended December 31, 2011 of $22 million in the pension plans represents $13 million related to the sale of Prince Albert, Saskatchewan facility recorded in Other operating (income)

102 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

loss on the Consolidated Statements of Earnings and $9 million related to certain U.S. plans being converted from defined benefit to defined contribution plans during the fourth quarter of 2011, recorded in Closure and restructuring costs on the Consolidated Statements of Earnings. The curtailment loss for the year ended December 31, 2010 of $12 million in the pension plans represents $10 million related to the sale of the Wood business and $2 million related to the sale of the Woodland, Maine mill, both recorded in Other operating (income) loss on the Consolidated Statements of Earnings. (b) The settlement loss for the year ended December 31, 2011 of $23 million in the pension plans is related to the sale of assets of Prince Albert, recorded in Other operating (income) loss on the Consolidated Statements of Earnings. The settlement loss for the year ended December 31, 2010 of $16 million in the pension plans is related to the sale of the Wood business, recorded in Other operating (income) loss on the Consolidated Statements of Earnings. (c) The curtailment gain for the year ended December 31, 2010 of $13 million in the other post-retirement benefit plans, represents $3 million related to the sale of the Wood business, recorded in Other operating (income) loss on the Consolidated Statements of Earnings and $10 million related to the harmonization of the Company’s post-retirement benefit plans, recorded in Selling, general and administrative on the Consolidated Statements of Earnings.

WEIGHTED-AVERAGE ASSUMPTIONS The Company used the following key assumptions to measure the accrued benefit obligation and the net periodic benefit cost. These assumptions are long-term, which is consistent with the nature of employee future benefits.

December 31, December 31, December 31, Pension plans 2011 2010 2009 Accrued benefit obligation Discount rate 4.9% 5.5% 6.4% Rate of compensation increase 2.7% 2.7% 2.7% Net periodic benefit cost Discount rate 5.3% 6.3% 6.8% Rate of compensation increase 2.9% 2.9% 2.8% Expected long-term rate of return on plan assets 6.3% 7.0% 6.8%

Discount rate for Canadian plans: 5.0% based on a model whereby cash flows are projected for hypothetical plans and are discounted using a spot rate yield curve developed from bond yield data for AA corporate bonds provided by PC Bond Analytics with an adjustment to the yields to disregard yields provided for 25-year and 30-year maturities, a constant spot rate was assumed from 20 years onward.

Discount rate for U.S. plans: 4.6% based on Domtar’s expected cash flows in the Mercer Yield Curve which is based on bonds rated AA or better by Moody’s, excluding callable bonds, bonds of less than a minimum issue size, and certain other bonds.

103 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

December 31, December 31, December 31, Other post-retirement benefit plans 2011 2010 2009 Accrued benefit obligation Discount rate 5.0% 5.5% 6.3% Rate of compensation increase 2.8% 2.8% 2.8% Net periodic benefit cost Discount rate 5.5% 6.4% 6.0% Rate of compensation increase 2.8% 2.8% 3.0%

Effective January 1, 2012, the Company will use 6.0% (2011—6.3%; 2010—7.0%) as the expected return on plan assets, which reflects the current view of long-term investment returns. The overall expected long-term rate of return on plan assets is based on management’s best estimate of the long-term returns of the major asset classes (cash and cash equivalents, equities, and bonds) weighted by the actual allocation of assets at the measurement date, net of expenses. This rate includes an equity risk premium over government bond returns for equity investments and a value-added premium for the contribution to returns from active management. The sources used to determine management’s best estimate of long-term returns are numerous and include country specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country-specific inflation and investment market expectations derived from market data and analysts’ or governments’ expectations as applicable.

For measurement purposes, a 5.8% weighted-average annual rate of increase in the per capita cost of covered health care benefits was assumed for 2012. The rate was assumed to decrease gradually to 4.1% by 2032 and remain at that level thereafter. An increase or decrease of 1% of this rate would have the following impact:

Increase of 1% Decrease of 1% $$ Impact on net periodic benefit cost for other post-retirement benefit plans 1 (1) Impact on accrued benefit obligation 9 (8)

FAIR VALUE MEASUREMENT Fair Value Measurements and Disclosures Topic of FASB ASC establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. Fair Value Measurements and Disclosures Topic of FASB ASC establishes and prioritizes three levels of inputs that may be used to measure fair value: Level 1— Quoted prices in active markets for identical assets or liabilities. Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3—Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

104 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

The following table presents the fair value of the plan assets at December 31, 2011, by asset category:

Fair Value Measurements at December 31, 2011 Quoted Prices in Significant Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Asset Category Total (Level 1) (Level 2) (Level 3) $$ $$ Cash and short-term investments 89 89 — — ABCP (1) 205 — — 205 Canadian government bonds 383 378 5 — Canadian and U.S. corporate debt securities 96 73 23 — Bond index funds (2 & 3) 265 — 265 — Canadian equities (4) 172 172 — — U.S. equities (5) 28 28 — — International equities (6) 216 216 — — U.S. stock index funds (3 & 7) 205 — 205 — Asset backed securities (3) 2— 2 — Derivative contracts (8) 4— 4 — Total 1,665 956 504 205

(1) This category is described in the section “Asset Backed Commercial Paper.” (2) This category represents a Canadian bond index fund not actively managed that tracks the DEX Long-term bond index and a U.S. actively managed bond fund that is benchmarked to the Barclays Capital Long-term Government/Credit index. (3) The fair value of these plan assets are classified as Level 2 (inputs that are observable; directly or indirectly) as they are measured based on quoted prices in active markets and can be redeemed at the measurement date or in the near term. (4) This category represents active segregated, large capitalization Canadian equity portfolios with the ability to purchase small and medium capitalized companies and $2 million of Canadian equities held within an active segregated global equity portfolio. (5) This category represents U.S. equities held within an active segregated global equity portfolio. (6) This category represents an active segregated non-North American multi-capitalization equity portfolio and the non-North American portion of an active segregated global equity portfolio. (7) This category represents equity index funds, not actively managed, that track the S&P 500. (8) The fair value of the derivative contracts are classified as Level 2 (inputs that are observable, directly or indirectly) as they are measured using long-term bond indices.

105 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

The following table presents the fair value of the plan assets at December 31, 2010, by asset category:

Fair Value Measurements at December 31, 2010 Quoted Prices in Significant Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Asset Category Total (Level 1) (Level 2) (Level 3) $$ $$ Cash and short-term investments 75 75 — — ABCP (1) 214 — — 214 Canadian government bonds 430 429 1 — Canadian and U.S. corporate debt securities 77 72 5 — Bond index funds (2 & 3) 181 — 181 — Canadian equities (4) 168 168 — — U.S. equities (5) 18 18 — — International equities (6) 194 194 — — U.S. stock index funds (3 & 7) 210 — 210 — Asset backed securities (3) 3— 3 — Derivative contracts (8) 2— 2 — Total 1,572 956 402 214

(1) This category is described in the section “Asset Backed Commercial Paper.” (2) This category represents a Canadian bond index fund not actively managed that tracks the DEX Long-term bonds, a U.S. bond index fund not actively managed that tracks the Barclays Capital Government/Credit index and a U.S. actively managed bond fund that is benchmarked to the Barclays Capital Long-term Government/Credit index. (3) The fair value of these plan assets are classified as Level 2 (inputs that are observable; directly or indirectly) as they are measured based on quoted prices in active markets and can be redeemed at the measurement date or in the near term. (4) This category represents active segregated, large capitalization Canadian equity portfolios with the ability to purchase small and medium capitalized companies. (5) This category represents U.S. equities held within an active segregated global equity portfolio. (6) This category represents an active segregated non-North American multi-capitalization equity portfolio and the non-North American portion of an active segregated global equity portfolio. (7) This category represents equity index funds, not actively managed, that track the S&P 500. (8) The fair value of the derivative contracts are classified as Level 2 (inputs that are observable, directly or indirectly) as they are measured using long-term bond indices.

106 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

ASSET BACKED COMMERCIAL PAPER At December 31, 2011, Domtar Corporation’s Canadian defined benefit pension funds held asset backed commercial paper investments (“ABCP”) valued at $205 million (CDN$208 million). At December 31, 2010, the plans held ABCP valued at $214 million (CDN$213 million). During 2011, the total value of the ABCP benefited from an increase in market value of $3 million (CDN$3 million). For the same period, the total value of the ABCP was reduced by 1) repayments totalling $8 million (CDN$8 million), and 2) a decrease in the value of the Canadian dollar of $4 million.

Most of these ABCP valued at $178 million (2010 – $193 million; 2009 – $186 million) were subject to restructuring under the court order governing the Montreal Accord that was completed in January 2009, while the remaining ABCP valued at $27 million (2010 – $21 million; 2009 – $19 million) were mainly restructured separately.

While there is a market for the ABCP held by the Company’s pension plans, this market is not considered sufficiently liquid to use for valuation purposes. Accordingly, the value of the ABCP is mainly based on a financial model incorporating uncertainties regarding return, credit spreads, the nature and credit risk of underlying assets, and the amounts and timing of cash inflows.

The largest conduit owned by the pension plans in the Montreal Accord, representing 75% of the total value, consists mainly of investments that serve as collateral to back credit default derivatives that protect counterparties against credit defaults above a specified threshold on different portfolios of corporate credits. The valuation methodology was based upon determining an appropriate credit spread for each class of notes based upon the implied protection level provided by each class against potential credit defaults. This was done by comparison to spreads for an investment grade credit default index and the comparable tranches within the index for equivalent credit protection. In addition, a liquidity premium of 1.75% was added to this spread. The resulting spread was used to calculate the present value of all such notes, based upon the anticipated maturity date. An additional discount of 2.5% was applied to the value to reflect uncertainty over collateral values held to support the derivative transactions. The resulting interest rate was used to calculate the present value of this class of ABCP, based upon the anticipated maturity date in early 2017. An increase in the discount rate of 1% would reduce the value by $7 million (CDN$7 million) for these ABCP.

The value of the remaining ABCP that were subject to the Montreal Accord were sourced either from the asset manager of the ABCP, or from trading values for similar securities of similar credit quality. The remaining ABCP that were not subject to the Montreal Accord, which also provide protection to counterparties against credit defaults through derivatives, were valued based upon the value of the investment held in the conduit that serve as collateral for the derivative counterparties, net of the market value of the credit derivatives as provided by the sponsor of the conduit, with an additional discount (equivalent to 1.75% per annum) applied for illiquidity.

Possible changes that could materially impact the future value of the ABCP include (1) changes in the value of the underlying assets and the related derivative transactions, (2) developments related to the liquidity of the ABCP market, (3) a severe and prolonged economic slowdown in North America and the bankruptcy of referenced corporate credits, and (4) the passage of time, as most of the notes will mature in early 2017.

107 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

The following table presents changes during the period for Level 3 fair value measurements of plan assets: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) ABCP Restricted ABCP Outside Bond Montreal Montreal Index Accord Accord Fund Total $$ $$ Balance at December 31, 2009 186 19 27 232 Settlements (20) — (29) (49) Return on plan assets 20 — 2 22 Effect of foreign currency exchange rate change 7 2 — 9 Balance at December 31, 2010 193 21 — 214 Settlements (8) — — (8) Return on plan assets (3) 6 — 3 Effect of foreign currency exchange rate change (4) — — (4) Balance at December 31, 2011 178 27 — 205

ESTIMATED FUTURE BENEFIT PAYMENTS FROM THE PLANS Estimated future benefit payments from the plans for the next 10 years at December 31, 2011 are as follows: Other Pension post-retirement plans benefit plans $$ 2012 206 7 2013 134 7 2014 99 7 2015 101 7 2016 105 6 2017—2021 576 34

MULTIEMPLOYER PLANS Domtar contributes to nine multiemployer defined benefit pension plans under the terms of collective agreements that cover certain Canadian union-represented employees (Canadian multiemployer plans) and certain U.S. union-represented employees (U.S. multiemployer plans). The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects: (a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (b) for the U.S. multiemployer plans, if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and (c) for the U.S. multiemployer plans, if Domtar chooses to stop participating in some of its multiemployer plans, Domtar may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

108 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

Domtar’s participation in these plans for the annual periods ended December 31 is outlined in the table below. The plan’s 2011 and 2010 actuarial status certification was completed as of January 1, 2011 and January 1, 2010 respectively, and is based on the plan’s actuarial valuation as of January 1, 2010 and January 1, 2009 respectively. This represents the most recent Pension Protection Act (“PPA”) zone status available. The zone status is based on information received from the plan and is certified by the plan’s actuary. The Company’s significant plan is in the red zone, which means it is less than 65 percent funded.

Pension Contributions Protection Act FIP / RP from Domtar to EIN / Pension Zone Status Status Pending / Multiemployer (b) Surcharge Pension Fund Plan Number 2011 2010 Implemented 2011 2010 2009 imposed? Expiration CBA $$$ U.S. Multiemployer Plans PACE Industry Union- Management Pension Fund 11-6166763-001 Red Red Yes - Implemented 3 3 3 Yes November 1, 2011 Canadian Multiemployer plans Pulp and Paper Industry Pension Plan (a) n.a. n.a. n.a. n.a. 3 2 2 n.a. April 30, 2012 Total 6 55 Total contributions made to all plans that are not individually significant 1 11 Total contributions made to all plans 7 66

(a) In the event that the Canadian multiemployer plan is underfunded, the monthly benefit amount can be reduced by the trustees of the plan. Moreover, Domtar is not responsible for the underfunded status of the plan because the Canadian multiemployer plans do not require participating employers to pay a withdrawal liability or penalty upon withdrawal. (b) For each of the three years presented, Domtar’s contributions to each multiemployer plan do not represent more than five percent of total contributions to each plan as indicated in the plan’s most recently available annual report.

The Company will withdraw from participation in one of its multiemployer plans in 2012. The expected withdrawal liability, recorded in December 2011 (see Note 16) is $32 million. The Company is reviewing its participation in the remaining multiemployer pension plans.

109 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 8.

OTHER OPERATING (INCOME) LOSS, NET

Other operating (income) loss is an aggregate of both recurring and occasional loss or income items and, as a result, can fluctuate from year to year. The Company’s other operating (income) loss includes the following:

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 $$$ Loss on sale of Prince Albert mill 12 — — Gain on sale of Columbus mill (2) — — Gain on sale of Distribution business unit (3) — — Alternative fuel tax credits (Note 10) — (25) (498) Loss on sale of Wood business (Note 26) — 50 — Gain on sale of Woodland mill (Note 26) — (10) — Gain on sale of trademarks —— (1) Gain on sale of property, plant and equipment (13) (7) (6) Environmental provision 7 4 4 Foreign exchange loss (gain) (3) 6 6 Other (2) 2 (2) Other operating (income) loss, net (4) 20 (497)

NOTE 9.

INTEREST EXPENSE, NET

The following table presents the components of interest expense:

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 $$$ Interest on long-term debt (1) 76 97 121 Loss on repurchase of long-term debt 4 35 3 Reversal of fair value decrement (increment) on debentures — 12 (12) Receivables securitization 1 2 2 Amortization of debt issue costs and other 7 10 11 88 156 125 Less: Interest income 1 1 — 87 155 125

(1) The Company did not capitalize interest expense in 2011. The Company capitalized $4 million in 2010 and $1 million in 2009 related to the borrowing costs associated with various construction projects at its facilities.

110 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 10.

INCOME TAXES

The components of Domtar Corporation’s earnings before income taxes by taxing jurisdiction were:

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 $$$ U.S. earnings 220 177 560 Foreign earnings (loss) 285 271 (70) Earnings before income taxes 505 448 490

Provisions for income taxes include the following:

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 $$$ U.S. Federal and State: Current 93 17 101 Deferred (19) (74) 79 Foreign: Deferred 59 (100) — Income tax expense (benefit) 133 (157) 180

The provision for income taxes of Domtar Corporation differs from the amounts computed by applying the statutory income tax rate of 35% to earnings before income taxes due to the following:

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 $$$ U.S. federal statutory income tax 177 157 172 Reconciling items: State and local income taxes, net of federal income tax benefit 5 15 4 Foreign income tax rate differential (20) (14) 6 Tax credits and special deductions (16) (148) (13) Alternative fuel tax credit income — (9) (176) Tax rate changes — — (2) Uncertain tax positions 5 15 168 U.S. manufacturing deduction (12) (2) (2) Valuation allowance on deferred tax assets — (164) 29 Other (6) (7) (6) Income tax expense (benefit) 133 (157) 180

111 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 10. INCOME TAXES (CONTINUED)

For 2011, the Company has a significantly larger manufacturing deduction in the U.S. than in prior years since the Company utilized its remaining federal net operating loss carryforward in 2010. This deduction resulted in a tax benefit of $12 million which impacted the effective tax rate for 2011. The Company also recorded a $16 million tax benefit related to federal, state, and provincial credits and special deductions which reduced the effective tax rate for 2011. Additionally, the Company recognized a state tax benefit of $3 million due to U.S. restructuring that impacted the 2011 effective tax rate by reducing state income tax expense.

During 2010, the Company recognized $25 million of income related to alternative fuel mixture tax credits in Other operating (income) loss on the Consolidated Statements of Earnings. The $25 million represented an adjustment to amounts presented as deferred revenue at December 31, 2009 and was released to income following guidance issued by the IRS in March 2010. This income resulted in an income tax benefit of $9 million and an additional liability for uncertain income tax positions of $7 million, both of which impacted the U.S. effective tax rate for 2010. Additionally, the Company recorded a net tax benefit of $127 million from claiming a Cellulosic Biofuel Producer Credit (“CBPC”) in 2010 ($209 million of CBPC net of tax expense of $82 million), which also impacted the U.S. effective tax rate. Finally, the Company released the valuation allowance on the Canadian net deferred tax assets during the fourth quarter of 2010. The full $164 million valuation allowance balance that existed at January 1st, 2010 was either utilized during the 2010 or reversed at the end of 2010 based on future projected income, which impacted the Canadian and consolidated effective tax rate.

During 2009, the Company recognized $503 million of income, before $5 million of related costs, from alternative fuel tax credits with no related tax expense, resulting in a benefit of $176 million and an additional liability for uncertain income tax positions of $162 million, with both items impacting the U.S. effective tax rate. If the Company’s income tax positions with respect to the alternative fuel mixture tax credits are sustained, either all or in part, the Company would recognize a tax benefit in the future equal to the amount of the benefits sustained. In the event the Company’s tax position is not sustained, this would result in a cash tax outflow of approximately $200 million. Additionally, the Canadian effective tax rate was impacted by the additional valuation allowance recorded against new Canadian deferred tax assets in the amount of $29 million.

In July 2010, the U.S. Internal Revenue Service (“IRS”) Office of Chief Counsel released an Advice Memorandum concluding that qualifying cellulosic biofuel sold or used before January 1, 2010, is eligible for the cellulosic biofuel producer credit (“CBPC”) and would not be required to be registered by the Environmental Protection Agency. Each gallon of qualifying cellulose biofuel produced by any taxpayer operating a pulp and paper mill and used as a fuel in the taxpayer’s trade or business during calendar year 2009 would qualify for the $1.01 non-refundable CBPC. A taxpayer will be able to claim the credit on its federal income tax return for the 2009 tax year upon receipt of a letter of registration from the IRS and any unused CBPC may be carried forward until 2015 to offset a portion of federal taxes otherwise payable.

The Company had approximately 207 million gallons of cellulose biofuel that qualified for this CBPC which had not previously been claimed under the Alternative Fuel Mixture Credit (“AFMC”) that represented approximately $209 million of CBPC or approximately $127 million of after tax benefit to the Corporation. In July 2010, the Company submitted an application with the IRS to be registered for the CBPC and on September 28, 2010, a notification was received from the IRS that the Company was successfully registered. On October 15, 2010 the IRS Office of Chief Counsel issued an Advice Memorandum concluding that the AFMC and CBPC could be claimed in the same year for different volumes of biofuel. In November 2010, the Company

112 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 10. INCOME TAXES (CONTINUED) filed an amended 2009 tax return with the IRS claiming a cellulosic biofuel producer credit of $209 million and recorded a net tax benefit of $127 million in Income tax expense (benefit) on the Consolidated Statements of Earnings for the year ended December 31, 2010. As of December 31, 2011, approximately $25 million of this credit remains to offset future U.S. federal income tax liability.

Deferred tax assets and liabilities are based on tax rates that are expected to be in effect in future periods when deferred items reverse. Change in tax rates or tax laws affect the expected future benefit or expense. The effect of such changes that occurred during each of the last three fiscal years is included in “Tax rate changes” disclosed under the effective income tax rate reconciliation shown above.

DEFERRED TAX ASSETS AND LIABILITIES The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2011 and December 31, 2010 are comprised of the following:

December 31, December 31, 2011 2010 $$ Accounting provisions 82 91 Net operating loss carryforwards and other deductions 104 114 Pension and other employee future benefit plans 76 52 Inventory 1 1 Tax credits 101 234 Other 33 32 Gross deferred tax assets 397 524 Valuation allowance (4) — Net deferred tax assets 393 524 Property, plant and equipment (801) (820) Deferred income (19) (83) Impact of foreign exchange on long-term debt and investments (13) (30) Intangible assets (73) (20) Total deferred tax liabilities (906) (953) Net deferred tax liabilities (513) (429) Included in: Deferred income tax assets 125 115 Other assets (Note 15) 36 140 Income and other taxes payable — (2) Deferred income taxes and other (674) (682) Total (513) (429)

On September 1, 2011, the Company completed its acquisition of 100% of the outstanding shares of Attends. The acquisition was accounted for as a business combination under the acquisition method of

113 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 10. INCOME TAXES (CONTINUED) accounting with the Business Combinations Topic of FASB ASC. As a result, Attends and the Company recorded additional net deferred tax liabilities of $62 million during 2011, primarily related to fixed assets and intangible assets. The balances of these recorded net deferred tax liabilities as of December 31, 2011 are included in the table above.

At December 31, 2010, Domtar Corporation had utilized all of its remaining U.S. federal net operating loss carryforwards and had no carryforward into future years. With the acquisition of Attends on September 1, 2011, the Company acquired additional federal net operating loss carryforwards of $2 million. These U.S. federal net operating losses are subject to annual limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), that can vary from year to year. At December 31, 2011, the Company had $2 million of federal net operating loss carryforward remaining which expires in 2028. Canadian federal losses and scientific research and experimental development expenditures not previously deducted represent an amount of $327 million (CDN $329 million), out of which losses in the amount of $72 million (CDN $73 million) will begin to expire in 2029.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets in the U.S., with the exception of certain state credits for which a valuation allowance of $4 million has been recorded in 2011.

The Company evaluates the realizeability of deferred tax assets on a quarterly basis. During the fourth quarter of 2010, the Company determined based on analysis of both positive and negative evidence that the realizeability of all such assets was “more likely than not” based on current and projected future taxable income and other accumulated positive evidence. Accordingly, the Company removed the valuation allowance from its deferred tax assets resulting in a benefit to deferred tax expense along with current utilization of $164 million in its statements of operations for 2010.

The Company evaluates the realization of deferred tax assets on a quarterly basis. Evaluating the need for an amount of a valuation allowance for deferred tax assets often requires significant judgment. All available evidence, both positive and negative, are considered when determining whether, based on the weight of that evidence, a valuation allowance is needed. Specifically, the Company evaluated the following items: • Historical income / (losses)—particularly the most recent three-year period • Reversals of future taxable temporary differences • Projected future income / (losses) • Tax planning strategies • Divestitures

In its evaluation process, the Company gives the most weight to historical income or losses. During the fourth quarter of 2010, after evaluating all available positive and negative evidence, although realization is not

114 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 10. INCOME TAXES (CONTINUED) assured, the Company determined that it is more likely than not that the Canadian net deferred tax assets will be fully realized in the future prior to expiration. Key factors contributing to this conclusion that the positive evidence ultimately outweighed existing negative evidence during the fourth quarter of 2010 included the fact that the Canadian operations, excluding the loss-generating Wood business (sold to a third party on June 30, 2010) and elements of other comprehensive income, went from a three-year cumulative loss position to a three- year cumulative income position during the fourth quarter of 2010; they have been able to demonstrate continual profitability throughout 2010 and 2011; and are projected to continue to be profitable in the coming years. Accordingly, the Company released the valuation allowance from its deferred tax assets resulting in a deferred tax benefit of $164 million in its Consolidated Statements of Earnings in 2010.

The Company does not provide for a U.S. income tax liability on undistributed earnings of its foreign subsidiaries. The earnings of the foreign subsidiaries, which reflect full provision for income taxes, are currently indefinitely reinvested in foreign operations. No provision is made for income taxes that would be payable upon the distribution of earnings from foreign subsidiaries as computation of these amounts is not practicable.

ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES At December 31, 2011, the Company had gross unrecognized tax benefits of approximately $253 million ($242 million and $226 million for 2010 and 2009 respectively). If recognized in 2012, these tax benefits would impact the effective tax rate. These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were sustained, such as federal deduction that could be realized if an unrecognized state deduction was not sustained.

December 31, December 31, December 31, 2011 2010 2009 $$$ Balance at beginning of year 242 226 45 Additions based on tax positions related to current year 4 14 179 Additions for tax positions of prior years 4 —— Reductions for tax positions of prior years (1) —— Expiration of statutes of limitations (4) (5) — Interest 9 6— Foreign exchange impact (1) 12 Balance at end of year 253 242 226

As a result of the acquisition of Attends, the Company recorded unrecognized tax benefits during 2011 which are shown as additions for tax positions of prior years in the table above.

The Company recorded $9 million of accrued interest associated with unrecognized tax benefits for the period ending December 31, 2011 ($6 million and nil for 2010 and 2009 respectively). The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of tax expense.

The Company and its subsidiaries will file one consolidated U.S. federal income tax return for 2011 as well as returns in Canada, Hong Kong, China, Belgium and various states and provinces. At December 31, 2011, the

115 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 10. INCOME TAXES (CONTINUED)

Company’s subsidiaries are subject to U.S. and foreign federal income tax as well as various state or provincial income tax examinations for the tax years 2006 through 2010, with federal years prior to 2008 being closed from a cash tax liability standpoint in the U.S., but the loss carryforwards can be adjusted in any open year where the loss has been utilized. The Company does not anticipate that adjustments stemming from these audits would result in a significant change to the results of its operations and financial condition. The Company does not expect a significant change to the amount of unrecognized tax benefits over the next 12 months. However, audit outcomes and the timing of audit settlement are subject to significant uncertainty.

NOTE 11.

INVENTORIES

The following table presents the components of inventories:

December 31, December 31, 2011 2010 $$ Work in process and finished goods 363 361 Raw materials 105 105 Operating and maintenance supplies 184 182 652 648

NOTE 12.

GOODWILL

The carrying value and any changes in the carrying value of goodwill are as follows:

December 31, December 31, 2011 2010 $$ Balance at beginning of year — — Acquisition of Attends Healthcare Inc. 163 — Balance at end of year 163 —

The goodwill at December 31, 2011 is entirely related to the Personal Care segment. (See Note 3 “Acquisition of Business” for further information).

In the fourth quarter of 2011, the Company assessed qualitative factors to determine whether the existence of events or circumstances lead to a determination that it was more likely than not that the fair value of the

116 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 12. GOODWILL (CONTINUED) reporting unit was less than its carrying amount. After assessing the totality of events and circumstances, the Company determined it was more likely than not that the fair value of the reporting unit was greater than its carrying amount. Thus, performing the two-step impairment test was unnecessary and no impairment charge was recorded for goodwill.

At December 31, 2011, the accumulated impairment loss amounted to $321 million (2010 – $321 million).

NOTE 13.

PROPERTY, PLANT AND EQUIPMENT

The following table presents the components of property, plant and equipment:

Range of December 31, December 31, useful lives 2011 2010 $$ Machinery and equipment 3-20 7,164 7,808 Buildings and improvements 10-40 934 1,122 Timber limits and land 264 284 Assets under construction 86 41 8,448 9,255 Less: Allowance for depreciation and amortization (4,989) (5,488) 3,459 3,767

117 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 14.

INTANGIBLE ASSETS

The following table presents the components of intangible assets:

December 31, December 31, Weighted average useful lives 2011 2010 $$ Intangible assets subject to amortization Water rights 40 8 8 Power purchase agreements 25 32 33 Customer relationships (1) 20-40 104 11 Trade names 7 7 7 Supplier agreement 5 6 6 157 65 Accumulated amortization (14) (9) 143 56 Intangible assets not subject to amortization Trade names (1) 61 — Total intangible assets 204 56

Amortization expense related to intangible assets for the year ended December 31, 2011 was $5 million (2010—$4 million; 2009—$8 million).

Amortization expense for the next five years related to intangible assets is expected to be as follows:

2012 2013 2014 2015 2016 $$$$$ Amortization expense related to intangible assets 75544 (1) Increase relates to the acquisition of Attends Healthcare, Inc. in September 2011.

118 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 15.

OTHER ASSETS

The following table presents the components of other assets:

December 31, December 31, 2011 2010 $$ Pension asset—defined benefit pension plans (Note 7) 53 36 Unamortized debt issue costs 11 13 Deferred income tax assets (Note 10) 36 140 Investments and advances 5 7 Other 4 7 109 203

NOTE 16.

CLOSURE AND RESTRUCTURING COSTS AND LIABILITY

The Company regularly reviews its overall production capacity with the objective of adjusting its production capacity with anticipated long-term demand.

During the fourth quarter of 2011, the Company decided to withdraw from one of its multiemployer pension plans and recorded a withdrawal liability and a charge to earnings of $32 million. The Company also incurred, in the fourth quarter of 2011, a $9 million loss from an estimated pension curtailment associated with the conversion of certain of its U.S. defined benefit pension plans to defined contribution pension plans recorded as a component of closure and restructuring costs.

Lebel-sur-Quévillon pulp mill and sawmill Following the permanent closure announced on December 18, 2008 of its Lebel-sur-Quévillon pulp mill and sawmill, the Company recorded a $4 million pension curtailment loss in 2009. Operations at the pulp mill had been indefinitely idled in November 2005 due to unfavorable economic conditions and the sawmill had been indefinitely idled since 2006. At the time, the pulp mill and sawmill employed 425 and 140 employees, respectively. The Lebel-sur-Quévillon pulp mill had an annual production capacity of 300,000 metric tons. During 2011, the Company reversed $2 million of severance and termination costs and following the signing of a definitive agreement (see Note 27), the Company recorded a $12 million write-down for the remaining fixed assets net book value, a component of Impairment and write-down of property, plant and equipment.

Ashdown pulp and paper mill On March 29, 2011, the Company announced that it would permanently shut down one of four paper machines at its Ashdown, Arkansas pulp and paper mill. This measure reduced the Company’s annual uncoated

119 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 16. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED) freesheet paper production capacity by approximately 125,000 short tons. The mill’s workforce was reduced by approximately 110 employees. The Company recorded $1 million of inventory obsolescence and $1 million of severance and termination costs as well as $73 million of accelerated depreciation, a component of Impairment and write-down of property, plant and equipment. Operations ceased on August 1, 2011.

Plymouth pulp and paper mill On February 5, 2009, the Company announced a permanent shut down of a paper machine at its Plymouth pulp and paper mill effective at the end of February 2009. This measure resulted in the permanent curtailment of 293,000 tons of paper production capacity and the shut down affected approximately 185 employees. The Company recorded a $35 million accelerated depreciation charge for the related write-down for plant and equipment, $7 million of severance and termination costs and $5 million of inventory obsolescence. Given the closure of the paper machine, the Company conducted a Step I impairment test on the remaining Plymouth mill operation’s fixed assets and concluded that the undiscounted estimated future cash flows associated with the long-lived assets exceeded their carrying value and, as such, no additional impairment charge was required. During 2011, the Company reversed $2 million of severance and termination costs.

On October 20, 2009, the Company announced that it would convert its Plymouth mill to 100% fluff pulp production. The aggregate pre-tax earnings charge in connection with this conversion was $26 million which included $13 million in non-cash charges relating to accelerated depreciation of the carrying amounts of the manufacturing equipment as well as $3 million in write-down of related spare parts and $10 million in severance and termination costs.

On November 17, 2010, the Company announced the start up of its new fluff pulp machine which has an annual production capacity of approximately 444,000 metric tons. The mill exclusively produces fluff pulp and operates two fiber lines and one fluff pulp machine. During 2010, the Company recorded $39 million of accelerated depreciation and $1 million of inventory obsolescence related to the reconfiguration of the Plymouth, North Carolina mill to 100% fluff pulp production, announced on October 20, 2009. The Company recorded a $1 million write-down for the related paper machine in 2010.

Langhorne forms plant On February 1, 2011, the Company announced the closure of its forms plant in Langhorne, Pennsylvania, and recorded $4 million in severance and termination costs.

Cerritos forms converting plant During the second quarter of 2010, the Company decided to close the Cerritos, California forms converting plant, and recorded a $1 million write-down for the related assets and $1 million in severance and termination costs. Operations ceased on July 16, 2010.

Columbus paper mill On March 16, 2010, the Company announced that it would permanently close its coated groundwood paper mill in Columbus, Mississippi. This measure resulted in the permanent curtailment of 238,000 tons of coated groundwood and 70,000 metric tons of thermo-mechanical pulp, as well as affected 219 employees. The Company recorded a $9 million write-down for the related fixed assets, $8 million of severance and termination costs and $8 million of inventory obsolescence. Operations ceased in April 2010.

120 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 16. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)

Prince Albert pulp and paper mill On December 21, 2009, the Company decided to dismantle the Prince Albert facility. The Prince Albert pulp and paper mill was closed in the first quarter of 2006 and has not been operated since. The Company recorded a $14 million impairment charge for the related machinery and equipment, $2 million of inventory obsolescence, $4 million of environmental costs and $1 million of other costs.

Dryden paper mill Following the permanent shut down of the paper machine and the converting operations at the Dryden mill announced on November 4, 2008, the Company recorded $3 million of severance and termination costs and $5 million of inventory obsolescence in 2009. These measures resulted in the permanent curtailment of Domtar’s annual paper production capacity by approximately 151,000 tons and affected approximately 195 employees.

Other costs During 2011, other costs related to previous closures include $4 million in severance and termination costs, $1 million of inventory obsolescence and $4 million in other costs.

During 2010, other costs related to previous closures include $3 million in severance and termination costs and $6 million of other costs.

During 2009, other costs related to previous closures include $5 million of severance and termination costs, $4 million loss of pension curtailment and $10 million of other costs.

The following tables provide the components of closure and restructuring costs by segment:

Year ended December 31, 2011 Pulp and Paper Distribution Total $$$ Severance and termination costs 415 Inventory obsolescence (1) 2—2 Loss on curtailment of pension benefits and pension withdrawal liability 41 — 41 Other 4—4 Closure and restructuring costs 51 1 52

Year ended December 31, 2010 Pulp and Paper Distribution Total $$$ Severance and termination costs 11 1 12 Inventory obsolescence (1) 9—9 Other 6—6 Closure and restructuring costs 26 1 27

121 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 16. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)

Year ended December 31, 2009 Pulp and Paper Distribution Wood Total $$$$ Severance and termination costs 20 2 3 25 Inventory obsolescence (1) 15 — — 15 Loss on curtailment of pension benefits 4 — 4 8 Environmental provision 4 — — 4 Other 9 — 2 11 Closure and restructuring costs 52 2 9 63

(1) Inventory obsolescence primarily relates to the write-down of operating and maintenance supplies classified as Inventories on the Consolidated Balance Sheets.

The following table provides the activity in the closure and restructuring liability:

December 31, December 31, 2011 2010 $$ Balance at beginning of year 17 24 Additions 7 13 Severance payments (10) (18) Changes in estimates (8) (2) Other — (1) Effect of foreign currency exchange rate change — 1 Balance at end of year 6 17

Other costs related to the above 2011 closures expected to be incurred over 2012 include approximately $1 million for security and $2 million of other costs. These costs will be expensed as incurred and are related as follows: $1 million for security and $1 million of other costs related to the Pulp and Paper segment and $1 million of other costs related to the Distribution segment.

Closure and restructuring costs are based on management’s best estimates at December 31, 2011. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates due to subsequent developments such as the results of environmental studies, the ability to find a buyer for assets set to be dismantled and demolished and other business developments. As such, additional costs and further write-downs may be required in future periods.

122 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 17.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year ended Year ended Year ended December 31, December 31, December 31, COMPREHENSIVE INCOME 2011 2010 2009 $$$ Net earnings 365 605 310 Other comprehensive income (loss) Net derivative gains (losses) on cash flow hedges: Net (loss) gain arising during the period, net of tax of $7 (2010—$3; 2009—$2) (13) (4) 51 Less: Reclassification adjustment for (gains) losses included in net earnings, net of tax of $(2) (2010—$(1); 2009—$1) (1) (2) 18 Foreign currency translation adjustments (25) 66 206 Change in unrecognized losses and prior service cost related to pension and post retirement benefit plans, net of tax of $15 (2010—$19; 2009—$(6)) (25) (54) (74) Comprehensive income 301 611 511

NOTE 18.

TRADE AND OTHER PAYABLES

The following table presents the components of trade and other payables:

December 31, December 31, 2011 2010 $$ Trade payables 383 373 Payroll-related accruals 168 168 Accrued interest 15 15 Payables on capital projects 11 3 Rebate accruals 45 49 Liability—other post-retirement benefit plans (Note 7) 2 4 Provision for environment and other asset retirement obligations (Note 22) 24 28 Closure and restructuring costs liability (Note 16) 6 17 Derivative financial instruments (Note 23) 19 10 Dividend payable (Note 21) 13 11 Other 2 — 688 678

123 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 19.

LONG-TERM DEBT

Notional December 31, December 31, Maturity Amount Currency 2011 2010 $$$ Unsecured notes 5.375% Notes 2013 74 US 72 70 7.125% Notes 2015 213 US 213 213 9.5% Notes 2016 125 US 133 135 10.75% Notes 2017 385 US 375 388 Capital lease obligations 2012 – 2028 48 21 841 827 Less: Due within one year 4 2 837 825

Principal long-term debt repayments, including capital lease obligations, in each of the next five years will amount to:

Long-term debt Capital leases $$ 2012 —8 2013 74 8 2014 —7 2015 213 6 2016 125 5 Thereafter 385 38 797 72 Less: Amounts representing interest — 24 Total payments, excluding fair value increment of $6 million and debt discount of $10 million 797 48

UNSECURED NOTES During the third quarter of 2011, the Company repurchased $15 million of its 10.75% debt and recorded a charge of $4 million on repurchase of this debt.

On October 19, 2010 the Company redeemed $135 million of the 7.875% Notes due in 2011 and recorded a charge of $7 million related to the repurchase of the notes.

As a result of the cash tender offer during the second quarter of 2010, the Company repurchased $238 million of the 5.375% Notes due 2013 and $187 million of the 7.125% Notes due 2015. The Company recorded a charge of $40 million related to the repurchase of the notes.

124 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 19. LONG-TERM DEBT (CONTINUED)

On June 9, 2009, the Company issued $400 million 10.75% Notes due 2017 (“Notes”) at an issue price of $385 million. The net proceeds from the offering of the Notes were used to fund the portion of the purchase price of the 7.875% Notes due 2011 tendered and accepted by the Company pursuant to a tender offer, including the payment of accrued interest and applicable early tender premiums, not funded with cash on hand. The Company recorded a gain of $15 million related to the fair value increment associated with the portion of the 7.875% Notes repurchased, and recorded an expense of $4 million for the premium paid, and $1 million for other costs. Issuance expenses for the Notes of $8 million were deferred and are being amortized over the duration of the Notes.

The Notes are redeemable, in whole or in part, at the Company’s option at any time. In the event of a change in control, unless the Company has exercised the right to redeem all of the Notes, each holder will have the right to require the Company to repurchase all or any part of such holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes plus any accrued and unpaid interest.

The Notes are general unsecured obligations and rank equally with existing and future unsecured and unsubordinated obligations. The Notes are fully and unconditionally guaranteed on an unsecured basis by direct and indirect, existing and future, U.S. 100% owned subsidiaries, which currently guarantee indebtedness under the Credit Agreement.

BANK FACILITY On June 23, 2011, the Company entered into a new Credit Agreement (the “Credit Agreement”), among the Company and certain of its subsidiaries as borrowers (collectively, the “Borrowers”) and the lenders and agents party thereto. The Credit Agreement replaced the Company’s existing $750 million revolving credit facility that was scheduled to mature March 7, 2012.

The Credit Agreement provides for a revolving credit facility (including a letter of credit sub-facility and a swingline sub-facility) with an initial maximum aggregate amount of availability of $600 million that matures on June 23, 2015. Borrowings may be made by the Company, by its U.S. subsidiary Domtar Paper Company, LLC, and, subject to a limit of $150 million, by its Canadian subsidiary Domtar Inc. The Company may increase the maximum aggregate amount of availability under the revolving Credit Agreement by up to $400 million, and the Borrowers may extend the final maturity of the Credit Agreement by one year, if, in each case, certain conditions are satisfied, including: (i) the absence of any event of default or default under the Credit Agreement, and (ii) the consent of the lenders participating in each such increase or extension, as applicable.

Borrowings under the Credit Agreement will bear interest at a rate dependent on the Company’s credit ratings at the time of such borrowing and will be calculated at the Borrowers’ option according to a base rate, prime rate, Eurodollar rate or the Canadian bankers’ acceptance rate plus an applicable margin, as the case may be. In addition, the Company must pay facility fees quarterly at rates dependent on the Company’s credit ratings.

The Credit Agreement contains customary covenants for transactions of this type, including the following financial covenants: (i) an interest coverage ratio (as defined under the Credit Agreement) that must be maintained at a level of not less than 3.0 to 1 and (ii) a leverage ratio (as defined under the Credit Agreement) that must be maintained at a level of not greater than 3.75 to 1. At December 31, 2011, the Company was in

125 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 19. LONG-TERM DEBT (CONTINUED) compliance with its covenants and no amounts were borrowed (December 31, 2010—nil). At December 31, 2011, the Company had outstanding letters of credit amounting to $29 million under this credit facility (December 31, 2010—$50 million).

All borrowings under the Credit Agreement are unsecured. Certain domestic subsidiaries of the Company will unconditionally guarantee any obligations from time to time arising under the Credit Agreement, and certain Canadian subsidiaries of the Company unconditionally guarantee any obligations of Domtar Inc., the Canadian subsidiary borrower, under the Credit Agreement.

During 2010, the Company repaid the outstanding amount on the secured term loan due in 2014 in the amount of $336 million.

RECEIVABLES SECURITIZATION The Company uses securitization of certain receivables to provide additional liquidity to fund its operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. The Company’s securitization program consists of the sale of its domestic receivables to a bankruptcy remote consolidated subsidiary which, in turn, transfers a senior beneficial interest in them to a special purpose entity managed by a financial institution for multiple sellers of receivables. The program normally allows the daily sale of new receivables to replace those that have been collected. The Company retains a subordinated interest which is included in Receivables on the Consolidated Balance Sheets and will be collected only after the senior beneficial interest has been settled. The book value of the retained subordinated interest approximates fair value. Fair value is determined on a discounted cash flow basis. The Company retains responsibility for servicing the receivables sold but does not record a servicing asset or liability as the fees received by the Company for this service approximate the fair value of the services rendered.

The program contains certain termination events, which include, but are not limited to, matters related to receivable performance, certain defaults occurring under the credit facility, and certain judgments being entered against the Company or the Company’s subsidiaries that remain outstanding for 60 consecutive days.

In November 2010, the agreement governing this receivables securitization program was amended and extended to mature in November 2013. The available proceeds that may be received under the program are limited to $150 million. The agreement was subsequently amended in November 2011 to add a letter of credit sub-facility.

At December 31, 2011 the Company had no borrowings and $28 million of letters of credit outstanding under the program (2010 – nil and nil). Sales of receivables under this program are accounted for as secured borrowings. Before 2010, gains and losses on securitization of receivables were calculated as the difference between the carrying amount of the receivables sold and the sum of the cash proceeds upon sale and the fair value of the retained subordinated interest in such receivables on the date of the transfer.

In 2011, a net charge of $1 million (2010—$2 million; 2009—$2 million) resulted from the program described above and was included in Interest expense in the Consolidated Statements of Earnings. The net cash outflow in 2011, from the reduction of senior beneficial interest under the program was nil (2010—$20 million).

126 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 20.

OTHER LIABILITIES AND DEFERRED CREDITS

The following table presents the components of other liabilities and deferred credits:

December 31, December 31, 2011 2010 $$ Liability—other post-retirement benefit plans (Note 7) 111 110 Pension liability—defined benefit pension plans (Note 7) 143 100 Pension liability—multiemployer plan withdrawal (Note 7) 32 — Provision for environmental and asset retirement obligations (Note 22) 68 79 Worker’s compensation 2 3 Stock-based compensation—liability awards 49 38 Other 12 20 417 350

ASSET RETIREMENT OBLIGATIONS The asset retirement obligations are principally linked to landfill capping obligations, asbestos removal obligations and demolition of certain abandoned buildings. At December 31, 2011, Domtar estimated the net present value of its asset retirement obligations to be $32 million (2010—$43 million); the present value is based on probability weighted undiscounted cash outflows of $80 million (2010—$92 million). The majority of the asset retirement obligations are estimated to be settled prior to December 31, 2033. However, some settlement scenarios call for obligations to be settled as late as December 31, 2050. Domtar’s credit adjusted risk-free rates were used to calculate the net present value of the asset retirement obligations. The rates used vary between 5.5% and 12.0%, based on the prevailing rate at the moment of recognition of the liability and on its settlement period.

The following table reconciles Domtar’s asset retirement obligations:

December 31, December 31, 2011 2010 $$ Asset retirement obligations, beginning of year 43 46 Revisions to estimated cash flows (1) — Sale of businesses (10) (7) Settlements (1) (1) Accretion expense 2 4 Effect of foreign currency exchange rate change (1) 1 Asset retirement obligations, end of year 32 43

127 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 21.

SHAREHOLDERS’ EQUITY

During 2011, the Company declared one quarterly dividend of $0.25 per share and three quarterly dividends of $0.35 per share to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc., a subsidiary of Domtar Corporation. The total dividends of approximately $10 million, $15 million, $13 million and $13 million were paid on April 15, 2011, July 15, 2011, October 17, 2011 and January 17, 2012, respectively, to shareholders of record as of March 15, 2011, June 15, 2011, September 15, 2011 and December 15, 2011, respectively.

During 2010, the Company declared three quarterly dividends of $0.25 per share to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc., a subsidiary of Domtar Corporation. The total dividends of approximately $11 million, $10 million and $11 million were paid on July 15, 2010, October 15, 2010 and January 17, 2011, respectively, to shareholders of record as of June 15, 2010, September 15, 2010 and December 15, 2010, respectively.

On February 22, 2012, the Company’s Board of Directors approved a quarterly dividend of $0.35 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc. This dividend is to be paid on April 16, 2012 to shareholders of record on March 15, 2012.

STOCK REPURCHASE PROGRAM On May 4, 2010, the Company’s Board of Directors authorized a stock repurchase program (“the Program”) of up to $150 million of Domtar Corporation’s common stock. On May 4, 2011, the Company’s Board of Directors approved an increase to the Program from $150 million to $600 million. On December 15, 2011, the Company’s Board of Directors approved another increase to the Program from $600 million to $1 billion. Under the Program, the Company is authorized to repurchase from time to time shares of its outstanding common stock on the open market or in privately negotiated transactions in the United States. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock, from time to time, in part to reduce the dilutive effects of its stock options, awards, and employee stock purchase plan and to improve shareholders’ returns.

During 2011 and 2010, the Company made open market purchases of its common stock using general corporate funds. Additionally, the Company entered into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements required the Company to make up-front payments to the counterparty financial institutions which resulted in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.

128 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 21. SHAREHOLDERS’ EQUITY (CONTINUED)

During 2011, the Company repurchased 5,921,732 shares at an average price of $83.52 for a total cost of $494 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

During 2010, the Company repurchased 738,047 shares at an average price of $59.96 for a total cost of $44 million. Also, the Company entered into structured stock repurchase agreements that did not result in the repurchase of shares but resulted in net gains of $2 million which are recorded as a component of Shareholder’s equity.

The authorized stated capital consists of the following:

PREFERRED SHARES The Company is authorized to issue twenty million preferred shares, par value $0.01 per share. The Board of Directors of the Company will determine the voting powers (if any) of the shares, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares at the time of issuance. No preferred shares were outstanding at December 31, 2011 or December 31, 2010.

COMMON STOCK The Company is authorized to issue two billion shares of common stock, par value $0.01 per share. Holders of the Company’s common stock are entitled to one vote per share.

On May 29, 2009, the Company’s Board of Directors authorized a reverse stock split at a 1-for-12 ratio of its outstanding common stock. Shareholder approval for the reverse stock split was obtained at the Company’s Annual General Meeting held on May 29, 2009 and the reverse stock split became effective June 10, 2009 at 6:01 PM (ET). At the effective time, every 12 shares of the Company’s common stock that was issued and outstanding was automatically combined into one issued and outstanding share, without any change in par value of such shares.

As a result of the reverse stock split, the Company reclassified $5 million from Common stock to Additional paid-in capital.

SPECIAL VOTING STOCK One share of special voting stock, par value $0.01 per share was issued on March 7, 2007. The share of special voting stock is held by Computershare Trust Company of Canada (the “Trustee”) for the benefit of the holders of exchangeable shares of Domtar (Canada) Paper Inc. in accordance with the voting and exchange trust agreement. The Trustee holder of the share of special voting stock is entitled to vote on each matter which shareholders generally are entitled to vote, and the Trustee holder of the share of special voting stock will be entitled to cast on each such matter a number of votes equal to the number of outstanding exchangeable shares of Domtar (Canada) Paper Inc. for which the Trustee holder has received voting instructions. The Trustee holder will not be entitled to receive dividends or distributions in its capacity as holder or owner thereof.

129 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 21. SHAREHOLDERS’ EQUITY (CONTINUED)

The changes in the number of outstanding common stock and their aggregate stated value during the years ended December 31, 2011 and December 31, 2010, were as follows:

December 31, December 31, 2011 2010 Number of Number of Common stock shares $ shares $

Balance at beginning of year 41,635,174 — 42,062,408 — Shares issued Stock options 13,115 — 15,932 — RSU and PCRSU conversions — — 52,064 — Conversion of exchangeable shares 193,586 — 169,627 — Treasury stock (1) (5,710,675) — (664,857) — Balance at end of year 36,131,200 — 41,635,174 —

(1) During 2011, the Company repurchased 5,921,732 shares (2010—738,047) and issued 211,057 shares (2010—73,190) out of Treasury stock in conjunction with the exercise of stock-based compensation awards.

EXCHANGEABLE SHARES The Company is authorized to issue unlimited exchangeable shares at no par value. On May 29, 2009, an equivalent reverse stock split was also authorized for the outstanding exchangeable shares of Domtar (Canada) Paper Inc. on the same terms and conditions as the Company’s common stock. The reverse stock split became effective June 10, 2009 at 6:01 PM (ET). As such, a total of 619,108 common stock remains reserved for future issuance for the exchangeable shares of Domtar (Canada) Paper Inc. outstanding at December 31, 2011 (2010— 812,694). The exchangeable shares of Domtar (Canada) Paper Inc. are intended to be substantially economic equivalent to shares of the Company’s common stock. The rights, privileges, restrictions and conditions attaching to the exchangeable shares include the following: • The exchangeable shares are exchangeable at any time, at the option of the holder on a one-for-one basis for shares of common stock of the Company; • In the event the Company declares a dividend on the common stock, the holders of exchangeable shares are entitled to receive from Domtar (Canada) Paper Inc. the same dividend, or an economically equivalent dividend, on their exchangeable shares; • The holders of the exchangeable shares of Domtar (Canada) Paper Inc. are not entitled to receive notice of or to attend any meeting of the shareholders of Domtar (Canada) Paper Inc. or to vote at any such meeting, except as required by law or as specifically provided in the exchangeable share conditions; • The exchangeable shares of Domtar (Canada) Paper Inc. may be redeemed by Domtar (Canada) Paper Inc. on a redemption date to be set by the board of directors of Domtar (Canada) Paper Inc., which date cannot be prior to July 31, 2023 (or earlier upon the occurrence of certain specified events) in exchange for one share of Company common stock for each exchangeable share presented and surrendered by the holder thereof, together with all declared but unpaid dividends on each exchangeable share. The

130 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 21. SHAREHOLDERS’ EQUITY (CONTINUED)

Board of Directors of Domtar (Canada) Inc. is permitted to accelerate the July 31, 2023 redemption date upon the occurrence of certain events, including, upon at least 60 days prior written notice to the holders, in the event less than 416,667 exchangeable shares (excluding any exchangeable shares held directly or indirectly by the Company) are outstanding at any time.

The holders of exchangeable shares of Domtar (Canada) Paper Inc. are entitled to instruct the Trustee to vote the special voting stock as described above.

NOTE 22.

COMMITMENTS AND CONTINGENCIES

ENVIRONMENT The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities.

In 2011, the Company’s operating expenses for environmental matters, as described in Note 1, amounted to $62 million (2010—$62 million; 2009—$71 million).

The Company made capital expenditures for environmental matters of $8 million in 2011 (2010— $3 million; 2009—$2 million), excluding the $83 million spent under the Pulp and Paper Green Transformation Program, which was reimbursed by the Government of Canada (2010—$51 million; 2009—nil), for the improvement of air emissions and energy efficiency, effluent treatment and remedial actions to address environmental compliance. At this time, management does not expect any additional required expenditure that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.

During the first quarter of 2006, the pulp and paper mill in Prince Albert, Saskatchewan was closed due to poor market conditions. The Company’s management determined that the Prince Albert facility was no longer a strategic fit for the Company and would not be reopened. On May 3, 2011, Domtar sold its Prince Albert facility to Paper Excellence Canada Holdings Corporation (“Paper Excellence”). Paper Excellence agreed to assume all past, present and future known and unknown environmental liabilities and as such, the Company reversed its reserve for environmental liabilities for this site in the second quarter of 2011.

An action was commenced by Seaspan International Ltd. (“Seaspan”) in the Supreme Court of British Columbia, on March 31, 1999 against Domtar Inc. and others with respect to alleged contamination of Seaspan’s site bordering Burrard Inlet in North Vancouver, British Columbia, including contamination of sediments in Burrard Inlet, due to the presence of creosote and heavy metals. On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan and Domtar Inc. in order to define and implement an action plan to address soil, sediment and groundwater issues. This Order was appealed to the Environmental Appeal Board (“Board”) on March 17, 2010 but there is no suspension in the execution of this Order unless the Board orders otherwise. The appeal hearing has been scheduled for October 2012. The relevant government authorities selected a remediation plan on July 15, 2011. In the interim, no stay of execution has been granted or requested. The Company has recorded an environmental reserve to address its estimated exposure for this matter.

131 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:

December 31, December 31, 2011 2010 $$ Balance at beginning of year 107 111 Additions 7 4 Sale of businesses and closed facility (11) (9) Environmental spending (13) (7) Accretion 3 4 Effect of foreign currency exchange rate change (1) 4 Balance at end of year 92 107

At December 31, 2011, anticipated undiscounted payments in each of the next five years are as follows:

2012 2013 2014 2015 2016 Thereafter Total $$$$$ $ $ Environmental provision and other asset retirement obligations 24 26 8 3 2 77 140

Climate change regulation Since 1997, when an international conference on global warming concluded an agreement known as the Kyoto Protocol, which called for reductions of certain emissions that may contribute to increases in atmospheric greenhouse gas (“GHG”) concentrations, various international, national and local laws have been proposed or implemented focusing on reducing GHG emissions. These actual or proposed laws do or may apply in the countries where the Company currently has, or may have in the future, manufacturing facilities or investments.

In the United States, Congress has considered legislation to reduce emissions of GHGs, although it appears unlikely that any legislation will be actively considered again until after the 2012 elections. Several states already are regulating GHG emissions from public utilities and certain other significant emitters, primarily through regional GHG cap-and-trade programs. Furthermore, the U.S. Environmental Protection Agency (“EPA”) is expected, in 2012, to propose GHG permitting requirements for some existing industrial facilities under the agency’s existing Clean Air Act authority. Passage of GHG legislation by Congress or individual states, or the adoption of regulations by the EPA or analogous state agencies, that restrict emissions of GHGs in areas in which the Company conducts business could have a variety of impacts upon the Company, including requiring it to implement GHG containment and reduction programs or to pay taxes or other fees with respect to any failure to achieve the mandated results. This, in turn, will increase the Company’s operating costs, which, to the extent passed through to customers, could reduce demand for the Company’s products. However, the Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers in the United States.

The province of Quebec initiated, as part of its commitment to the Western Climate Initiative (“WCI”), a GHG cap-and-trade system on January 1, 2012. Reduction targets for Quebec are expected to be promulgated

132 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED) later in 2012, to be effective January 1, 2013. There are presently no federal or provincial legislation on regulatory obligations to reduce GHGs for the Company’s pulp and paper operations elsewhere in Canada.

While it is likely that there will be increased regulation relating to GHG emissions in the future, at this time it is not possible to estimate either a timetable for the promulgation or implementation of any new regulations or the Company’s cost of compliance to said regulations. The impact could, however, be material.

At December 31, 2011, the Company had a provision of $92 million for environmental matters and other asset retirement obligations (2010—$107 million). Additional costs, not known or identifiable, could be incurred for remediation efforts. Based on policies and procedures in place to monitor environmental exposure, management believes that such additional remediation costs would not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Industrial Boiler Maximum Achievable Controlled Technology Standard (“MACT”) On December 23, 2011, the EPA proposed a new set of standards related to emissions from boilers and process heaters included in the Company’s manufacturing processes. These standards are generally referred to as Boiler MACT. These proposed rules are open for comment and final versions of these Rules are expected in mid-2012. It is anticipated compliance will be required by in the fall of 2015. Domtar expects that the capital cost required to comply with the Boiler MACT rules, as they were published in December 2011, is between $34 million to $52 million. Domtar is currently assessing the associated increase in operating costs as well as alternate compliance strategies.

Domtar is also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws. The EPA and/or various state agencies have notified the Company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. Domtar continues to take remedial action under its Care and Control Program, as such sites mostly relate to its former wood preserving operating sites, and a number of operating sites due to possible soil, sediment or groundwater contamination. The investigation and remediation process is lengthy and subject to the uncertainties of changes in legal requirements, technological developments and, if and when applicable, the allocation of liability among potentially responsible parties.

CONTINGENCIES In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at December 31, 2011, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The pulp and paper mill in Prince Albert was closed in the first quarter of 2006 and has not been operated since. In December 2009, the Company decided to dismantle the Prince Albert facility. In a grievance relating to

133 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED) the closure of the Prince Albert facility, the union is claiming that it is entitled to the accumulated pension benefits during the actual layoff period because, according to the union, a majority of employees still had recall rights during the layoff. Arbitration in this matter was held in February 2010, and the arbitrator ruled in favor of the Company on August 24, 2010. As a result of the sale of the Prince Albert facility to Paper Excellence in the second quarter of 2011, the union agreed to release any claims for judicial review it may have against the Company in relation to the grievance.

On July 31, 1998, Domtar Inc. (now a 100% owned subsidiary of Domtar 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 included a purchase price adjustment whereby, in the event of the acquisition by a third party of more than 50% of the shares of Domtar Inc. in specified circumstances, Domtar Inc. may be required to pay an increase in consideration of up to a maximum of $118 million (CDN$120 million), an amount gradually declining over a 25-year period. At March 7, 2007, the maximum amount of the purchase price adjustment was approximately $108 million (CDN$110 million).

On March 14, 2007, the Company received a letter from George Weston Limited (the previous owner of E.B. Eddy and a party to the purchase agreement) demanding payment of $108 million (CDN$110 million) as a result of the consummation of the Transaction. On June 12, 2007, an action was commenced by George Weston Limited against Domtar Inc. in the Superior Court of Justice of the Province of Ontario, Canada, claiming that the consummation of the Transaction triggered the purchase price adjustment and sought a purchase price adjustment of $108 million (CDN$110 million) as well as additional compensatory damages. The Company does not believe that the consummation of the Transaction triggers an obligation to pay an increase in consideration under the purchase price adjustment and intends to defend itself vigorously against any claims with respect thereto. However, the Company may not be successful in the defense of such claims, and if the Company is ultimately required to pay an increase in consideration, such payment may have a material adverse effect on the Company’s financial position, results of operations or cash flows. On March 31, 2011, George Weston Limited filed a motion for summary judgment which the Company expects to be resolved by the Court in due course. No provision is recorded for this potential purchase price adjustment.

LEASE AND OTHER COMMERCIAL COMMITMENTS The Company has entered into operating leases for property, plant and equipment. The Company also has commitments to purchase property, plant and equipment, roundwood, wood chips, gas and certain chemicals. Purchase orders in the normal course of business are excluded from the table below. Any amounts for which the Company is liable under purchase orders are reflected in the Consolidated Balance Sheets as Trade and other payables. Minimum future payments under these operating leases and other commercial commitments, determined at December 31, 2011, were as follows:

2012 2013 2014 2015 2016 Thereafter Total $$$$$ $ $ Operating leases 27 22 18 11 7 5 90 Other commercial commitments 644431 3 79

Total operating lease expense amounted to $32 million in 2011 (2010—$32 million; 2009—$36 million).

134 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED)

INDEMNIFICATIONS In the normal course of business, the Company 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. At December 31, 2011, the Company 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 provision has been recorded. These indemnifications have not yielded a significant expense in the past.

NOTE 23.

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

INTEREST RATE RISK The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, its bank indebtedness, its bank credit facility and its long-term debt. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts.

CREDIT RISK The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of December 31, 2011 and December 31, 2010, the Company did not have any customers that represented more than 10% of the receivables.

The Company is also exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company minimizes this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored. Additionally, the Company is exposed to credit risk in the event of non-performance by its insurers. The Company minimizes this exposure by doing business only with large reputable insurance companies.

COST RISK Cash flow hedges: The Company purchases natural gas and oil at the prevailing market price at the time of delivery. In order to manage the cash flow risk associated with purchases of natural gas and oil, the Company may utilize derivative financial instruments or physical purchases to fix the price of forecasted natural gas and oil purchases. The

135 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Company formally documents the hedge relationships, including identification of the hedging instruments and the hedged items, the risk management objectives and strategies for undertaking the hedge transactions, and the methodologies used to assess effectiveness and measure ineffectiveness. Current contracts are used to hedge forecasted purchases over the next three years. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Accumulated other comprehensive loss within Shareholders’ equity, and is recognized in Cost of sales in the period in which the hedged transaction occurs.

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of December 31, 2011 to hedge forecasted purchases:

Notional contractual Notional contractual value Percentage of forecasted quantity under under derivative contracts purchases under derivative Commodity derivative contracts (in millions of dollars) contracts for 2012 2013 2014 Natural gas 7,920,000 MMBTU (1) $39 31% 20% 3% (1) MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective for accounting purposes as of December 31, 2011. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings for the year ended December 31, 2011 resulting from hedge ineffectiveness (2010 and 2009—nil).

FOREIGN CURRENCY RISK Cash flow hedges: The Company has manufacturing operations in the United States and Canada. As a result, it is exposed to movements in the foreign currency exchange rate in Canada. Also, certain assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. As a result, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar relative to the U.S. dollar. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates. Foreign exchange forward contracts are contracts whereby the Company has the obligation to buy Canadian dollars at a specific rate. Currency options purchased are contracts whereby the Company has the right, but not the obligation, to buy Canadian dollars at the strike rate if the Canadian dollar trades above that rate. Currency options sold are contracts whereby the Company has the obligation to buy Canadian dollars at the strike rate if the Canadian dollar trades below that rate.

The Company formally documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. Foreign exchange forward contracts and currency options contracts used to hedge forecasted purchases in Canadian dollars are designated as cash flow hedges. Current contracts are used to hedge forecasted purchases over the next

136 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

12 months. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Accumulated other comprehensive loss within Shareholders’ equity, and is recognized in Cost of sales in the period in which the hedged transaction occurs.

The following table presents the currency values under contracts pursuant to currency options outstanding as of December 31, 2011 to hedge forecasted purchases:

Percentage of CDN denominated forecasted expenses, net of revenues Contract Notional contractual value under contracts for 2012 Currency options purchased CDN $400 50% Currency options sold CDN $400 50%

The currency options are fully effective as at December 31, 2011. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings for the year ended December 31, 2011 resulting from hedge ineffectiveness (2010 and 2009—nil).

The Effect of Derivative Instruments on the Consolidated Statements of Earnings and Consolidated Statement of Shareholders’ Equity, Net of Tax

Derivatives Designated as Cash Flow Hedging Instruments under the Gain (Loss) Recognized in Gain (Loss) Reclassified from Accumulated Derivatives and Hedging Topic of Accumulated Other Comprehensive Other Comprehensive Loss into Income FASB ASC Loss on Derivatives (Effective Portion) (Effective Portion) For the year ended For the year ended December 31, December 31, December 31, December 31, December 31, December 31, 2011 2010 2009 2011 2010 2009 $$$$$$ Natural gas swap contracts (a) (7) (8) (4) (6) (9) (2) Oil swap contracts (a) — —2— —1 Currency options (a) (6) 453 7 11 (17) Total (13) (4) 51 1 2 (18)

(a) The Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) is recorded in Cost of sales.

137 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The accounting standards for fair value measurements and disclosures, establish a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

138 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (c) below) for the years ended December 31, 2011 and December 31, 2010, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Quoted prices in Significant Significant active markets for observable unobservable December 31, identical assets inputs inputs Fair Value of financial instruments at: 2011 (Level 1) (Level 2) (Level 3) Balance sheet classification $$$$ Derivatives designated as cash flow hedging instruments under the Derivatives and Hedging Topic of FASB ASC: Asset derivatives Currency options 7 — 7 — (a) Prepaid expenses Total Assets 7 —7—

Liabilities derivatives Currency options 11 — 11 — (a) Trade and other payables Natural gas swap contracts 8 — 8 — (a) Trade and other payables Natural gas swap contracts 3 — 3 — (a) Other liabilities and deferred credits Total Liabilities 22 —22—

Other Instruments: Asset backed commercial paper investments (“ABCP”) 5 — — 5 (b) Other assets Long-term debt 992 992 — — (c) Long-term debt

The cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts of $11 million at December 31, 2011, will be recognized in Cost of sales upon maturity of the derivatives over the next three years at the then prevailing values, which may be different from those at December 31, 2011.

The cumulative loss recorded in Accumulated other comprehensive loss relating to currency options of $4 million at December 31, 2011, will be recognized in Cost of sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at December 31, 2011.

139 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Quoted prices in Significant Significant active markets observable unobservable December 31, for identical inputs inputs Fair Value of financial instruments at: 2010 assets (Level 1) (Level 2) (Level 3) Balance sheet classification $$$$ Derivatives designated as cash flow hedging instruments under the Derivatives and Hedging Topic of FASB ASC: Asset derivatives Currency options 14 — 14 — (a) Prepaid expenses Total Assets 14 —14— Liabilities derivatives Currency options 3 — 3 — (a) Trade and other payables Natural gas swap contracts 7 — 7 — (a) Trade and other payables Natural gas swap contracts 2 — 2 — (a) Other liabilities and deferred credits Total Liabilities 12 —12— Other Instruments: ABCP 6 — — 6 (b) Other assets Long-term debt 979 979 — — (c) Long-term debt

(a) Fair value of the Company’s derivatives is classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows: • For currency options: Fair value is measured using techniques derived from the Black-Scholes pricing model. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques. • For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates. (b) Fair value of ABCP investments is classified under Level 3 and is mainly based on a financial model incorporating uncertainties regarding return, credit spreads, the nature and credit risk of underlying assets, the amounts and timing of cash inflows and the limited market for the notes as at December 31, 2011 and December 31, 2010. (c) Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. In accordance with U.S. GAAP, the Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at December 31, 2011 and December 31, 2010. However, fair value disclosure is required.

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, receivables, bank indebtedness, trade and other payables and income and other taxes approximate their fair values.

140 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 24.

SEGMENT DISCLOSURES

Following the sale of the Wood business on June 30, 2010, the Company’s reportable segments correspond to the following business activities: Pulp and Paper and Distribution.

On September 1, 2011, the Company purchased Attends Healthcare, Inc. As a result, an additional reportable segment, Personal Care, has been added.

Prior to June 30, 2010, the Company operated in three reportable segments: Pulp and Paper (formerly known as Papers), Distribution (formerly known as Paper Merchants) and Wood.

Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies. The following summary briefly describes the operations included in each of the Company’s reportable segments:

• Pulp and Paper Segment—comprises the manufacturing, sale and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.

• Distribution Segment—comprises the purchasing, warehousing, sale and distribution of the Company’s paper products and those of other manufacturers. These products include business and printing papers, certain industrial products and printing supplies.

• Personal Care Segment—consists of the manufacturing, sale and distribution of adult incontinence products.

• Wood—comprises the manufacturing and marketing of lumber and wood-based value-added products and the management of forest resources.

The accounting policies of the reportable segments are the same as described in Note 1. The Company evaluates performance based on operating income, which represents sales, reflecting transfer prices between segments at fair value, less allocable expenses before interest expense and income taxes. Segment assets are those directly used in segment operations.

The Company attributes sales to customers in different geographical areas on the basis of the location of the customer.

Long-lived assets consist of property, plant and equipment, intangible assets and goodwill used in the generation of sales in the different geographical areas.

141 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 24. SEGMENT DISCLOSURES (CONTINUED)

An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:

Year ended Year ended Year ended December 31, December 31, December 31, SEGMENT DATA 2011 2010 2009 $$$ Sales Pulp and Paper (1) 4,953 5,070 4,632 Distribution 781 870 873 Personal Care 71 — — Wood (2) — 150 211 Total for reportable segments 5,805 6,090 5,716 Intersegment sales—Pulp and Paper (193) (229) (231) Intersegment sales—Wood — (11) (20) Consolidated sales 5,612 5,850 5,465 Depreciation and amortization and impairment and write-down of property, plant and equipment Pulp and Paper 368 381 382 Distribution 4 4 3 Personal Care 4 — — Wood (2) —1020 Total for reportable segments 376 395 405 Impairment and write-down of property, plant and equipment— Pulp and Paper 85 50 62 Consolidated depreciation and amortization and impairment and write-down of property, plant and equipment 461 445 467 Operating income (loss) Pulp and Paper 581 667 650 Distribution — (3) 7 Personal Care 7 — — Wood (2) — (54) (42) Corporate 4 (7) — Consolidated operating income 592 603 615 Interest expense, net 87 155 125 Earnings before income taxes and equity earnings 505 448 490 Income tax expense (benefit) 133 (157) 180 Equity loss, net of taxes 7 — — Net earnings 365 605 310

142 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 24. SEGMENT DISCLOSURES (CONTINUED)

December 31, December 31, SEGMENT DATA (CONTINUED) 2011 2010 $$ Segment assets Pulp and Paper 4,874 5,088 Distribution 84 99 Personal Care 458 — Wood (2) — — Total for reportable segments 5,416 5,187 Corporate 453 839 Consolidated assets 5,869 6,026

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 $$$ Additions to property, plant and equipment Pulp and Paper 133 142 93 Distribution 2 21 Personal Care — —— Wood (2) — 14 Total for reportable segments 135 145 98 Corporate 10 58 Consolidated additions to property, plant and equipment 145 150 106 Add: Change in payables on capital projects (1) 3— Consolidated additions to property, plant and equipment per Consolidated Statements of Cash Flows 144 153 106

(1) In 2011, Staples, one of the Company’s largest customers in the Pulp and Paper segment, represented approximately 10% of the total sales. (2) The Wood segment was sold in the second quarter of 2010.

Year ended Year ended Year ended December 31, December 31, December 31, 2011 2010 2009 $$$ Geographic information Sales United States 4,200 4,245 4,139 Canada 756 837 789 China 229 375 215 Other foreign countries 427 393 322 5,612 5,850 5,465

143 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 24. SEGMENT DISCLOSURES (CONTINUED)

December 31, December 31, SEGMENT DATA (CONTINUED) 2011 2010 $$ Long-lived assets United States 2,675 2,553 Canada 1,148 1,270 Other foreign countries 3 — 3,826 3,823

NOTE 25.

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar Paper Company, LLC, a 100% owned subsidiary of the Company and the successor to the Weyerhaeuser Fine Paper Business U.S. Operations, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Ariva Distribution Inc., Domtar Delaware Investments Inc., Domtar Delaware Holdings, LLC, Domtar A.W. LLC (and subsidiary), Domtar AI Inc., and Attends Healthcare Products, Inc., all 100% owned subsidiaries of the Company (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt will not be guaranteed by certain of Domtar Paper Company, LLC’s own 100% owned subsidiaries; including Domtar Delaware Holdings Inc. and Domtar Inc., (collectively the “Non-Guarantor Subsidiaries”). The subsidiary’s guarantee may be released in certain customary circumstances, such as if the subsidiary is sold or sells all of its assets, if the subsidiary’s guarantee of the Credit Agreement is terminated or released and if the requirements for legal defeasance to discharge the indenture have been satisfied.

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at December 31, 2011 and December 31, 2010 and the Statements of Earnings (Loss) and Cash Flows for the years ended December 31, 2011, December 31, 2010 and December 31, 2009 for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method. The 2010 and 2009 comparative figures have been retrospectively adjusted to reflect the fact that Domtar Delaware Investments Inc. and Domtar Delaware Holdings, LLC both became Guarantor subsidiaries in June 2011.

144 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Year ended December 31, 2011 Non- CONDENSED CONSOLIDATING Guarantor Guarantor Consolidating STATEMENT OF EARNINGS Parent Subsidiaries Subsidiaries Adjustments Consolidated $$ $ $ $ Sales — 4,719 1,824 (931) 5,612 Operating expenses Cost of sales, excluding depreciation and amortization — 3,672 1,430 (931) 4,171 Depreciation and amortization — 274 102 — 376 Selling, general and administrative 28 330 (18) — 340 Impairment and write-down of property, plant and equipment —7312— 85 Closure and restructuring costs —511— 52 Other operating loss (income), net — (9) 5 — (4) 28 4,391 1,532 (931) 5,020 Operating income (loss) (28) 328 292 — 592 Interest expense (income), net 98 14 (25) — 87 Earnings (loss) before income taxes and equity earnings (126) 314 317 — 505 Income tax expense (benefit) (56) 118 71 — 133 Equity loss, net of taxes —— 7 — 7 Share in earnings of equity accounted investees 435 239 — (674) — Net earnings 365 435 239 (674) 365

Year ended December 31, 2010 Non- CONDENSED CONSOLIDATING Guarantor Guarantor Consolidating STATEMENT OF EARNINGS Parent Subsidiaries Subsidiaries Adjustments Consolidated $$ $ $ $ Sales — 4,826 1,962 (938) 5,850 Operating expenses Cost of sales, excluding depreciation and amortization — 3,805 1,550 (938) 4,417 Depreciation and amortization — 287 108 — 395 Selling, general and administrative 28 333 (23) — 338 Impairment and write-down of property, plant and equipment — 50 — — 50 Closure and restructuring costs — 19 8 — 27 Other operating loss (income), net 7 (14) 27 — 20 35 4,480 1,670 (938) 5,247 Operating income (loss) (35) 346 292 — 603 Interest expense (income), net 153 11 (9) — 155 Earnings (loss) before income taxes (188) 335 301 — 448 Income tax expense (benefit) (164) 98 (91) — (157) Share in earnings of equity accounted investees 629 392 — (1,021) — Net earnings 605 629 392 (1,021) 605

145 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Year ended December 31, 2009 Non- CONDENSED CONSOLIDATING Guarantor Guarantor Consolidating STATEMENT OF EARNINGS (LOSS) Parent Subsidiaries Subsidiaries Adjustments Consolidated $$ $ $ $ Sales — 4,504 1,684 (723) 5,465 Operating expenses Cost of sales, excluding depreciation and amortization — 3,659 1,536 (723) 4,472 Depreciation and amortization — 299 106 — 405 Selling, general and administrative 30 241 74 — 345 Impairment and write-down of property, plant and equipment — 48 14 — 62 Closure and restructuring costs — 31 32 — 63 Other operating income, net (143) (487) (11) 144 (497) (113) 3,791 1,751 (579) 4,850 Operating income (loss) 113 713 (67) (144) 615 Interest expense (income), net 122 (1) 4 — 125 Earnings (loss) before income taxes (9) 714 (71) (144) 490 Income tax expense 28 152 — — 180 Share in earnings of equity accounted investees 491 (71) — (420) — Net earnings (loss) 454 491 (71) (564) 310

146 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

December 31, 2011 Non- Guarantor Guarantor Consolidating CONDENSED CONSOLIDATING BALANCE SHEET Parent Subsidiaries Subsidiaries Adjustments Consolidated $$ $ $ $ Assets Current assets Cash and cash equivalents 91 2 351 — 444 Receivables — 456 188 — 644 Inventories — 475 177 — 652 Prepaid expenses 6 5 11 — 22 Income and other taxes receivable 20 1 26 — 47 Intercompany accounts 349 3,198 53 (3,600) — Deferred income taxes 5 61 59 — 125 Total current assets 471 4,198 865 (3,600) 1,934 Property, plant and equipment, at cost — 5,581 2,867 — 8,448 Accumulated depreciation — (3,230) (1,759) — (4,989) Net property, plant and equipment — 2,351 1,108 — 3,459 Goodwill — 163 — — 163 Intangible assets, net of amortization — 162 42 — 204 Investments in affiliates 6,933 1,952 — (8,885) — Intercompany long-term advances 6 79 431 (516) — Other assets 21 1 97 (10) 109 Total assets 7,431 8,906 2,543 (13,011) 5,869 Liabilities and shareholders’ equity Current liabilities Bank indebtedness — 7 — — 7 Trade and other payables 37 425 226 — 688 Intercompany accounts 3,196 370 34 (3,600) — Income and other taxes payable 4 10 3 — 17 Long-term debt due within one year — 4 — — 4 Total current liabilities 3,237 816 263 (3,600) 716 Long-term debt 790 35 12 — 837 Intercompany long-term loans 431 85 — (516) — Deferred income taxes and other — 916 21 (10) 927 Other liabilities and deferred credits 50 133 234 — 417 Shareholders’ equity 2,923 6,921 2,013 (8,885) 2,972 Total liabilities and shareholders’ equity 7,431 8,906 2,543 (13,011) 5,869

147 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

December 31, 2010 Non- Guarantor Guarantor Consolidating CONDENSED CONSOLIDATING BALANCE SHEET Parent Subsidiaries Subsidiaries Adjustments Consolidated $$ $ $ $ Assets Current assets Cash and cash equivalents 311 50 169 — 530 Receivables 4 416 181 — 601 Inventories — 477 171 — 648 Prepaid expenses 5 6 17 — 28 Income and other taxes receivable 47 — 33 (2) 78 Intercompany accounts 367 2,801 287 (3,455) — Deferred income taxes 1 104 10 — 115 Total current assets 735 3,854 868 (3,457) 2,000 Property, plant and equipment, at cost — 5,537 3,718 — 9,255 Accumulated depreciation — (2,993) (2,495) — (5,488) Net property, plant and equipment — 2,544 1,223 — 3,767 Intangible assets, net of amortization —1046— 56 Investments in affiliates 6,421 1,713 — (8,134) — Intercompany long-term advances 6 80 271 (357) — Other assets 27 1 189 (14) 203 Total assets 7,189 8,202 2,597 (11,962) 6,026 Liabilities and shareholders’ equity Current liabilities Bank indebtedness — 19 4 — 23 Trade and other payables 33 375 270 — 678 Intercompany accounts 2,825 400 230 (3,455) — Income and other taxes payable — 14 10 (2) 22 Long-term debt due within one year — 2 — — 2 Total current liabilities 2,858 810 514 (3,457) 725 Long-term debt 803 10 12 — 825 Intercompany long-term loans 351 6 — (357) — Deferred income taxes and other — 920 18 (14) 924 Other liabilities and deferred credits 39 66 245 — 350 Shareholders’ equity 3,138 6,390 1,808 (8,134) 3,202 Total liabilities and shareholders’ equity 7,189 8,202 2,597 (11,962) 6,026

148 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Year ended December 31, 2011 Non- CONDENSED CONSOLIDATING STATEMENT OF Guarantor Guarantor Consolidating CASH FLOWS Parent Subsidiaries Subsidiaries Adjustments Consolidated $$ $ $ $ Operating activities Net earnings 365 435 239 (674) 365 Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings 10 (330) 164 674 518 Cash flows provided from operating activities 375 105 403 — 883 Investing activities Additions to property, plant and equipment — (103) (41) — (144) Proceeds from disposals of property, plant and equipment — 16 18 — 34 Proceeds from sale of business — 10 — — 10 Acquisition of business, net of cash acquired — (288) — — (288) Other — — (7) — (7) Cash flows used for investing activities — (365) (30) — (395) Financing activities Dividend payments (49) — — — (49) Net change in bank indebtedness — (12) (4) — (16) Repayment of long-term debt (15) (3) — — (18) Premium paid on debt repurchases and tender offer costs (7) — — — (7) Stock repurchase (494) — — — (494) Increase in long-term advances to related parties (40) — (187) 227 — Decrease in long-term advances to related parties — 227 — (227) — Other 10 — — — 10 Cash flows provided from (used for) financing activities (595) 212 (191) — (574)

Net increase (decrease) in cash and cash equivalents (220) (48) 182 — (86) Cash and cash equivalents at beginning of year 311 50 169 — 530 Cash and cash equivalents at end of year 91 2 351 — 444

149 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Year ended December 31, 2010 Non- CONDENSED CONSOLIDATING STATEMENT OF Guarantor Guarantor Consolidating CASH FLOWS Parent Subsidiaries Subsidiaries Adjustments Consolidated $$ $ $ $ Operating activities Net earnings 605 629 392 (1,021) 605 Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings 205 (560) (105) 1,021 561 Cash flows provided from operating activities 810 69 287 — 1,166 Investing activities Additions to property, plant and equipment — (134) (19) — (153) Proceeds from disposals of property, plant and equipment — 6 20 — 26 Proceeds from sale of businesses and investments — 44 141 — 185 Cash flows provided from (used for) investing activities — (84) 142 — 58 Financing activities Dividend payments (21) — — — (21) Net change in bank indebtedness — (8) (11) — (19) Repayment of long-term debt (896) (2) — — (898) Debt issue and tender offer costs (35) — — — (35) Stock repurchase (44) — — — (44) Prepaid and premium on strutured stock repurchase, net 2 — — — 2 Increase in long-term advances to related parties — (8) (253) 261 — Decrease in long-term advances to related parties 261 — — (261) — Other (3) — — — (3) Cash flows used for financing activities (736) (18) (264) — (1,018) Net increase (decrease) in cash and cash equivalents 74 (33) 165 — 206 Cash and cash equivalents at beginning of year 237 83 4 — 324 Cash and cash equivalents at end of year 311 50 169 — 530

150 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Year ended December 31, 2009 Non- CONDENSED CONSOLIDATING STATEMENT OF Guarantor Guarantor Consolidating CASH FLOWS Parent Subsidiaries Subsidiaries Adjustments Consolidated $$ $ $ $ Operating activities Net earnings (loss) 454 491 (71) (564) 310 Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings (loss) 503 (669) 84 564 482 Cash flows provided from (used for) operating activities 957 (178) 13 — 792 Investing activities Additions to property, plant and equipment — (83) (23) — (106) Proceeds from disposals of property, plant and equipment — 5 16 — 21 Cash flows used for investing activities — (78) (7) — (85) Financing activities Net change in bank indebtedness — 2 (2) — — Change of revolving bank credit facility (60) — — — (60) Issuance of long-term debt 385 — — — 385 Repayment of long-term debt (717) (6) (2) — (725) Debt issue and tender offer costs (14) — — — (14) Increase in long-term advances to related parties (314) — (15) 329 — Decrease in long-term advances to related parties — 329 — (329) — Cash flows provided from (used for) financing activities (720) 325 (19) — (414) Net increase (decrease) in cash and cash equivalents 237 69 (13) — 293 Translation adjustments related to cash and cash equivalents — — 15 — 15 Cash and cash equivalents at beginning of year — 14 2 — 16 Cash and cash equivalents at end of year 237 83 4 — 324

151 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 26.

SALE OF WOOD BUSINESS AND WOODLAND MILL

Sale of Wood business On June 30, 2010, the Company sold its Wood business to EACOM Timber Corporation (“EACOM”), following the obtainment of various third party consents and customary closing conditions, which included approvals of the transfers of cutting rights in Quebec and Ontario, for proceeds of $75 million (CDN$80 million) plus elements of working capital of approximately $42 million (CDN$45 million). Domtar received 19% of the proceeds in shares of EACOM representing an approximate 12% ownership interest in EACOM. The sale resulted in a loss on disposal of the Wood business and related pension and other post-retirement benefit plan curtailments and settlements of $50 million, which was recorded in the second quarter of 2010 in Other operating (income) loss on the Consolidated Statements of Earnings. The investment of the Company in EACOM was then accounted for under the equity method.

The transaction included the sale of five operating sawmills: Timmins, Nairn Centre and Gogama in Ontario, and Val-d’Or and Matagami in Quebec; as well as two non-operating sawmills: Ear Falls in Ontario and Ste-Marie in Quebec. The sawmills had approximately 3.5 million cubic meters of annual harvesting rights and a production capacity of close to 900 million board feet. Also included in the transaction was the Sullivan remanufacturing facility in Quebec and interests in two investments: Anthony-Domtar Inc. and Elk Lake Planning Mill Limited.

In December 2010, in an unrelated transaction, the Company sold its investment in EACOM Timber Corporation for CDN$0.51 per common share for net proceeds of $24 million (CDN$24 million) resulting in no further gain or loss. Domtar has fiber supply agreements in place with its former wood division at its Espanola facility. Since these continuing cash outflows are expected to be significant to the former Wood business, the sale of the Wood business did not qualify as a discontinued operation under ASC 205-20.

Sale of Woodland, Maine market pulp mill On September 30, 2010, the Company sold its Woodland hardwood market pulp mill, hydro electric assets and related assets, located in Baileyville, Maine and New Brunswick, Canada. The purchase price was for an aggregate value of $60 million plus net working capital of $8 million. The sale resulted in a net gain on disposal of the Woodland, Maine mill of $10 million including pension curtailment expense of $2 million and has been recorded as a component of Other operating (income) loss on the Consolidated Statements of Earnings.

NOTE 27.

SUBSEQUENT EVENTS

Acquisition of Attends Healthcare Limited On January 26, 2012, Domtar announced the signing of a definitive agreement for the acquisition of privately-held Attends Healthcare Limited (“Attends Europe”), a manufacturer and supplier of adult incontinence care products in Europe, from Rutland Partners. The purchase price is estimated at $236 million (€180 million), including the assumed debt.

152 DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

NOTE 27. SUBSEQUENT EVENTS (CONTINUED)

Attends Europe operates a manufacturing, research and development and distribution facility in Aneby, Sweden, and also operates distribution centers in Scotland and Germany. Attends Europe has approximately 413 employees.

The transaction is expected to close during the first quarter of 2012, subject to customary closing conditions.

Sale of Lebel-sur-Quévillon assets On January 31, 2012, Domtar announced the signing of a definitive agreement with Fortress Global Cellulose Ltd (“Fortress”), and with a subsidiary of the Government of Quebec, for the sale of its Lebel-sur-Quévillon assets. The transaction is subject to customary closing conditions and is expected to close in the second quarter of 2012.

All pulp and sawmilling assets including the buildings and equipment will be sold to Fortress for the nominal sum of $1 and all lands related to the facilities will be sold to a subsidiary of the Government of Quebec for the nominal sum of $1.

The manufacturing operations at the pulp mill ceased in November 2005 due to unfavorable economic conditions while sawmilling operations at the facility ceased in 2006.

Tender offer for certain outstanding notes

On February 22, 2012, the Company announced the commencement of a cash tender offer for its outstanding 10.75% Notes due 2017 (the “First Priority Notes”), 9.5% Notes due 2016 (the “Second Priority Notes”), 7.125% Notes due 2015 (the “Third Priority Notes”) and 5.375% Notes due 2013 (the “Fourth Priority Notes”) such that the maximum aggregate consideration for Notes purchased in the tender offer, excluding accrued and unpaid interest, which will not exceed $250 million. The tender offer is scheduled to expire at 12:00 midnight, New York City time, on March 20, 2012, unless extended or earlier terminated.

The Company may waive, increase or decrease the maximum payment amount in its sole discretion. The Company’s obligation to consummate the tender offer is conditioned upon the satisfaction or waiver of certain conditions, including the Company obtaining approximately $250 million of proceeds from a debt financing, on terms and conditions reasonably satisfactory to the Company, at or before the expiration date of the tender.

153 DOMTAR CORPORATION Interim Financial Results (Unaudited) (in millions of dollars, unless otherwise noted)

2011 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year Sales $1,423 $1,403 $1,417 $1,369 $5,612 Operating income 211(a) 95(a) 187(a) 99(b) 592 Earnings before income taxes and equity earnings 190 74 162 79 505 Net earnings 133 54 117 61 365 Basic net earnings per share 3.16 1.31 2.96 1.64 9.15 Diluted net earnings per share 3.14 1.30 2.95 1.63 9.08

2010 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year Sales $1,457 $1,547 $1,473 $1,373 $5,850 Operating income 116(c)(d) 96(c) 236(c) 155 603 Earnings before income taxes 84 26 212 126 448 Net earnings 58 31 191 325(e) 605 Basic net earnings per share 1.35 0.72 4.47 7.67 14.14 Diluted net earnings per share 1.34 0.71 4.44 7.59 14.00 (a) The operating income for the first three quarters of 2011 includes a write-down of property, plant and equipment relating to the permanent shut down of a paper machine at the Ashdown mill of $73 million ($3 million, $62 million and $8 million, respectively for each quarter). (b) The operating income for the 4th Quarter of 2011 includes a write-down of property, plant and equipment relating to the closure of the Lebel-sur-Quévillon pulp mill and sawmill of $12 million. Also, the operating income for the 4th Quarter of 2011 includes an estimated withdrawal liability and a charge to earnings of $32 million, related to the withdrawal from one of the Company’s U.S. multiemployer pension plans and a $9 million loss from a pension curtailment associated with the conversion of certain of the Company’s U.S. defined benefit pension plans to defined contribution pension plans. (c) The operating income of 2010 includes $39 million in accelerated depreciation at the Plymouth mill related to its conversion to 100% fluff pulp production, which represents $13 million for each of the 1st Quarter, 2nd Quarter and 3rd Quarter. The conversion of the mill was achieved in the fourth quarter of 2010. (d) The operating income for the 1st Quarter of 2010 also includes a write-down of property, plant and equipment relating to the closure of the coated groundwood paper mill in Columbus of $9 million. (e) Net earnings for the 4th Quarter of 2010 include the impact of the reversal of the Canadian deferred tax asset valuation allowance of $100 million and the recognition of the Cellulosic Biofuel tax credit of $127 million.

154 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has nothing to report under this item.

ITEM 9A.CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2011, an evaluation was performed by members of management, at the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, management has conducted an assessment, including testing, using the criteria established in Internal Control— Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

As permitted by SEC rules, management has excluded Attends, Inc. from the assessment of internal control over financial reporting as of December 31, 2011 because they were acquired by the Company in a purchase business combination during 2011. The assets and revenues of this businesses represent 8% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

155 The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included under Part II, Item 8, Financial Statements and Supplementary Data.

Change in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.

ITEM 9B. OTHER INFORMATION

The Company has nothing to report under this item.

156 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information included under the captions “Governance of the Corporation,” “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

Information regarding our executive officers is presented in Part I, Item 1, Business, of this Form 10-K under the caption “Our Executive Officers.”

ITEM 11. EXECUTIVE COMPENSATION The information appearing under the caption “Compensation Discussion and Analysis,” “Executive Compensation” and “Director Compensation” in our Proxy Statement for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information appearing under the caption “Security Ownership of Certain Beneficial Owners, Directors and Officers” in our Proxy Statement for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

The following table sets forth the number of shares of our stock reserved for issuance under our equity compensation plans as of December 31, 2011:

Number of securities Number of securities remaining to be issued upon Weighted average exercise available for future issuance exercise of outstanding price of outstanding under equity compensation options, warrants and options, warrants and plans (excluding securities Plan Category rights (#) rights ($) reflected in column (a)(#) (a) (b) (c) Equity compensation plans approved by security holders 657,787(1) $63.94(2) 737,998(3) Equity compensation plans not approved by security holders N/A N/A N/A

Total 657,787 $63.94 737,998

(1) Represents the number of shares associated with options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), performance share units (“PSUs”), deferred share units (“DSUs”) and dividends equivalent units (“DEUs”) outstanding as of December 31, 2011. This number assumes that PSUs will vest at the “maximum” performance level, and that any performance requirements applicable to options and SARs will be satisfied. In addition, there are 124,564 shares reserved for issuance with respect to outstanding awards granted under equity compensation plans assumed from Domtar Inc., which we assumed in 2007 connection with a transaction. The options granted under the Domtar Inc. plans have a weighted average exercise price of $102.24. Those plans are no longer available for future awards. (2) Represents the weighted average exercise price of options and SARs disclosed in column (a). (3) Represents the number of shares remaining available for future issuance under the Domtar Corporation 2007 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) upon exercise of options. Of this number,

157 285,656 shares are available for issuance as restricted stock, restricted stock units, performance shares, performance units, deferred share units and awards based on the full value of stock (rather than an increase in value) under the Omnibus Incentive Plan. Please see “Approval of the Amended and Restated Domtar Corporation 2007 Omnibus Incentive Plan (“Omnibus Incentive Plan”) for more information.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information appearing under the captions “Governance of the Corporation—Board Independence and Other Determinations” in our Proxy Statement for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 14. PRINCIPLE ACCOUNTANT FEES AND SERVICES The information appearing under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” and “Independent Registered Public Accounting Firm Fees” in our Proxy Statement for the 2012 Annual Meeting of Stockholders is incorporated herein by reference.

158 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements—See Part II, Item 8, Financial Statements and Supplementary Data.

2. Schedule II—Valuation and Qualifying Accounts

All other schedules are omitted as the information required is either included elsewhere in the consolidated financial statements in Part II, Item 8—or is not applicable.

3. Exhibits:

Exhibit Number Exhibit Description

3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2008) 3.2 Certificate of Amendment of the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2009) 3.3 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2009) 4.1 Form of Rights Agreement between the Company and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 4.2 Form of Indenture among Domtar Corp., Domtar Paper Company, LLC and The Bank of New York, as trustee, relating to Domtar Corp.’s (i) 7.125% Notes due 2015, (ii) 5.375% Notes due 2013, (iii) 7.875% Notes due 2011, (iv) 9.5% Notes due 2016 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-4, Amendment No.1 filed with the SEC on October 16, 2007) 4.3 Supplemental Indenture, dated February 15, 2008, among Domtar Corp., Domtar Paper Company, LLC, The Bank of New York, as Trustee, and the new subsidiary guarantors parties thereto, relating to Domtar Corp.’s (i) 7.125% Notes due 2015, (ii) 5.375% Notes due 2013, (iii) 7.875% Notes due 2011, (iv) 9.5% Notes due 2016 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the SEC on February 21, 2008) 4.4 Second Supplemental Indenture, dated February 20, 2008, among Domtar Corp., Domtar Paper Company, LLC, The Bank of New York, as Trustee, and the new subsidiary guarantor party thereto, relating to Domtar Corp.’s (i) 7.125% Notes due 2015, (ii) 5.375% Notes due 2013, (iii) 7.875% Notes due 2011, (iv) 9.5% Notes due 2016 (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed with the SEC on February 21, 2008) 4.5 Third Supplement Indenture, dated June 9, 2009, among Domtar Corp., The Bank of New York Mellon, as Trustee, and the subsidiary guarantors party thereto, relating to Domtar Corp.’s 10.75% Senior Notes due 2017 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 9, 2009) 4.6 Fourth Supplemental Indenture, dated June 23, 2011, among Domtar Corporation, Domtar Delaware Investments Inc., and Domtar Delaware Holdings, LLC and The Bank of New York Melon, as trustee, relating to the Company’s 7.125% Notes due 2015, 5.375% Notes due 2013, 9.5% Notes due 2016 and 10.75% Notes due 2017 (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q filed with the SEC on August 4, 2011)

159 Exhibit Number Exhibit Description

4.7 Fifth Supplemental Indenture, dated September 7, 2011, among Domtar Corporation, Domtar Delaware Investments Inc. and Domtar Delaware Holdings, LLC, and The Bank of New York Melon, as trustee, relating to the Company’s 7.125% Notes due 2015, 5.375% Notes due 2013, 9.5% Notes due 2016 and 10.75% Notes due 2017 (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q filed with the SEC on November 4, 2011) 9.1 Form of Voting and Exchange Trust Agreement (incorporated by reference to Exhibit 9.1 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.1 Form of Tax Sharing Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.2 Form of Transition Services Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.3 Form of Pine Chip Supply Agreement (Plymouth, North Carolina) (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.4 Form of Hog Fuel Supply Agreement (Plymouth, North Carolina) (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.5 Form of Site Services Agreement (Plymouth, North Carolina) (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.6 Form of Site Services Agreement (Columbus, Mississippi) (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.7 Form of Fiber Supply Agreement (Princeton, British Columbia) (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.8 Form of Fiber Supply Agreement (Okanagan Falls, British Columbia) (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.9 Form of Fiber Supply Agreement (Kamloops, British Columbia) (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.10 Form of Fiber Supply Agreement (Carrot River and Hudson Bay) (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.11 Form of Fiber Supply Agreement (Prince Albert, Saskatchewan) (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.12 Form of Fiber Supply Agreement (White River, Ontario) (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007)

160 Exhibit Number Exhibit Description

10.13 Form of Site Services Agreement (Utilities) (Columbus, Mississippi) (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.14 Form of Site Services Agreement (Utilities) (Plymouth, North Carolina) (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.15 Pine and Hardwood Roundwood Supply Agreement (Plymouth, North Carolina) (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007) 10.16 Agreement for the Purchase and Supply of Pulp (Plymouth, North Carolina) (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007) 10.17 Pine In-Woods Chip Supply Agreement (Plymouth, North Carolina) (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007) 10.18 Pine and Amory Hardwood Roundwood Supply Agreement (Columbus, Mississippi) (incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007) 10.19 OSB Supply Agreement (Hudson Bay, Saskatchewan) (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007) 10.20 Hog Fuel Supply Agreement (Kenora, Ontario) (incorporated by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007) 10.21 Fiber Supply Agreement (Trout Lake and Wabigoon, Ontario) (incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007) 10.22 Form of Intellectual Property License Agreement (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.23 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007) 10.24 Domtar Corporation 2007 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2011)* 10.25 Domtar Corporation 2004 Replacement Long-Term Incentive Plan for Former Employees of Weyerhaeuser Company (incorporated by reference to Exhibit 10.30 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007)* 10.26 Domtar Corporation 1998 Replacement Long-Term Incentive Compensation Plan for Former Employees of Weyerhaeuser Company (incorporated by reference to Exhibit 10.31 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007)* 10.27 Domtar Corporation Replacement Long-Term Incentive Compensation Plan for Former Employees of Weyerhaeuser Company (incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007)*

161 Exhibit Number Exhibit Description

10.28 Domtar Corporation Executive Stock Option and Share Purchase Plan (applicable to eligible employees of Domtar Inc. for grants prior to March 7, 2007) (incorporated by reference to Exhibit 10.33 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007)* 10.29 Domtar Corporation Executive Deferred Share Unit Plan (applicable to members of the Management Committee of Domtar Inc. prior to March 7, 2007) (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2009)* 10.30 Domtar Corporation Deferred Share Unit Plan for Outside Directors (for former directors of Domtar Inc.) (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2009)* 10.31 Supplementary Pension Plan for Senior Executives of Domtar Corporation (for certain designated senior executives) (incorporated by reference to Exhibit 10.36 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007)* 10.32 Supplementary Pension Plan for Designated Managers of Domtar Corporation (for certain designated management employees) (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2009)* 10.33 Domtar Retention Plan (incorporated by reference to Exhibit 10.38 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007)* 10.34 Domtar Corporation Restricted Stock Plan (applicable to eligible employees of Domtar Inc. for grants prior to March 7, 2007) (incorporated by reference to Exhibit 10.39 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 9, 2007)* 10.35 Director Deferred Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2007)* 10.36 Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2007)* 10.37 Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2007)* 10.38 Senior Executive Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on May 24, 2007)* 10.39 Credit Agreement among the Company, Domtar, JPMorgan Chase Bank, N.A., as administrative agent, Morgan Stanley Senior Funding, Inc., as syndication agent, Bank of America, N.A., Royal Bank of Canada and The Bank of Nova Scotia, as co-documentation agents, and the lenders from time to time parties thereto 10.40 Indenture between Domtar Inc. and the Bank of New York dated as of July 31, 1996 relating to Domtar’s $125,000,000 9.5% debentures due 2016 (incorporated by reference to Exhibit 10.20 to the Company’s registration statement on Form 10, Amendment No. 2 filed with the SEC on January 26, 2007) 10.41 Employment Agreement of Mr. John D. Williams (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 2, 2008)* 10.42 Employment Agreement of Mr. Marvin Cooper (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2007)* 10.43 Severance Program for Management Committee Members (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2011)*

162 Exhibit Number Exhibit Description

10.44 First Amendment, dated August 13, 2008, to Credit Agreement among the Company, Domtar, JPMorgan Chase Bank, N.A., as administrative agent, Morgan Stanley Senior Funding, Inc., as syndication agent, Bank of America, N.A., Royal Bank of Canada and The Bank of Nova Scotia, as co-documentation agents, and the lenders from time to time parties thereto 10.45 DB SERP for Management Committee Members of Domtar (incorporated by reference to Exhibit 10.46 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2009)* 10.46 DC SERP for Designated Executives of Domtar (incorporated by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2009)* 10.47 Supplementary Pension Plan for Steven Barker (incorporated by reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2009)* 10.48 Form of Indemnification Agreement for members of Pension Administration Committee of Domtar Corporation (incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2009)* 10.49 Consulting Agreement of Mr. Marvin Cooper* 10.50 Retirement Agreement of Mr. Steven A. Barker* 10.51 Retirement Agreement of Mr. Gilles Pharand* 10.52 Retirement Agreement of Mr. Michel Dagenais* 10.53 Credit Agreement among the Company, Domtar Paper Company, LLC, Domtar Inc., JPMorgan Chase Bank, N.A., as administrative agent, The Bank of Nova Scotia and Bank of America, N.A. as syndication agents, CIBC Inc., Goldman Sachs Lending Partners LLC and Royal Bank of Canada, as co-documentation agents and the lenders from time to time parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the SEC on August 4, 2011) 10.54 Stock Purchase Agreement by and among Attends Healthcare Holdings, LLC, Attends Healthcare, Inc. and Domtar Corporation dated as of August 12, 2011 (incorporated by reference to Exhibit 2.1 to the Company’s Form 10-Q filed with the SEC on November 4, 2011) 12.1 Computation of Ratio of Earnings to Fixed Charges 21.1 Subsidiaries of Domtar Corporation 23 Consent of Independent Registered Public Accounting Firm 24.1 Powers of Attorney (included in signature page) 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Indicates management contract or compensatory arrangement

163 FINANCIAL STATEMENT SCHEDULE (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

For the three years ended:

Balance at beginning Charged to (Deductions) from / Balance at end of year income Additions to reserve of year $$ $ $ Allowances deducted from related asset accounts: Doubtful accounts—Accounts receivable 2011 7 2 (4) 5 2010 8 4 (5) 7 2009 11 4 (7) 8

164 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Montreal, Quebec, Canada, on February 27, 2012.

DOMTAR CORPORATION

by /s/ John D. Williams Name: John D. Williams Title: President and Chief Executive Officer

We, the undersigned directors and officers of Domtar Corporation, hereby severally constitute Zygmunt Jablonski and Razvan L. Theodoru, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

Signature Title Date

/s/ John D. Williams President and Chief Executive Officer February 27, 2012 John D. Williams (Principal Executive Officer) and Director

/s/ Daniel Buron Senior Vice-President and Chief Financial February 27, 2012 Daniel Buron Officer (Principal Financial Officer and Principal Accounting Officer)

/s/ Harold H. MacKay Director February 27, 2012 Harold H. MacKay

/s/ Jack C. Bingleman Director February 27, 2012 Jack C. Bingleman

/s/ Louis P. Gignac Director February 27, 2012 Louis P. Gignac

/s/ Brian M. Levitt Director February 27, 2012 Brian M. Levitt

/s/ David G. Maffucci Director February 27, 2012 David G. Maffucci

/s/ W. Henson Moore Director February 27, 2012 W. Henson Moore

/s/ Michael R. Onustock Director February 27, 2012 Michael R. Onustock

165 Signature Title Date

/s/ Robert J. Steacy Director February 27, 2012 Robert J. Steacy

/s/ Pamela B. Strobel Director February 27, 2012 Pamela B. Strobel

/s/ Denis Turcotte Director February 27, 2012 Denis Turcotte

166 Exhibit 12.1

Domtar Corporation Computation of ratio of earnings to fixed charges (In millions of dollars, unless otherwise noted)

Year ended Year ended Year ended Year ended Year ended December 30, December 31, December 31, December 31, December 31, 2007 2008 2009 2010 2011 $$$$$

Available earnings: Earnings (loss) before income taxes and equity earnings 99 (570) 490 448 505 Add fixed charges: Interest expense incurred 166 128 115 144 80 Amortization of debt expense and discount 5 5 10 11 7 Interest portion of rental expense 10 13 12 11 11 Total earnings (loss) as defined 280 (424) 627 614 603 Fixed charges: Interest expense incurred 166 128 115 144 80 Amortization of debt expense and discount 5 5 10 11 7 Interest portion of rental expense 10 13 12 11 11 Total fixed charges 181 146 137 166 98 Ratio of earnings to fixed charges 1.5 4.6 3.7 6.2 Deficiency in the coverage of earnings to fixed charges 570

1 Exhibit 31.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John D. Williams, certify that: 1. I have reviewed this annual report on Form 10-K of Domtar Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 27, 2012

/S/JOHN D. WILLIAMS John D. Williams President and Chief Executive Officer Exhibit 31.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel Buron, certify that: 1. I have reviewed this annual report on Form 10-K of Domtar Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 27, 2012

/S/DANIEL BURON Daniel Buron Senior Vice-President and Chief Financial Officer Exhibit 32.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies that to his knowledge, the Company’s Annual Report on Form 10-K for the period ended December 31, 2011 (the “Form 10-K”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/JOHN D. WILLIAMS John D. Williams President and Chief Executive Officer Exhibit 32.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies that to his knowledge, the Company’s Annual Report on Form 10-K for the period ended December 31, 2011 (the “Form 10-K”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/DANIEL BURON Daniel Buron Senior Vice-President and Chief Financial Officer [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] pape r because print is an art form.

pape r because learning something new deserves all your attention.

With the printed page, you can hold art in your hands, mount it on a wall, put it in your pocket, “Focus and attention are the keys to efficient and successful task completion. We need to encourage read or sing it out loud. Even create art yourself, and we are committed to keeping it that way. students to recognize that some tasks, such as studying or problem solving, are generally best Learn more at paperbecause.com. accomplished without distraction or interference.” (Cora M. Dzubak, Ph.D.) Learn more at paperbecause.com.

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print is an art form — sustainability is the only business model that will survive — learning is more rewarding on paper — the cloud can put all your files at your fingertips, just so long as you have a printer — all this social media might be making us less social — bringing in the mail is one of the few things we still all have in common — only tracking your finances online is a good way to lose track of your finances — learning something new deserves all your attention — it’s easier to learn on paper — new customers are worth much more than the price of postage — it’s one of the most recycled products on the planet — it’ll be remembered longer on paper — opening a nice envelope is surprisingly exciting

dOMtar_2011 annual report_IT’S IN OUR FIBER 18 Domtar has produced a series of videos that promote the important role paper plays in our lives. The videos rely on satire to highlight how using paper responsibly makes business sense and how it’s an environmentally sound choice.

omtar’s campaign to promote the sustainability and utility of responsible paper use continued to garner industry recognition in 2011, with channel partners also coming on board to help carry the message of paper’s enduring value in a digital age to a wider audience. DIn October 2011, the Graphic Arts Show Company (GASC) awarded the campaign its “Positively Print” honor. The Positively Print program showcases creative and effective print advocacy campaigns in the graphic communications industry. PAPERbecause also took home the Promotional Campaign of the Year–Environmental Message award at the Pulp and Paper International (PPI) Awards 2011 ceremony held in Brussels, Belgium in November. The award recognized the campaign’s featured short films and print ads for their use of humor to engage audiences.

These awards add to a long list of honors that PAPERbecause had received in its 2010 launch year. This included Best in Show at the ACE Awards, Best of Category in the Business Marketing Association’s B2 Awards, a NAMMU 2010 Environmental Award, as well as recognition from both the Association of Independent Creative Editors and the Printing Industry of the Carolinas.

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19 dOMtar_2011 annual report_IT’S IN OUR FIBER dOMtar cOrpOratiOn recOnciliatiOn OF nOn-gaap Financial MeaSureS (In millions of dollars, unless otherwise noted) The following table sets forth certain non-U.S. generally accepted The Company calculates “Earnings before items” and “EBITDA before accounting principles (“GAAP”) financial metrics identified in bold items” by excluding the after-tax (pre-tax) effect of items considered as “Earnings before items”, “Earnings before items per diluted share”, by management as not reflecting our current operations. Management “EBITDA”, “EBITDA margin”, “EBITDA before items”, “EBITDA margin uses these measures, as well as “EBITDA” and “Free cash flow”, to before items”, “Free cash flow”, “Net debt” and “Net debt-to-total focus on ongoing operations and believes that it is useful to investors capitalization.” Management believes that the financial metrics because it enables them to perform meaningful comparisons between presented are frequently used by investors and are useful to evaluate periods. Domtar believes that using this information along with our ability to service debt and our overall credit profile. Management Net earnings provides for a more complete analysis of the results believes these metrics are also useful to measure the operating of operations. Net earnings and Cash flow provided from operating performance and benchmark with peers within the industry. These activities are the most directly comparable GAAP measures. metrics are presented as a complement to enhance the understanding of operating results but not in substitution for GAAP results.

2009 2010 2011 Reconciliation of “Earnings before items” to Net earnings Net earnings ($) 310 605 365 (–) Alternative fuel tax credits ($) (336) (18) – (–) Cellulose biofuel producer credits ($) – (127) – (–) Reversal of valuation allowance on Canadian deferred income tax balances ($) – (100) – (+) Impairment and write-down of PP&E1 ($) 43 34 53 (+) Closure and restructuring costs ($) 44 20 33 (–) Net losses (gains) on disposals of PP&E1 and sale of businesses ($) (9) 29 (3) (+) Impact of purchase accounting ($) –– 1 (+) Loss (gain) on repurchase of long-term debt ($) (6) 28 3 (=) Earnings before items ($) 46 471 452 ( / ) Weighted avg. number of common and exchangeable shares outstanding (diluted) (millions) 43.2 43.2 40.2 (=) Earnings before items per diluted share ($) 1.06 10.90 11.24

Reconciliation of “EBITDA” and “EBITDA before items” to Net earnings Net earnings ($) 310 605 365 (+) Equity loss, net of taxes ($) –– 7 (+) Income tax expense (benefit) ($) 180 (157) 133 (+) Interest expense, net ($) 125 155 87 (=) Operating income ($) 615 603 592 (+) Depreciation and amortization ($) 405 395 376 (+) Impairment and write-down of PP&E1 ($) 62 50 85 (–) Net losses (gains) on disposals of PP&E1 and sale of businesses ($) (7) 33 (6) (=) EBITDA ($) 1,075 1,081 1,047 ( / ) Sales ($) 5,465 5,850 5,612 (=) EBITDA margin (%) 20% 18% 19% EBITDA ($) 1,075 1,081 1,047 (–) Alternative fuel tax credits ($) (498) (25) – (+) Closure and restructuring costs ($) 63 27 52 (+) Impact of purchase accounting ($) –– 1 (=) EBITDA before items ($) 640 1,083 1,100 (/) Sales ($) 5,465 5,850 5,612 (=) EBITDA margin before items (%) 12% 19% 20%

Reconciliation of “Free cash flow” to Cash flow provided from operating activities Cash flow provided from operating activities ($) 792 1,166 883 (–) Additions to property, plant and equipment ($) (106) (153) (144) (=) Free cash flow ($) 686 1,013 739

1 PP&E: Property, plant and equipment

dOMtar_2011 annual report_IT’S IN OUR FIBER 2020 (continued) 2009 2010 2011

“Net debt-to-total capitalization” computation Bank indebtedness ($) 43 23 7 (+) Long-term debt due within one year ($) 11 2 4 (+) Long-term debt ($) 1,701 825 837 (=) Debt ($) 1,755 850 848 (–) Cash and cash equivalents ($) (324) (530) (444) (=) Net debt ($) 1,431 320 404 (+) Shareholders’ equity ($) 2,662 3,202 2,972 (=) Total capitalization ($) 4,093 3,522 3,376 Net debt ($) 1,431 320 404 ( / ) Total capitalization ($) 4,093 3,522 3,376 (=) Net debt-to-total capitalization (%) 35% 9% 12%

“Earnings before items”, “Earnings before items per diluted share”, “EBITDA”, “EBITDA margin”, “EBITDA before items”, “EBITDA margin before items”, “Free cash flow”, “Net debt” and “Net debt-to-total capitalization” 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 or as a substitute for Net earnings, Operating income or any other earnings statement, cash flow statement or balance sheet financial information prepared in accordance with GAAP. It is important for readers to understand that certain items may be presented in different lines by different companies on their financial statements thereby leading to different measures for different companies. recOnciliatiOn OF nOn-gaap Financial MeaSureS by SegMent (In millions of dollars, unless otherwise noted) The following table sets forth certain non-U.S. generally accepted The Company calculates the segmented “Operating income (loss) accounting principles (“GAAP”), financial metrics identified in bold before items” by excluding the pre-tax effect of items considered by as “Operating income (loss) before items”, “EBITDA before items” and management as not reflecting our ongoing operations. Management “EBITDA margin before items” by reportable segment. Management uses these measures to focus on ongoing operations and believes believes that the financial metrics presented are frequently used that it is useful to investors because it enables them to perform by investors and are useful to measure the operating performance meaningful comparisons between periods. Domtar believes that using and benchmark with peers within the industry. These metrics this information along with Operating income (loss) provides for a more are presented as a complement to enhance the understanding of complete analysis of the results of operations. Operating income (loss) operating results but not in substitution for GAAP results. by segment is the most directly comparable GAAP measure.

Pulp and Paper Distribution Personal Care1 Corporate 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 Reconciliation of Operating income (loss) to “Operating income (loss) before items” Operating income (loss) ($) 650 667 581 7 (3) – –– 7 – (7) 4 (–) Alternative fuel tax credits ($) (498) (25) – –– – ––––– – (+) Impairment and write-down of PP&E2 ($) 62 50 85 –– – ––––– – (+) Closure and restructuring costs ($) 52 26 51 2 1 1 ––––– – (–) Net losses (gains) on disposals of PP&E2 and sale of businesses ($) 4 (17) 3 –– (3) ––– (3) 2 (6) (+) Impact of purchase accounting ($) –– – –– – –– 1 –– – (=) Operating income (loss) before items ($) 270 701 720 9 (2) (2) –– 8 (3) (5) (2)

Reconciliation of “Operating income (loss) before items” to “EBITDA before items” Operating income (loss) before items ($) 270 701 720 9 (2) (2) –– 8 (3) (5) (2) (+) Depreciation and amortization ($) 382 381 368 3 4 4 – – 4 – – – (=) EBITDA before items ($) 652 1,082 1,088 12 2 2 –– 12 (3) (5) (2) (/) Sales ($) 4,632 5,070 4,953 873 870 781 –– 71 –– – (=) EBITDA margin before items (%) 14% 21% 22% 1% – – –– 17% –– –

“Operating income (loss) before items”, “EBITDA before items” and “EBITDA margin before 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 or as a substitute for Operating income (loss) or any other earnings statement, cash flow statement or balance sheet financial information prepared in accordance with GAAP. It is important for readers to understand that certain items may be presented in different lines by different companies on their financial statements thereby leading to different measures for different companies. 1 On September 1, 2011, the Company acquired 100% of the shares of Attends Healthcare, Inc. 2 PP&E: Property, plant and equipment

2121 dOMtar_2011 annual report_IT’S IN OUR FIBER SharehOlder inFOrMatiOn dividend policy 2012 tentative earnings calendar Subject to approval by its Board of Directors, Domtar pays a quarterly dividend on its common stock (NYSE: UFS) (TSX: UFS) and on its exchangeable shares (TSX: UFX) First Quarter: to stockholders of record on the 15th day of March, June, September and December. Thursday, April 26, 2012

Second Quarter: dividend history Friday, July 27, 2012

Year ended 2011 Third Quarter: Declared Record Date Payable Date Amount Thursday, October 25, 2012 Nov. 2, 2011 Dec. 15, 2011 Jan. 17, 2012 US$0.35 Fourth Quarter: Aug. 3, 2011 Sept. 15, 2011 Oct. 17, 2011 US$0.35 Friday, February 1, 2013 May 4, 2011 June 15, 2011 July 15, 2011 US$0.35 Feb. 23, 2011 March 15, 2011 April 15, 2011 US$0.25

Shareholder Services Stock exchange information annual Meeting

For shareholder related services, Domtar Corporation common stock is Domtar Annual Meeting of Stockholders including estate settlement, lost stock traded on the New York Stock Exchange May 2, 2012, Montreal, Quebec certificates, change of name or address, and on the Toronto Stock Exchange Montreal Museum of Fine Arts stock transfers and duplicate mailings, under the symbol “UFS” . Domtar Claire and Marc Bourgie Pavilion please contact the transfer agent at: (Canada) Paper Inc. exchangeable 1339 Sherbrooke Street West shares are traded on the Toronto Stock Computershare Investor Services Montreal, QC H3G 1J5 Canada Exchange under the symbol “UFX” . P.O. Box 43078 Providence, RI 02940-3078 Toll Free: 1-877-282-1168 requests for information Outside of U.S.: 781- 575-2723 www.computershare.com For additional copies of the Annual Report or other financial information, Canadian shareholders should contact please contact: the transfer agent at: Corporate Communications and Computershare Investor Services Inc. Investor Relations Department 100 University Avenue, 9th Floor Domtar Corporation Toronto, ON M5J 2Y1 Canada 395 de Maisonneuve Blvd. West Toll Free: 1-866-245-4053 Montreal, QC H3A 1L6 Canada Fax: 1-888-453-0330 Tel.: 514-848-5555 [email protected] Voice Recognition: “Investor Relations” SEDAR™ files should be sent to: Email: [email protected] [email protected] Website www.domtar.com

Electronic versions of this Annual Report, SEC filings and other company publications are available through the corporate website.

dOMtar_2011 annual report_IT’S IN OUR FIBER 22 Production notes

Paper

Cover printed on 80 lb. Cougar® Cover, Smooth Finish, FSC® certified

Insert printed on 60 lb. Cougar® Text, Smooth Finish, FSC® certified

Printing

Cover and insert printed with UV inks on a Heidelberg Speedmaster 6-color CD 102 press with in line coater and full inter-deck and end of press extended delivery UV drying systems.

10%

Domtar is pleased to make an annual contribution of $350,000 to WWF from the sale of EarthChoice® products.

®WWF Registered Trademark. Panda Symbol © 1986 WWF. © 1986 Panda symbol WWF-World Wide Fund for Nature (also known as World Wildlife Fund). ®“WWF” is a WWF Registered Trademark. domtar.com

On the cOver: Meagan Walker, Senior Process Engineer, Ashdown, Arkansas is holding an image of a papercut tapestry produced by artist Kevin Jay Stanton on Domtar Cougar® paper entitled “The Fiber of Domtar”. This visual representation articulates Domtar’s vision, mission and values, and depicts the roots of our legacy and our aspiration to build on the fiber of our people. Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

¨ 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 001-33164

DOMTAR CORPORATION (Exact name of registrant as specified in its charter)

DELAWARE 20-5901152 (State of Incorporation) (I.R.S. Employer Identification No.) 395 de Maisonneuve West, Montreal, Quebec H3A 1L6 Canada (Address of principal executive offices) (zip code)

(514) 848-5555 (Registrant’s telephone number)

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. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer x Accelerated filer ¨

Non-accelerated filer ¨ (do not check if a smaller reporting company) Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

At October 31, 2012, 34,646,777 shares of the issuer’s voting common stock were outstanding.

Table of Contents

DOMTAR CORPORATION FORM 10-Q For the Quarterly Period Ended September 30, 2012 INDEX

PART I. FINANCIAL INFORMATION 3

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 3

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME 3

CONSOLIDATED BALANCE SHEETS 4

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY 5

CONSOLIDATED STATEMENTS OF CASH FLOWS 6

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 45

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 64

ITEM 4. CONTROLS AND PROCEDURES 66

PART II OTHER INFORMATION 66

ITEM 1. LEGAL PROCEEDINGS 66

ITEM 1A. RISK FACTORS 66

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 67

ITEM 3. DEFAULT UPON SENIOR SECURITIES 67

ITEM 4. MINE SAFETY DISCLOSURES 67

ITEM 5. OTHER INFORMATION 67

ITEM 6. EXHIBITS 68 Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) DOMTAR CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

For the three For the nine months ended months ended

September 30, September 30, September 30, September 30, 2012 2011 2012 2011 (Unaudited) $ $ $ $ Sales 1,389 1,417 4,155 4,243 Operating expenses Cost of sales, excluding depreciation and amortization 1,100 1,055 3,263 3,132 Depreciation and amortization 96 93 289 281 Selling, general and administrative 80 75 268 253 Impairment and write-down of property, plant and equipment (NOTE 11) — 8 2 73 Closure and restructuring costs (NOTE 11) 2 1 3 14 Other operating loss (income), net (NOTE 7) 2 (2) 6 (3) 1,280 1,230 3,831 3,750 Operating income 109 187 324 493 Interest expense, net (NOTE 12) 20 25 109 67 Earnings before income taxes and equity earnings 89 162 215 426 Income tax expense 22 45 57 122 Equity loss, net of taxes 1 — 5 — Net earnings 66 117 153 304 Per common share (in dollars) (NOTE 5) Net earnings Basic 1.85 2.96 4.21 7.43 Diluted 1.84 2.95 4.20 7.38 Weighted average number of common and exchangeable shares outstanding (millions) Basic 35.7 39.5 36.3 40.9 Diluted 35.8 39.7 36.4 41.2 Net earnings 66 117 153 304 Other comprehensive income (loss) (NOTE 2): Net derivative gains (losses) on cash flow hedges: Net gains (losses) arising during the period, net of tax of $2 and $2, respectively (2011 - $7 and $5, respectively) 6 (17) 6 (12) Less: Reclassification adjustment for (gains) losses included in net earnings, net of tax of $1 and $4, respectively (2011 - $1 and nil, respectively) 2 (1) 7 (3) Foreign currency translation adjustments 47 (89) 32 (56) Change in unrecognized gains (losses) and prior cost related to pension and post-retirement benefit plans, net of tax of $(3) and $(3) (2011 - nil and $(5)) (5) — (5) 16 Other comprehensive income (loss) 50 (107) 40 (55) Comprehensive income 116 10 193 249

The accompanying notes are an integral part of the consolidated financial statements.

3 Table of Contents

DOMTAR CORPORATION CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

At September 30, December 31, 2012 2011 (Unaudited) $ $ Assets Current assets Cash and cash equivalents 593 444 Receivables, less allowances of $5 and $5 674 644 Inventories (NOTE 8) 663 652 Prepaid expenses 34 22 Income and other taxes receivable 44 47 Deferred income taxes 124 125 Total current assets 2,132 1,934 Property, plant and equipment, at cost 8,794 8,448 Accumulated depreciation (5,330) (4,989) Net property, plant and equipment 3,464 3,459 Goodwill (NOTE 9) 261 163 Intangible assets, net of amortization (NOTE 10) 347 204 Other assets 115 109 Total assets 6,319 5,869 Liabilities and shareholders’ equity Current liabilities Bank indebtedness 15 7 Trade and other payables 682 688 Income and other taxes payable 16 17 Long-term debt due within one year (NOTE 12) 7 4 Total current liabilities 720 716 Long-term debt (NOTE 12) 1,196 837 Deferred income taxes and other 997 927 Other liabilities and deferred credits 402 417 Commitments and contingencies (NOTE 14) Shareholders’ equity Common stock $0.01 par value; authorized 2,000,000,000 shares; issued: 42,514,796 and 42,506,732 shares — — Treasury stock (NOTE 13) $0.01 par value; 7,760,573 and 6,375,532 shares — — Exchangeable shares No par value; unlimited shares authorized; issued and held by nonaffiliates: 616,914 and 619,108 shares 49 49 Additional paid-in capital 2,210 2,326 Retained earnings 779 671 Accumulated other comprehensive loss (34) (74) Total shareholders’ equity 3,004 2,972 Total liabilities and shareholders’ equity 6,319 5,869

The accompanying notes are an integral part of the consolidated financial statements.

4 Table of Contents

DOMTAR CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

Issued and outstanding common and exchangeable Accumulated Total shares Additional other shareholders (millions of Exchangeable paid-in Retained comprehensive ’ shares) shares capital earnings loss equity (Unaudited) $ $ $ $ $ Balance at December 31, 2011 36.8 49 2,326 671 (74) 2,972 Stock-based compensation — — 4 — — 4 Net earnings — — — 153 — 153 Net derivative gains on cash flow hedges: Net gain arising during the period, net of tax of $2 — — — — 6 6 Less: Reclassification adjustments for losses included in net earnings, net of tax of $4 — — — — 7 7 Foreign currency translation adjustments — — — — 32 32 Amortization of unrecognized losses and prior service cost related to pension and post retirement benefit plans, net of tax of $(3) — — — — (5) (5) Stock repurchase (1.5) — (120) — — (120) Cash dividends — — — (45) — (45) Balance at September 30, 2012 35.3 49 2,210 779 (34) 3,004

The accompanying notes are an integral part of the consolidated financial statements.

5 Table of Contents

DOMTAR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

For the nine months ended September 30, September 30, 2012 2011 (Unaudited) $ $ Operating activities Net earnings 153 304 Adjustments to reconcile net earnings to cash flows from operating activities Depreciation and amortization 289 281 Deferred income taxes and tax uncertainties 13 56 Impairment and write-down of property, plant and equipment 2 73 Loss on repurchase of long-term debt and debt restructuring costs — 4 Net gains on disposals of property, plant and equipment and sale of business — (5) Stock-based compensation expense 3 3 Equity loss, net 5 — Other (11) — Changes in assets and liabilities, excluding the effects of acquisition and sale of businesses Receivables (1) (56) Inventories 20 20 Prepaid expenses (7) (4) Trade and other payables (80) 4 Income and other taxes 6 27 Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense 7 (7) Other assets and other liabilities 12 11 Cash flows provided from operating activities 411 711 Investing activities Additions to property, plant and equipment (171) (64) Proceeds from disposals of property, plant and equipment — 34 Proceeds from sale of business — 10 Acquisition of businesses, net of cash acquired (293) (288) Investment in joint venture (5) — Cash flows used for investing activities (469) (308) Financing activities Dividend payments (42) (36) Net change in bank indebtedness 8 (7) Issuance of long-term debt 548 — Repayment of long-term debt (190) (17) Debt issue and tender offer costs — (7) Stock repurchase (116) (415) Other (1) 10 Cash flows provided from (used for) financing activities 207 (472) Net increase (decrease) in cash and cash equivalents 149 (69) Translation adjustments related to cash and cash equivalents — — Cash and cash equivalents at beginning of period 444 530 Cash and cash equivalents at end of period 593 461 Supplemental cash flow information Net cash payments for: Interest (including $47 million of tender offer premiums in 2012) 92 51 Income taxes paid 60 42

The accompanying notes are an integral part of the consolidated financial statements.

6 Table of Contents

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 BASIS OF PRESENTATION 8

NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS 9

NOTE 3 ACQUISITION OF BUSINESSES 10

NOTE 4 DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT 12

NOTE 5 EARNINGS PER SHARE 18

NOTE 6 PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS 19

NOTE 7 OTHER OPERATING LOSS (INCOME), NET 21

NOTE 8 INVENTORIES 22

NOTE 9 GOODWILL 23

NOTE 10 INTANGIBLE ASSETS 24

NOTE 11 CLOSURE AND RESTRUCTURING COSTS AND LIABILITY 25

NOTE 12 LONG-TERM DEBT 27

NOTE 13 SHAREHOLDERS’ EQUITY 29

NOTE 14 COMMITMENTS AND CONTINGENCIES 30

NOTE 15 SEGMENT DISCLOSURES 34

NOTE 16 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION 36

7 Table of Contents

DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed in the Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Results for the first nine months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission. The December 31, 2011 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

To conform with the basis of presentation adopted in the current period, certain figures previously reported in the Statements of Cash Flows have been reclassified.

8 Table of Contents

DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING CHANGES IMPLEMENTED COMPREHENSIVE INCOME In June 2011, the Financial Accounting Standards Board (“FASB”) issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. The Company adopted the new requirement on January 1, 2012 with no impact on the Company’s consolidated financial statements except for the change in presentation. The Company has chosen to present a single continuous statement of comprehensive income.

FUTURE ACCOUNTING CHANGES INTANGIBLES—GOODWILL AND OTHER In July 2012, the FASB issued an update to Intangibles – Goodwill and Other, which simplifies how entities test indefinite-lived intangible assets for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If the entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, then it is required to perform the quantitative impairment test.

The amended provisions are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. This amendment impacts impairment testing steps only, and therefore adoption is not expected to have an impact on the Company’s consolidated financial position, results of operations or cash flows.

9 Table of Contents

DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 3. ACQUISITION OF BUSINESSES EAM Corporation On May 10, 2012, the Company completed the acquisition of 100% of the outstanding shares of EAM Corporation (“EAM”). EAM manufactures high quality airlaid and ultrathin laminated absorbent cores used in feminine hygiene, adult incontinence, baby diapers, and other medical healthcare and performance packaging solutions. EAM operates a manufacturing, research and development and distribution facility in Jesup, Georgia. EAM has 54 employees. The results of EAM’s operations have been included in the consolidated financial statements since May 1, 2012, the effective time of the transaction, and are presented in the Personal Care reportable segment. The purchase price was $61 million in cash, including working capital, net of cash acquired of $1 million. The acquisition was accounted for as a business combination under the acquisition method of accounting, in accordance with the Business Combinations Topic of FASB Accounting Standards Codification (“ASC”).

The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s preliminary estimates of their fair value, which was based on information currently available. During the third quarter of 2012, the Company completed the evaluation of all assets and liabilities. The Company is still reviewing the expected useful lives of intangible assets.

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition Receivables 6 Inventory 2 Property, plant and equipment 13 Intangible assets (Note 10) Customer relationships (1) 19 Technology (2) 8 Non-compete (3) 1 28 Goodwill (Note 9) 31 Total assets 80

Less: Liabilities Trade and other payables 4 Deferred income tax liabilities and unrecognized tax benefits 15 Total liabilities 19

Fair value of net assets acquired at the date of acquisition 61

(1) The useful life of the Customer relationships acquired is expected to be 30 years. (2) The useful life of the Technology acquired is between 7 and 20 years. (3) The useful life of the Non-compete acquired is expected to be 9 years.

10 Table of Contents

DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 3. ACQUISITION OF BUSINESSES (CONTINUED) Attends Healthcare Limited On March 1, 2012, the Company completed the acquisition of 100% of the outstanding shares of Attends Healthcare Limited (“Attends Europe”). Attends Europe manufactures and supplies adult incontinence care products in Europe. Attends Europe operates a manufacturing, research and development and distribution facility in Aneby, Sweden and also operates distribution centers in Scotland and Germany. Attends Europe has approximately 456 employees. The results of Attends Europe’s operations have been included in the consolidated financial statements since March 1, 2012, and are presented in the Personal Care reportable segment. The purchase price was $232 million (€ 173 million) in cash, including working capital, net of acquired cash of $4 million (€ 3 million). The acquisition was accounted for as a business combination under the acquisition method of accounting, in accordance with the Business Combinations Topic of FASB ASC.

The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which was based on information currently available. During the second quarter of 2012, the Company completed the evaluation of all assets and liabilities. The Company is still reviewing the useful lives of intangible assets.

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition Receivables 21 Inventory 22 Property, plant and equipment 67 Intangible assets (Note 10) Trade names (1) 54 Customer relationships (2) 71 125 Goodwill (Note 9) 71 Total assets 306

Less: Liabilities Trade and other payables 27 Capital lease obligation 6 Deferred income tax liabilities and unrecognized tax benefits 38 Pension 3 Total liabilities 74

Fair value of net assets acquired at the date of acquisition 232

(1) Indefinite useful life. (2) The useful life of the Customer relationships acquired is expected to be 30 years.

For both acquisitions, goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is attributable to the general reputation of the business, the assembled workforce, and the expected future cash flows of the business. Disclosed goodwill is not deductible for tax purposes. Pro forma results have not been provided, as these acquisitions have no material impact on the Company.

11 Table of Contents

DOMTAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT INTEREST RATE RISK The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, its bank indebtedness, its bank credit facility and its long-term debt. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts.

CREDIT RISK The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As at September 30, 2012, one of Domtar’s Paper segment customers located in the United States represented 10% ($66 million) ((2011 – 9% ($58 million)) of the Company’s receivables.

The Company is also exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company minimizes this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored. Additionally, the Company is exposed to credit risk in the event of non-performance by its insurers. The Company minimizes this exposure by doing business only with large reputable insurance companies.

COST RISK Cash flow hedges: The Company purchases natural gas at the prevailing market price at the time of delivery. In order to manage the cash flow risk associated with purchases of natural gas, the Company may utilize derivative financial instruments or physical purchases to fix the price of forecasted natural gas purchases. The Company formally documents the hedge relationships, including identification of the hedging instruments and the hedged items, the risk management objectives and strategies for undertaking the hedge transactions, and the methodologies used to assess effectiveness and measure ineffectiveness. Current contracts are used to hedge forecasted purchases over the next five years. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Accumulated other comprehensive loss within Shareholders’ equity, and is recognized in Cost of sales in the period in which the hedged transaction occurs.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of September 30, 2012 to hedge forecasted purchases:

Notional contractual Notional contractual value quantity under derivative Percentage of forecasted under derivative contracts purchases under derivative Commodity contracts (in millions of dollars) contracts for 2012 2013 2014 2015 2016 Natural gas 12,180,000 MMBTU(1) $ 53 36% 27% 25% 14% 12%

(1) MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective for accounting purposes as of September 30, 2012. The critical terms of hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings and Other comprehensive income (loss) for the three and nine months ended September 30, 2012 resulting from hedge ineffectiveness (three and nine months ended September 30, 2011 – nil).

FOREIGN CURRENCY RISK Cash flow hedges: The Company has manufacturing operations in the United States, Canada, Sweden and China. As a result, it is exposed to movements in foreign currency exchange rates in Canada, Europe and Asia. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. As a result, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar and of other European currencies relative to the U.S. dollar. The Company’s Swedish subsidiary is exposed to movements in foreign currency exchange rates on transactions denominated in a different currency than its Euro functional currency. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to five years. The Company may use derivative instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates or to designate them as hedging instruments in order to hedge the subsidiary’s cash flow risk for purposes of the consolidated financial statements.

The Company formally documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. Foreign exchange currency options contracts used to hedge forecasted purchases in Canadian dollars by the Canadian subsidiary and forecasted sales in British Pound Sterling and forecasted purchases in U.S. dollars by the Swedish subsidiary are designated as cash flow hedges. Current contracts are used to hedge forecasted sales or purchases over the next 12 months. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Other comprehensive income (loss) and is recognized in Cost of sales or in Sales in the period in which the hedged transaction occurs.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Net investment hedge: The Company uses foreign exchange currency option contracts to hedge the net assets of Attends Europe to offset the foreign currency translation and economic exposures related to its investment in the subsidiary. The Company is exposed to movements in foreign currency exchange rates of the Euro versus the U.S. dollar as Attends Europe has a Euro functional currency whereas the Company has a U.S. dollar functional and reporting currency. Current contracts are used to hedge the net investment over the next five months. The effective portion of changes in the fair value of derivative contracts designated as net investment hedges is recorded in Other comprehensive income (loss) as part of the Foreign currency translation adjustments.

The following table presents the currency values under contracts pursuant to currency options outstanding as of September 30, 2012 to hedge forecasted purchases, forecasted sales and the net investment:

Percentage of forecasted net exposures under Contract Notional contractual value contracts for 2012 2013 Currency options purchased CDN $ 425 50% 37% EUR € 176 97% 97% USD $ 29 100% 69% GBP £ 18 100% 62%

Currency options sold CDN $ 425 50% 37% EUR € 76 42% 42% USD $ 29 100% 69% GBP £ 18 100% 62% The currency options are fully effective as at September 30, 2012. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive income for the three and nine months ended September 30, 2012 resulting from hedge ineffectiveness (three and nine months ended September 30, 2011 – nil).

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The Effect of Derivative Instruments on the Consolidated Statements of Earnings and Comprehensive Income and Consolidated Statement of Shareholders’ Equity, Net of Tax

Derivatives Designated as Cash Flow and Net Investment Gain (Loss) Recognized in Gain (Loss) Reclassified from Hedging Instruments Other comprehensive Other comprehensive income (loss) under the Derivatives and Hedging income (loss) on Derivatives into Income Topic of FASB ASC (Effective Portion) (Effective Portion) For the three months ended For the three months ended September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 $ $ $ $ Natural gas swap contracts (a) 2 (2) (1) — Currency options (b) 5 (15) (1) 1 Net Investment Hedge (c) (1) — — — Total 6 (17) (2) 1

Derivatives Designated as Cash Flow and Net Investment Gain (Loss) Recognized in Gain (Loss) Reclassified from Hedging Instruments Other comprehensive Other comprehensive income (loss) under the Derivatives and Hedging income (loss) on Derivatives into Income Topic of FASB ASC (Effective Portion) (Effective Portion) For the nine months ended For the nine months ended September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 $ $ $ $ Natural gas swap contracts (a) — (3) (5) (3) Currency options (b) 7 (9) (2) 6 Net Investment Hedge (c) (1) — — — Total 6 (12) (7) 3

(a) The Gain (Loss) reclassified from Other comprehensive income (loss) into Income (Effective Portion) is recorded in Cost of Sales. (b) The Gain (Loss) reclassified from Other comprehensive income (loss) into Income (Effective Portion) is recorded in Cost of Sales or Sales. (c) Gains and losses from the settlements of the Company’s net investment hedge remain in Other comprehensive income (loss) until partial or complete liquidation of the net investment.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

FAIR VALUE MEASUREMENT The accounting standards for fair value measurement and disclosures, establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.

Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (c) below) at September 30, 2012 and December 31, 2011, in accordance with the accounting standards dealing with fair value measurement and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair Value of financial instruments at:

Derivatives designated as cash flow Quoted prices in and net investment hedging active Significant Significant instruments under the Derivatives markets for observable unobservable September 30, identical assets inputs inputs and Hedging Topic of FASB ASC: 2012 (Level 1) (Level 2) (Level 3) Balance sheet classification $ $ $ $ Asset derivatives Currency options 11 — 11 — (a) Prepaid expenses Natural gas swap contracts 2 — 2 — (a) Intangible assets and Deferred Charges Total Assets 13 — 13 — Liabilities derivatives Currency options 4 — 4 — (a) Trade and other payables Natural gas swap contracts 4 — 4 — (a) Trade and other payables Natural gas swap contracts 1 — 1 — (a) Other liabilities and deferred credits Total Liabilities 9 — 9 — Other Instruments Asset backed commercial paper investments 6 — — 6 (b) Other assets Long-term debt 1,360 1,360 — — (c) Long-term debt

The cumulative loss recorded in Other comprehensive income (loss) relating to natural gas contracts of $3 million at September 30, 2012, of which $4 million will be recognized in Cost of sales over the next 12 months and the remaining gain of $1 million upon maturity of the derivatives at the then prevailing values, which may be different from those at September 30, 2012.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The cumulative gain recorded in Other comprehensive income (loss) relating to currency options hedging forecasted purchases of $7 million at September 30, 2012, will be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at September 30, 2012.

Fair Value of financial instruments at:

Derivatives designated as cash flow Quoted prices in and net investment hedging active Significant Significant instruments under the Derivatives markets for observable unobservable December 31, identical assets inputs inputs and Hedging Topic of FASB ASC: 2011 (Level 1) (Level 2) (Level 3) Balance sheet classification $ $ $ $ Asset derivatives Currency options 7 — 7 — (a) Prepaid expenses Total Assets 7 — 7 — Liabilities derivatives Currency options 11 — 11 — (a) Trade and other payables Natural gas swap contracts 8 — 8 — (a) Trade and other payables Natural gas swap contracts 3 — 3 — (a) Other liabilities and deferred credits Total Liabilities 22 — 22 — Other Instruments Asset backed commercial paper investments 5 — — 5 (b) Other assets Long-term debt 992 992 — — (c) Long-term debt

(a) Fair value of the Company’s derivatives is classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows:

– For currency options: Fair value is measured using techniques derived from the Black-Scholes pricing model. Interest rates, forward market rates

and volatility are used as inputs for such valuation techniques.

– For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates.

(b) Fair value of asset backed commercial paper (“ABCP”) investments is classified under Level 3 and is mainly based on a discounted cash flow financial model incorporating uncertainties regarding return, credit spreads, the nature and credit risk of underlying assets, the amounts and timing of cash inflows and the limited market for the notes at September 30, 2012 and December 31, 2011.

(c) Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. In accordance with US GAAP, the Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at September 30, 2012 and December 31, 2011. However, fair value disclosure is required. The carrying value of the Company’s long-term debt is $1,203 million and $841 million at September 30, 2012 and December 31, 2011, respectively.

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, receivables, bank indebtedness, trade and other payables and income and other taxes approximate their fair values.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 5. EARNINGS PER SHARE The following table provides the reconciliation between basic and diluted earnings per share:

For the three For the nine months ended months ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Net earnings $ 66 $ 117 $ 153 $ 304 Weighted average number of common and exchangeable shares outstanding (millions) 35.7 39.5 36.3 40.9 Effect of dilutive securities (millions) 0.1 0.2 0.1 0.3 Weighted average number of diluted common and exchangeable shares outstanding (millions) 35.8 39.7 36.4 41.2 Basic net earnings per share (in dollars) $ 1.85 $ 2.96 $ 4.21 $ 7.43 Diluted net earnings per share (in dollars) $ 1.84 $ 2.95 $ 4.20 $ 7.38

The following table provides the securities that could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive:

For the three For the nine months ended months ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 Restricted stock units 15,802 — — — Performance Stock Units 7,231 — — — Options 177,970 189,381 84,625 146,930

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS DEFINED CONTRIBUTION PLANS The Company has several defined contribution plans and multi-employer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and nine months ended September 30, 2012, the related pension expense was $4 million and $19 million, respectively (2011 - $5 million and $18 million, respectively).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS The Company has several defined benefit pension plans covering approximately 80% of the employees. The defined benefit plans are generally contributory in Canada and non-contributory in the United States. Non-unionized employees in Canada joining the Company after June 1, 2000 participate in defined contribution plans. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Also, starting on January 1, 2013, all U.S. unionized employees covered under the agreement with the United Steel Workers not grandfathered under the existing defined benefit pension plans will transition to a defined contribution pension plan for future service. The Company also provides other post-retirement plans to eligible Canadian and U.S. employees; the plans are unfunded and include life insurance programs, medical and dental benefits. The Company also provides supplemental unfunded benefit pension plans to certain senior management employees.

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans

For the three months ended For the nine months ended September 30, 2012 September 30, 2012 Other Other Pension post-retirement Pension post-retirement plans benefit plans plans benefit plans $ $ $ $ Service cost 10 — 29 2 Interest expense 20 1 60 4 Expected return on plan assets (23) (69) Amortization of net actuarial loss 4 1 13 1 Curtailment gain (a) — (13) — (13) Settlement loss — — — — Amortization of prior year service costs 1 — 3 (1) Net periodic benefit cost 12 (11) 36 (7)

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans

For the three months ended For the nine months ended September 30, 2011 September 30, 2011 Other Other Pension post-retirement Pension post-retirement plans benefit plans plans benefit plans $ $ $ $ Service cost 9 — 26 2 Interest expense 21 2 65 5 Expected return on plan assets (26) — (78) — Amortization of net actuarial loss 3 — 10 — Curtailment loss (a) — — 13 — Settlement loss (b) — — 23 — Amortization of prior year service costs 1 — 2 (1) Net periodic benefit cost 8 2 61 6

(a) The curtailment gain of $13 million in the other post-retirement benefit plans for the three and nine months ended September 30, 2012, is as a result of the curtailment of benefits related to the majority of employees covered by the plan. The curtailment loss of $13 million in the pension plans for the nine months ended September 30, 2011 is related to the sale of Prince Albert. (b) The settlement loss of $23 million in the pension plans for the nine months ended September 30, 2011, is related to the sale of assets of Prince Albert.

The Company contributed $10 million and $29 million for the three and nine months ended September 30, 2012, respectively (2011—$16 million and $33 million, respectively) to the pension plans. The Company also contributed $2 million and $6 million for the three and nine months ended September 30, 2012, respectively (2011 - $1 million and $5 million, respectively) to the other post-retirement benefit plans.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 7. OTHER OPERATING LOSS (INCOME), NET Other operating loss (income) is an aggregate of both recurring and occasional loss or income items and, as a result, can fluctuate from period to period. The Company’s other operating loss (income), net includes the following:

Three months ended Nine months ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 $ $ $ $ Gains on sale of property, plant and equipment — (4) — (5) Environmental provision — 3 2 3 Foreign exchange loss (gain) 1 (3) 3 (4) Other 1 2 1 3 Other operating loss (income), net 2 (2) 6 (3)

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 8. INVENTORIES The following table presents the components of inventories:

September 30, December 31, 2012 2011 $ $ Work in process and finished goods 362 363 Raw materials 112 105 Operating and maintenance supplies 189 184 Total Inventories 663 652

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 9. GOODWILL The carrying value and any changes in the carrying value of goodwill are as follows:

$ Balance at December 31, 2011 163 Acquisition of Attends Healthcare Limited 71 Acquisition of EAM Corporation 31 Effect of foreign currency exchange rate change (4) Balance at September 30, 2012 261

The goodwill at September 30, 2012 is entirely related to the Personal Care segment. (See Note 3 “Acquisition of Businesses” for further information on the increase in 2012).

At September 30, 2012, the accumulated impairment loss amounted to $321 million, related to the 2008 impairment of goodwill in the Pulp and Paper segment (2011 – $321 million).

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 10. INTANGIBLE ASSETS The following table presents the components of intangible assets:

Estimated useful September 30, December 31, lives ( in years) 2012 2011 $ $ Intangible assets subject to amortization Water rights 40 8 8 Power purchase agreements 25 34 32 Customer relationships (1) 20 - 40 191 104 Trade names 7 7 7 Supplier agreement 5 6 6 Technology (2) 7 - 20 8 — Non-Compete (2) 9 1 — 255 157 Accumulated amortization (20) (14) 235 143 Intangible assets not subject to amortization Trade names (3) 112 61 Total intangible assets 347 204

Amortization expense related to intangible assets for the three and nine months ended September 30, 2012 was $2 million and $6 million, respectively (2011 – $1 million and $3 million, respectively).

Amortization expense for the next five years related to intangible assets is expected to be as follows:

2012 2013 2014 2015 2016 $ $ $ $ $ Amortization expense related to intangible assets 9 8 8 7 7

(1) Increase relates to the acquisitions of Attends Healthcare Limited on March 1, 2012 ($71 million) and EAM Corporation on May 10, 2012 ($19 million).

(2) Increase relates to the acquisition of EAM Corporation on May 10, 2012.

(3) Increase relates to the acquisition of Attends Healthcare Limited on March 1, 2012.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 11. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY The Company regularly reviews its overall production capacity with the objective of adjusting its production capacity with anticipated long-term demand.

Ottawa/ Gatineau Hydro Assets On June 13, 2012, the Company announced the signing of a Definitive Purchase and Sale Agreement with Energy Ottawa Inc. for the sale of its hydro assets in Ottawa, Ontario and Gatineau, Quebec for CDN$45 million. The assets have a carrying value of CDN$44 million, classified as Property, plant and equipment and Intangible assets on the Consolidated Balance Sheets. The transaction includes three power stations (21MW of installed capacity), water rights in the area, as well as Domtar Inc.’s equity stake in the Chaudière Water Power Inc. a ring dam consortium. On June 26, 2012, Energy Ottawa Inc., the renewable energy subsidiary of Hydro Ottawa Holding Inc., assigned the Definitive Purchase and Sale Agreement to Chaudière Hydro Inc., its affiliate, which is now the purchaser. Energy Ottawa Inc. remains responsible for the purchaser’s obligation under the Definitive Purchase and Sale Agreement. Currently, the Company has approximately 12 workers operating the hydro assets in Ottawa/ Gatineau which will become employees of Chaudière Hydro L.P., a subsidiary of Energy Ottawa Inc. upon closing of the transaction.

As a result of the signing of the definitive agreement, the Company assessed whether this transaction met the criteria for assets held for sale. Transfer of some of the water rights and subdivision of some lands require government consent. Given that the transfer of the water rights and the subdivision of some lands have a certain degree of uncertainty, the Company concluded the criteria for assets held for sale accounting was not met.

Mira Loma, California converting plant During the first quarter of 2012, the Company recorded a $2 million write-down of property, plant and equipment at its Mira Loma location, in Impairment and write-down of property, plant and equipment.

Ashdown pulp and paper mill On March 29, 2011, the Company announced that it would permanently shut down one of four paper machines at its Ashdown, Arkansas pulp and paper mill. This measure reduced the Company’s annual uncoated freesheet paper production capacity by approximately 125,000 short tons. The mill’s workforce was reduced by approximately 110 employees. For the three and nine months ended September 30, 2011, the Company recorded $1 million recovery and $1 million expense, respectively, of inventory obsolescence and nil and $2 million, respectively, of severance and termination costs, as well as $8 million and $73 million, respectively, of accelerated depreciation on property, plant and equipment, a component of Impairment and write-down of property, plant and equipment. Operations ceased on August 1, 2011.

Langhorne forms plant On February 1, 2011, the Company announced the closure of its forms plant in Langhorne, Pennsylvania, and recorded $4 million of severance and termination costs in the first quarter of 2011.

Other Costs For the three and nine months ended September 30, 2012, the Company also incurred other costs related to previous and ongoing closures which include nil and $1 million, respectively, of severance and termination costs (2011 – $1 million and $2 million, respectively) and $2 million and $2 million, respectively, of other costs (2011 – $1 million and $5 million, respectively).

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 11. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)

The following tables provide the components of closure and restructuring costs by segment:

Three months ended Three months ended September 30, 2012 September 30, 2011 Pulp and Paper Distribution Personal Care Total Pulp and Paper $ $ $ $ $ Severance and termination costs — — — — 1 Inventory obsolescence (1) — — — — (1) Other — 1 1 2 1 Closure and restructuring costs — 1 1 2 1

Nine months ended Nine months ended September 30, 2012 September 30, 2011 Pulp and Paper Distribution Personal Care Total Pulp and Paper $ $ $ $ $ Severance and termination costs 1 — — 1 8 Inventory obsolescence (1) — — — — 1 Other — 1 1 2 5 Closure and restructuring costs 1 1 1 3 14

(1) Inventory obsolescence primarily relates to the write-down of operating and maintenance supplies classified as Inventories on the Consolidated Balance Sheets.

The following table provides the activity in the closure and restructuring liability:

$ Balance at December 31, 2011 6 Severance payments (2) Balance at September 30, 2012 4

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 12. LONG-TERM DEBT

Par September 30, December 31, Maturity Amount Currency 2012 2011 $ $ $ Unsecured notes 5.375% Notes 2013 73 US 71 72 7.125% Notes 2015 166 US 166 213 9.5% Notes 2016 94 US 99 133 10.75% Notes 2017 278 US 272 375 4.4% Notes 2022 300 US 297 — 6.25 % Notes 2042 250 US 247 — Capital lease obligations 2012 - 2028 51 48 1,203 841 Less: Due within one year 7 4 1,196 837

UNSECURED NOTES As a result of a cash tender offer during the first quarter of 2012, the Company repurchased $1 million of the 5.375% Notes due 2013, $47 million of the 7.125% Notes due 2015, $31 million of the 9.5% Notes due 2016 and $107 million of the 10.75% Notes due 2017. The Company incurred a premium of $47 million and additional charges of $3 million as a result of this extinguishment, both of which are included in Interest expense in the Consolidated Statements of Earnings and Comprehensive Income.

SENIOR NOTES OFFERING On August 20, 2012, the Company issued $250 million 6.25% Notes due 2042 for net proceeds of $247 million. The net proceeds from the offering of these Notes will be used for general corporate purposes.

On March 7, 2012, the Company issued $300 million 4.4% Notes due 2022 for net proceeds of $297 million. The net proceeds from the offering of these Notes were used to fund the portion of the purchase of the 5.375% Notes due 2013, 7.125% Notes due 2015, 9.5% Notes due 2016 and the 10.75% Notes due 2017 tendered and accepted by the Company pursuant to a tender offer, including the payment of accrued interest and applicable early tender premiums, not funded with cash on hand, as well as for general corporate purposes.

The Notes are redeemable, in whole or in part, at the Company’s option at any time. In the event of a change in control, each holder will have the right to require the Company to repurchase all or any part of such holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes, plus any accrued and unpaid interest.

The Notes are general unsecured obligations and rank equally with existing and future unsecured and unsubordinated indebtedness. The Notes are fully and unconditionally guaranteed on an unsecured basis by direct and indirect, existing and future, U.S. 100% owned subsidiaries, which currently guarantee indebtedness under the Credit Agreement as well as the Company’s other unsecured unsubordinated indebtedness.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 12. LONG-TERM DEBT (CONTINUED)

BANK FACILITY On June 15, 2012, the Company amended and restated its existing Credit Agreement (the “Credit Agreement”), among the Company and certain of its subsidiaries as borrowers (collectively, the “Borrowers”) and the lenders and agents party thereto. The Credit Agreement amended the Company’s existing $600 million revolving credit facility that was scheduled to mature June 23, 2015.

The Credit Agreement provides for a revolving credit facility (including a letter of credit sub-facility and a swingline sub-facility) that matures on June 15, 2017. The maximum aggregate amount of availability under the revolving Credit Agreement is $600 million, which may be borrowed in US Dollars, Canadian Dollars (in an amount up to the Canadian Dollar equivalent of $150 million) and Euros (in an amount up to the Euro equivalent of $200 million). Borrowings may be made by the Company, by its U.S. subsidiary Domtar Paper Company, LLC, by its Canadian subsidiary Domtar Inc. and by any additional borrower designated by the Company in accordance with the Credit Agreement. The Company may increase the maximum aggregate amount of availability under the revolving Credit Agreement by up to $400 million, and the Borrowers may extend the final maturity of the Credit Agreement by one year, if, in each case, certain conditions are satisfied, including (i) the absence of any event of default or default under the Credit Agreement and (ii) the consent of the lenders participating in each such increase or extension, as applicable.

Borrowings under the Credit Agreement will bear interest at a rate dependent on the Company’s credit ratings at the time of such borrowing and will be calculated at the Borrowers’ option according to a base rate, prime rate, LIBO rate, EURIBO rate or the Canadian bankers’ acceptance rate plus an applicable margin, as the case may be. In addition, the Company must pay facility fees quarterly at rates dependent on the Company’s credit ratings.

The Credit Agreement contains customary covenants for transactions of this type, including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not less than 3.0 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not greater than 3.75 to 1. At September 30, 2012, the Company was in compliance with the covenants, and no amounts were borrowed (December 31, 2011 – nil).

At September 30, 2012, the Company had outstanding letters of credit amounting to $12 million under this credit facility (December 31, 2011 - $29 million).

All borrowings under the Credit Agreement are unsecured. However, certain domestic subsidiaries of the Company will unconditionally guarantee any obligations from time to time arising under the Credit Agreement, and certain subsidiaries of the Company that are not organized in the United States will unconditionally guarantee any obligations of Domtar Inc., the Canadian subsidiary borrower, or of additional borrowers that are not organized in the United States, under the Credit Agreement, in each case, subject to the provisions of the Credit Agreement.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 13. SHAREHOLDERS’ EQUITY On February 22, 2012, the Company’s Board of Directors approved a quarterly dividend of $0.35 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc. Total dividends of approximately $13 million were paid on April 16, 2012 to shareholders of record on March 15, 2012.

On May 1, 2012 and July 31, 2012, the Company’s Board of Directors approved a quarterly dividend of $0.45 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc. Total quarterly dividends of approximately $16 million each were paid on July 16, 2012 and October 15, 2012, respectively, to shareholders of record on June 15, 2012 and September 17, 2012, respectively.

On October 31, 2012, the Company’s Board of Directors approved a quarterly dividend of $0.45 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc. This dividend is to be paid on January 15, 2013 to shareholders of record on December 14, 2012.

STOCK REPURCHASE PROGRAM On May 4, 2010, the Company’s Board of Directors authorized a stock repurchase program (“the Program”) of up to $150 million of Domtar Corporation’s common stock. On May 4, 2011, the Company’s Board of Directors approved an increase to the Program from $150 million to $600 million. On December 15, 2011, the Company’s Board of Directors approved another increase to the Program from $600 million to $1 billion. Under the Program, the Company is authorized to repurchase from time to time shares of its outstanding common stock on the open market or in privately negotiated transactions in the United States. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock, from time to time, in part to reduce the dilutive effects of its stock options, awards, and employee stock purchase plan and to improve shareholders’ returns.

During 2011 and the first three quarters of 2012, the Company made open market purchases of its common stock using general corporate funds. Additionally, the Company entered into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements required the Company to make up-front payments to the counterparty financial institutions which resulted in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.

During the first three quarters of 2012, the Company repurchased 1,521,667 shares at an average price of $78.77 for a total cost of $120 million. Of the $120 million shares repurchased, $4 million was payable at September 30, 2012.

During the first three quarters of 2011, the Company repurchased 4,987,795 shares at an average price of $85.44 for a total cost of $426 million. Of the $426 million shares repurchased, $11 million was payable at September 30, 2011. Since the inception of the Program, the Company repurchased 8,181,445 shares at an average price of $80.51 for a total cost of $659 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES ENVIRONMENT The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities.

An action was commenced by Seaspan International Ltd. (“Seaspan”) in the Supreme Court of British Columbia, on March 31, 1999 against Domtar Inc. and others with respect to alleged contamination of Seaspan’s site bordering Burrard Inlet in North Vancouver, British Columbia, including contamination of sediments in Burrard Inlet, due to the presence of creosote and heavy metals. On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan and Domtar Inc. in order to define and implement an action plan to address soil, sediment and groundwater issues. This Order was appealed to the Environmental Appeal Board (“Board”) on March 17, 2010 but there is no suspension in the execution of this Order unless the Board orders otherwise. The appeal hearing has been re-scheduled to occur between April 15 and May 10, 2013. The relevant government authorities selected a remediation plan on July 15, 2011. In the interim, no stay of execution has been granted or requested. The Company has recorded an environmental reserve to address its estimated exposure for this matter.

The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:

$ Balance at December 31, 2011 92 Environmental spending (9) Effect of foreign currency exchange rate change 2 Balance at September 30, 2012 85

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Climate change regulation Since 1997, when an international conference on global warming concluded an agreement known as the Kyoto Protocol, which called for reductions of certain emissions that may contribute to increases in atmospheric greenhouse gas (“GHG”) concentrations, various international, national and local laws have been proposed or implemented focusing on reducing GHG emissions. These actual or proposed laws do or may apply in the countries where the Company currently has, or may have in the future, manufacturing facilities or investments.

In the United States, Congress has considered legislation to reduce emissions of GHGs, although it appears unlikely that any legislation will be actively considered again until after the 2012 elections. Several states already are regulating GHG emissions from public utilities and certain other significant emitters, primarily through regional GHG cap-and-trade programs. Furthermore, the U.S. Environmental Protection Agency (“EPA”) has adopted and implemented GHG permitting requirements for new sources and modifications of existing industrial facilities and has recently proposed GHG performance standards for electric utilities under the agency’s existing Clean Air Act authority. Passage of GHG legislation by Congress or individual states, or the adoption of regulations by the EPA or analogous state agencies, that restrict emissions of GHGs in areas in which the Company conducts business could have a variety of impacts upon the Company, including requiring it to implement GHG containment and reduction programs or to pay taxes or other fees with respect to any failure to achieve the mandated results. This, in turn, will increase the Company’s operating costs. However, the Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers in the United States.

The province of Quebec initiated, as part of its commitment to the Western Climate Initiative (“WCI”), a GHG cap-and-trade system on January 1, 2012. Reduction targets for Quebec have been promulgated and will be effective January 1, 2013. The Company does not expect the cost of compliance will have a material impact on the Company’s financial position, results of operations or cash flows. With the exception of the British Columbia carbon tax, which applies to the purchase of fossil fuels within the province and which was implemented in 2008, there are presently no federal or provincial legislation on regulatory obligations that affect the emission of GHGs for the Company’s pulp and paper operations elsewhere in Canada.

Under the Copenhagen Accord, the Government of Canada has committed to reducing greenhouse gases by 17 percent from 2005 levels by 2020. A sector by sector approach is being used to set performance standards to reduce greenhouse gases. On September 5, 2012 final regulations were published for the coal- fired electrical generators which will go in force July 1, 2015. The industry sector, which includes pulp and paper, is the next sector to undergo this review. The Company does not expect the performance standards to be disproportionately affected by these future measures compared with other pulp and paper producers in Canada.

While it is likely that there will be increased regulation relating to GHG emissions in the future, at this time it is not possible to estimate either a timetable for the promulgation or implementation of any new regulations or the Company’s cost of compliance to said regulations. The impact could, however, be material.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”) On December 2, 2011, the EPA proposed a new set of standards related to emissions from boilers and process heaters included in the Company’s manufacturing processes. These standards are generally referred to as Boiler MACT and seek to require reductions in the emission of certain hazardous air pollutants or surrogates of hazardous air pollutants. A final version of this Rule, as well as associated rules related to solid waste incinerators and the definition of solid waste has been under review at the White House Office of Management and Budget since May 17, 2012, and therefore could be issued at any time. It is anticipated that compliance will be required by the end of 2015 or early 2016 for existing emission units or upon startup for any new emission units. Domtar expects that the capital cost required to comply with the Boiler MACT rules, as they were published in December 2011, is between $37 million and $42 million. Domtar is currently assessing the associated increase in operating costs as well as alternate compliance strategies.

Domtar is also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws. The EPA and/or various state agencies have notified the Company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. Domtar continues to take remedial action under its Care and Control Program, as such sites mostly relate to its former wood preserving operating sites, and a number of operating sites due to possible soil, sediment or groundwater contamination. The investigation and remediation process is lengthy and subject to the uncertainties of changes in legal requirements, technological developments and, if and when applicable, the allocation of liability among potentially responsible parties.

CONTINGENCIES In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at September 30, 2012, cannot be predicted with certainty, it is management’s opinion that, except as noted below, their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

On July 31, 1998, Domtar Inc. (now a 100% owned subsidiary of Domtar 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 included a purchase price adjustment whereby, in the event of the acquisition by a third party of more than 50% of the shares of Domtar Inc. in specified circumstances, Domtar Inc. may be required to pay an increase in consideration of up to a maximum of $122 million (CDN$120 million), an amount gradually declining over a 25- year period. At March 7, 2007, the maximum amount of the purchase price adjustment was approximately $112 million (CDN$110 million).

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

On March 14, 2007, the Company received a letter from George Weston Limited (the previous owner of E.B. Eddy and a party to the purchase agreement) demanding payment of $112 million (CDN$110 million) as a result of the consummation of the series of transactions whereby the Fine Paper Business of Weyerhaeuser Company was transferred to the Company and the Company acquired Domtar Inc. (the “Transaction”). On June 12, 2007, an action was commenced by George Weston Limited against Domtar Inc. in the Superior Court of Justice of the Province of Ontario, Canada, claiming that the consummation of the Transaction triggered the purchase price adjustment and sought a purchase price adjustment of $112 million (CDN$110 million) as well as additional compensatory damages. On March 31, 2011, George Weston Limited filed a motion for summary judgment. On September 3, 2012, the Court directed that this matter proceed to examinations for discovery and trial, rather than proceed by way of summary judgment. A trial is expected in 2013. The Company does not believe that the consummation of the Transaction triggers an obligation to pay an increase in consideration under the purchase price adjustment and intends to defend itself vigorously against any claims with respect thereto. However, the Company may not be successful in the defense of such claims, and if the Company is ultimately required to pay an increase in consideration, such payment may have a material adverse effect on the Company’s financial position, results of operations or cash flows. No provision is recorded for this matter.

INDEMNIFICATIONS In the normal course of business, the Company 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. At September 30, 2012, the Company 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 provision has been recorded. These indemnifications have not yielded a significant expense in the past.

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NOTE 15. SEGMENT DISCLOSURES On September 1, 2011, the Company purchased Attends Healthcare Inc. As a result, an additional reportable segment, Personal Care, has been added. On March 1, 2012 and May 10, 2012, the Company grew its Personal Care segment with the purchase of Attends Healthcare Limited and EAM Corporation, respectively. (See Note 3 “Acquisition of Businesses” for further information).

Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies. The following summary briefly describes the operations included in each of the Company’s reportable segments:

• Pulp and Paper Segment – comprises the manufacturing, sale and distribution of communication, specialty and packaging papers, as well as

softwood, fluff and hardwood market pulp.

• Distribution Segment – comprises the purchasing, warehousing, sale and distribution of the Company’s paper products and those of other

manufacturers. These products include business and printing papers, certain industrial products and printing supplies.

• Personal Care Segment – consists of the manufacturing, sale and distribution of adult incontinence products and high quality absorbent cores.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 15. SEGMENT DISCLOSURES (CONTINUED)

An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:

For the three months ended For the nine months ended September 30, September 30, September 30, September 30, SEGMENT DATA 2012 2011 2012 2011 $ $ $ $ Sales Pulp and Paper 1,153 1,246 3,476 3,776 Distribution 167 197 528 604 Personal Care 111 17 288 17 Total for reportable segments 1,431 1,460 4,292 4,397 Intersegment sales - Pulp and Paper (42) (43) (137) (154) Consolidated sales 1,389 1,417 4,155 4,243 Depreciation and amortization and impairment and write-down of property, plant and equipment Pulp and Paper 90 91 271 277 Distribution — 1 3 3 Personal Care 6 1 15 1 Total for reportable segments 96 93 289 281 Impairment and write-down of property, plant and equipment - Pulp and Paper — 8 2 73 Consolidated depreciation and amortization and impairment and write- down of property, plant and equipment 96 101 291 354 Operating income (loss) Pulp and Paper 103 189 306 489 Distribution (5) (1) (8) — Personal Care 12 — 32 — Corporate (1) (1) (6) 4 Consolidated operating income 109 187 324 493 Interest expense, net 20 25 109 67 Earnings before income taxes 89 162 215 426 Income tax expense 22 45 57 122 Equity loss, net of taxes 1 — 5 — Net earnings 66 117 153 304

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar Paper Company, LLC, a 100% owned subsidiary of the Company and the successor to the Weyerhaeuser Fine Paper Business U.S. Operations, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Ariva Distribution Inc., Domtar Delaware Investments Inc., Domtar Delaware Holdings, LLC, Domtar A.W. LLC (and subsidiary), Domtar AI Inc., Attends Healthcare Inc., and EAM Corporation, all 100% owned subsidiaries of the Company (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt will not be guaranteed by certain of Domtar Paper Company, LLC’s own 100% owned subsidiaries; including Domtar Delaware Holdings Inc., Attends Healthcare Limited and Domtar Inc., (collectively the “Non-Guarantor Subsidiaries”). The subsidiary’s guarantee may be released in certain customary circumstances, such as if the subsidiary is sold or sells all of its assets, if the subsidiary’s guarantee of the Credit Agreement is terminated or released and if the requirements for legal defeasance to discharge the indenture have been satisfied.

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Statements of Earnings and Comprehensive income (loss) for the three and nine months ended September 30, 2012 and September 30, 2011, the Balance Sheets at September 30, 2012 and December 31, 2011 and the Statements of Cash Flows for the nine months ended September 30, 2012 and September 30, 2011 for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method.

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the three months ended September 30, 2012 Non- CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND Guarantor Guarantor Consolidating COMPREHENSIVE INCOME Parent Subsidiaries Subsidiaries Adjustments Consolidated $ $ $ $ $ Sales — 1,150 492 (253) 1,389 Operating expenses Cost of sales, excluding depreciation and amortization — 937 416 (253) 1,100 Depreciation and amortization — 69 27 — 96 Selling, general and administrative 6 58 16 — 80 Impairment and write-down of property, plant and equipment — — — — — Closure and restructuring costs — 2 — — 2 Other operating loss (income), net — (2) 4 — 2 6 1,064 463 (253) 1,280 Operating income (loss) (6) 86 29 — 109 Interest expense (income), net 22 5 (7) — 20 Earnings (loss) before income taxes and equity earnings (28) 81 36 — 89 Income tax expense (benefit) (9) 22 9 — 22 Equity loss, net of taxes — — 1 — 1 Share in earnings of equity accounted investees 85 26 — (111) — Net earnings 66 85 26 (111) 66 Other comprehensive income (loss) 3 (5) 52 — 50 Comprehensive income 69 80 78 (111) 116

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NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the nine months ended September 30, 2012 Non- CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND Guarantor Guarantor Consolidating COMPREHENSIVE INCOME Parent Subsidiaries Subsidiaries Adjustments Consolidated $ $ $ $ $ Sales — 3,456 1,448 (749) 4,155 Operating expenses Cost of sales, excluding depreciation and amortization — 2,797 1,215 (749) 3,263 Depreciation and amortization — 208 81 — 289 Selling, general and administrative 24 224 20 — 268 Impairment and write-down of property, plant and equipment — 2 — — 2 Closure and restructuring costs — 2 1 — 3 Other operating loss, net — — 6 — 6 24 3,233 1,323 (749) 3,831 Operating income (loss) (24) 223 125 — 324 Interest expense (income), net 114 14 (19) — 109 Earnings (loss) before income taxes and equity earnings (138) 209 144 — 215 Income tax expense (benefit) (46) 61 42 — 57 Equity loss, net of taxes — — 5 — 5 Share in earnings of equity accounted investees 245 97 — (342) — Net earnings 153 245 97 (342) 153 Other comprehensive income (loss) 5 (5) 40 — 40 Comprehensive income 158 240 137 (342) 193

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the three months ended September 30, 2011 Non- CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND Guarantor Guarantor Consolidating COMPREHENSIVE INCOME (LOSS) Parent Subsidiaries Subsidiaries Adjustments Consolidated $ $ $ $ $ Sales — 1,196 463 (242) 1,417 Operating expenses Cost of sales, excluding depreciation and amortization — 940 357 (242) 1,055 Depreciation and amortization — 68 25 — 93 Selling, general and administrative 5 77 (7) — 75 Impairment and write-down of property, plant and equipment — 8 — — 8 Closure and restructuring costs — 1 — — 1 Other operating income, net — (1) (1) — (2) 5 1,093 374 (242) 1,230 Operating income (loss) (5) 103 89 — 187 Interest expense (income), net 28 4 (7) — 25 Earnings (loss) before income taxes (33) 99 96 — 162 Income tax expense (benefit) (10) 26 29 — 45 Share in earnings of equity accounted investees 140 67 — (207) — Net earnings 117 140 67 (207) 117 Other comprehensive loss (1) — (106) — (107) Comprehensive income (loss) 116 140 (39) (207) 10

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NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the nine months ended September 30, 2011 Non- CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND Guarantor Guarantor Consolidating COMPREHENSIVE INCOME Parent Subsidiaries Subsidiaries Adjustments Consolidated $ $ $ $ $ Sales — 3,550 1,397 (704) 4,243 Operating expenses Cost of sales, excluding depreciation and amortization — 2,752 1,084 (704) 3,132 Depreciation and amortization — 204 77 — 281 Selling, general and administrative 22 249 (18) — 253 Impairment and write-down of property, plant and equipment — 73 — — 73 Closure and restructuring costs — 11 3 — 14 Other operating loss (income), net — (11) 8 — (3) 22 3,278 1,154 (704) 3,750 Operating income (loss) (22) 272 243 — 493 Interest expense (income), net 75 10 (18) — 67 Earnings (loss) before income taxes (97) 262 261 — 426 Income tax expense (benefit) (29) 72 79 — 122 Share in earnings of equity accounted investees 372 182 — (554) — Net earnings 304 372 182 (554) 304 Other comprehensive income (loss) 1 — (56) — (55) Comprehensive income 305 372 126 (554) 249

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

September 30, 2012 Non- Guarantor Guarantor Consolidating CONDENSED CONSOLIDATING BALANCE SHEET Parent Subsidiaries Subsidiaries Adjustments Consolidated $ $ $ $ $ Assets Current assets Cash and cash equivalents 300 65 228 — 593 Receivables — 461 213 — 674 Inventories — 460 203 — 663 Prepaid expenses 15 4 15 — 34 Income and other taxes receivable 113 — 8 (77) 44 Intercompany accounts 370 3,484 76 (3,930) — Deferred income taxes 5 58 61 — 124 Total current assets 803 4,532 804 (4,007) 2,132 Property, plant and equipment, at cost — 5,722 3,072 — 8,794 Accumulated depreciation — (3,446) (1,884) — (5,330) Net property, plant and equipment — 2,276 1,188 — 3,464 Goodwill — 194 67 — 261 Intangible assets, net of amortization — 187 160 — 347 Investments in affiliates 7,272 2,088 — (9,360) — Intercompany long-term advances 6 79 444 (529) — Other assets 25 — 99 (9) 115 Total assets 8,106 9,356 2,762 (13,905) 6,319 Liabilities and shareholders’ equity Current liabilities Bank indebtedness — 15 — — 15 Trade and other payables 50 407 225 — 682 Intercompany accounts 3,482 409 39 (3,930) — Income and other taxes payable — 86 7 (77) 16 Long-term debt due within one year — 5 2 — 7 Total current liabilities 3,532 922 273 (4,007) 720 Long-term debt 1,150 31 15 — 1,196 Intercompany long-term loans 444 85 — (529) — Deferred income taxes and other — 907 99 (9) 997 Other liabilities and deferred credits 25 139 238 — 402 Shareholders’ equity 2,955 7,272 2,137 (9,360) 3,004 Total liabilities and shareholders’ equity 8,106 9,356 2,762 (13,905) 6,319

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

December 31, 2011 Non- Guarantor Guarantor Consolidating CONDENSED CONSOLIDATING BALANCE SHEET Parent Subsidiaries Subsidiaries Adjustments Consolidated $ $ $ $ $ Assets Current assets Cash and cash equivalents 91 2 351 — 444 Receivables — 456 188 — 644 Inventories — 475 177 — 652 Prepaid expenses 6 5 11 — 22 Income and other taxes receivable 20 1 26 — 47 Intercompany accounts 349 3,198 53 (3,600) — Deferred income taxes 5 61 59 — 125 Total current assets 471 4,198 865 (3,600) 1,934 Property, plant and equipment, at cost — 5,581 2,867 — 8,448 Accumulated depreciation — (3,230) (1,759) — (4,989) Net property, plant and equipment — 2,351 1,108 — 3,459 Goodwill — 163 — — 163 Intangible assets, net of amortization — 162 42 — 204 Investments in affiliates 6,933 1,952 — (8,885) — Intercompany long-term advances 6 79 431 (516) — Other assets 21 1 97 (10) 109 Total assets 7,431 8,906 2,543 (13,011) 5,869 Liabilities and shareholders’ equity Current liabilities Bank indebtedness — 7 — — 7 Trade and other payables 37 425 226 — 688 Intercompany accounts 3,196 370 34 (3,600) — Income and other taxes payable 4 10 3 — 17 Long-term debt due within one year — 4 — — 4 Total current liabilities 3,237 816 263 (3,600) 716 Long-term debt 790 35 12 — 837 Intercompany long-term loans 431 85 — (516) — Deferred income taxes and other — 916 21 (10) 927 Other liabilities and deferred credits 50 133 234 — 417 Shareholders’ equity 2,923 6,921 2,013 (8,885) 2,972 Total liabilities and shareholders’ equity 7,431 8,906 2,543 (13,011) 5,869

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NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the nine months ended September 30, 2012 Non- Guarantor Guarantor Consolidating CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Parent Subsidiaries Subsidiaries Adjustments Consolidated $ $ $ $ $ Operating activities Net earnings 153 245 97 (342) 153 Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings (105) (64) 85 342 258 Cash flows provided from operating activities 48 181 182 — 411 Investing activities Additions to property, plant and equipment — (124) (47) — (171) Acquisition of businessses, net of cash acquired — (61) (232) — (293) Investment in joint venture — — (5) — (5) Cash flows used for investing activities — (185) (284) — (469) Financing activities Dividend payments (42) — — — (42) Net change in bank indebtedness — 8 — — 8 Issuance of long-term debt 548 — — — 548 Repayment of long-term debt (186) (3) (1) — (190) Stock repurchase (116) — — — (116) Increase in long-term advances to related parties (42) — (20) 62 — Decrease in long-term advances to related parties — 62 — (62) — Other (1) — — — (1) Cash flows provided from (used for) financing activities 161 67 (21) — 207 Net increase (decrease) in cash and cash equivalents 209 63 (123) — 149 Cash and cash equivalents at beginning of period 91 2 351 — 444 Cash and cash equivalents at end of period 300 65 228 — 593

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SEPTEMBER 30, 2012 (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) (UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the nine months ended September 30, 2011 Non- Guarantor Guarantor Consolidating CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Parent Subsidiaries Subsidiaries Adjustments Consolidated $ $ $ $ $ Operating activities Net earnings 304 372 182 (554) 304 Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings (36) (232) 121 554 407 Cash flows provided from operating activities 268 140 303 — 711 Investing activities Additions to property, plant and equipment — (46) (18) — (64) Proceeds from disposals of property, plant and equipment — 16 18 — 34 Proceeds from sale of business — 10 — — 10 Acquisition of business, net of cash acquired — (288) — — (288) Cash flows used for investing activities — (308) — — (308) Financing activities Dividend payments (36) — — — (36) Net change in bank indebtedness — (6) (1) — (7) Repayment of long-term debt (16) (1) — — (17) Debt issue and tender offer costs (7) — — — (7) Stock repurchase (415) — — — (415) Increase in long-term advances to related parties — — (158) 158 — Decrease in long-term advances to related parties 27 131 — (158) — Other 10 — — — 10 Cash flows provided from (used for) financing activities (437) 124 (159) — (472) Net increase (decrease) in cash and cash equivalents (169) (44) 144 — (69) Cash and cash equivalents at beginning of period 311 50 169 — 530 Cash and cash equivalents at end of period 142 6 313 — 461

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with Domtar Corporation’s unaudited interim consolidated financial statements and notes thereto included elsewhere in this Quarterly Report. The MD&A should also be read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2012. Throughout this MD&A, unless otherwise specified, “Domtar Corporation”, “the Company”, “Domtar”, “we”, “us” and “our” refer to Domtar Corporation and its subsidiaries, as well as its investments. Domtar Corporation’s common stock is listed on the New York Stock Exchange and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is determined on the basis of accounting principles generally accepted in the United States (“GAAP”).

In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT” refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars, and the term “dollars” and the symbol “$” refer to U.S. dollars. In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, prices, contribution to net earnings (loss), and shipment volume are based on the three-month and nine- month periods ended September 30, 2012 as compared to the three-month period ended June 30, 2012 and the three-month and nine-month periods ended September 30, 2011. The three-month and nine-month periods ended September 30, 2012 and 2011 are also referred to as the third quarter of 2012 and 2011, respectively, and the first nine months of 2012 and 2011, respectively, and the three-month period ended June 30, 2012 as the second quarter of 2012.

EXECUTIVE SUMMARY In the third quarter of 2012, we reported operating income of $109 million, an increase of $3 million compared to $106 million in the second quarter of 2012. This increase is due to higher shipments for both pulp and paper, lower maintenance, and the curtailment of the post-retirement benefit plan of $13 million. These factors were partially offset by cyclically low selling prices for pulp and costs related to lower efficiency mostly due to lack-of-order and maintenance downtime for pulp and paper.

Due to seasonal factors, Domtar paper shipments are expected to decline in the fourth quarter when compared to the third quarter. In pulp, we anticipate that prices will begin to gradually increase in the medium term due to favorable market dynamics and low softwood inventory levels. Input costs, notably energy and chemicals are expected to increase slightly in the fourth quarter.

Closure and restructuring activities We regularly review our overall production capacity with the objective of aligning our production capacity with anticipated long-term demand.

On June 13, 2012, we announced the signing of a Definitive Purchase and Sale Agreement with Energy Ottawa Inc. for the sale of our hydro assets in Ottawa, Ontario and Gatineau, Quebec for CDN$45 million. The assets have a carrying value of CDN$44 million, classified as Property, plant and equipment and Intangible assets on the Consolidated Balance Sheets. The transaction includes three power, stations (21MW of installed capacity), water rights in the area, as well as Domtar Inc.’s equity stake in the Chaudière Water Power Inc., a ring dam consortium. On June 26, 2012, Energy Ottawa Inc., the renewable energy subsidiary of Hydro Ottawa Holding Inc., assigned the Definitive Purchase and Sale Agreement to Chaudière Hydro Inc., its affiliate, which is now the purchaser. Energy Ottawa Inc. remains responsible for the purchaser’s obligation under the Definitive Purchase and Sale Agreement. Currently the Company has approximately 12 workers operating the hydro assets in Ottawa/ Gatineau who will become employees of Chaudière Hydro L.P., a subsidiary of Energy Ottawa Inc. upon closing of the transaction.

As a result of the signing of the definitive agreement, we assessed whether this transaction met the criteria for assets held for sale. Transfer of some of the water rights and subdivision of some lands require government consent. Given that the transfer of the water rights and the subdivision of some lands have a certain degree of uncertainty, the Company concluded the criteria for assets held for sale accounting was not met.

During the first quarter of 2012, we recorded a $2 million write-down of property, plant and equipment at our Mira Loma location, in Impairment and write- down of property, plant and equipment.

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On March 29, 2011, we announced the permanent shut down of one of our paper machines at our Ashdown, Arkansas pulp and paper mill. This measure reduced our annual uncoated freesheet paper production capacity by approximately 125,000 short tons. The mill’s workforce was reduced by approximately 110 employees. For the three and nine months ended September 30, 2011, we recorded $1 million recovery and $1 million expense, respectively, of inventory obsolescence and nil and $2 million, respectively, of severance and termination costs, as well as $8 million and $73 million, respectively, of accelerated depreciation on property, plant and equipment, a component of Impairment and write-down of property, plant and equipment. Operations ceased on August 1, 2011.

On February 1, 2011, we announced the closure of our forms plant in Langhorne, Pennsylvania and recorded $4 million of severance and termination costs in the first quarter of 2011.

For the three and nine months ended September 30, 2012, we also incurred other costs related to previous and ongoing closures which include nil and $1 million, respectively, of severance and termination costs (2011 – $1 million and $2 million, respectively) and $2 million and $2 million, respectively, of other costs (2011 – $1 million and $5 million, respectively).

RECENT DEVELOPMENTS Senior notes offering On August 20, 2012, we issued $250 million aggregate principal amount of 6.25% Notes due 2042 for net proceeds of $247 million. The net proceeds from the offering of the Notes will be used for general corporate purposes.

OUR BUSINESS Information relating to our business is contained in our Annual Report on Form 10-K for the year ended December 31, 2011. There has not been any material change in our business since December 31, 2011, except for the completion of the acquisitions of Attends Healthcare Limited (“Attends Europe”) and EAM. The acquired businesses are presented under our Personal Care reporting segment.

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CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENTS REVIEW The following table includes the consolidated financial results of Domtar Corporation for the third quarter of 2012 and 2011 and the first nine months of 2012 and 2011:

Three months ended Nine months ended September 30, September 30, September 30, September 30, FINANCIAL HIGHLIGHTS 2012 2011 2012 2011 (In millions of dollars, unless otherwise noted) Sales $ 1,389 $ 1,417 $ 4,155 $ 4,243 Operating income 109 187 324 493 Net earnings 66 117 153 304 Net earnings per common share (in dollars) 1: Basic 1.85 2.96 4.21 7.43 Diluted 1.84 2.95 4.20 7.38 Operating income (loss) per segment: Pulp and Paper $ 103 $ 189 $ 306 $ 489 Distribution (5) (1) (8) — Personal Care 12 — 32 — Corporate (1) (1) (6) 4 Total $ 109 $ 187 $ 324 $ 493

At At September 30, December 31, 2012 2011 Total assets $ 6,319 $ 5,869 Total long-term debt, including current portion $ 1,203 $ 841

1 Refer to Note 5 of the consolidated financial statements included in Item 1, for more information on the calculation of net earnings per common share.

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THIRD QUARTER 2012 VERSUS THIRD QUARTER 2011

Sales Sales for the third quarter of 2012 amounted to $1,389 million, a decrease of $28 million, or 2%, from sales of $1,417 million in the third quarter of 2011. The decrease in sales is mainly attributable to a decrease of $92 million in our Pulp and Paper segment due largely to lower average selling prices for pulp and paper as well as lower shipments in paper, partially offset by higher shipments for pulp. In addition, sales also decreased for the Distribution segment by $30 million as deliveries were down 16% in the third quarter of 2012 compared to the third quarter of 2011 due to difficult market conditions. These factors were offset by the increase in sales due to the inclusion of a full quarter of financial results of Attends Healthcare Inc. (“Attends US”) as well as the inclusion of Attends Europe and EAM pursuant to the acquisitions for a total of $94 million.

Cost of Sales, excluding Depreciation and Amortization Cost of sales, excluding depreciation and amortization, amounted to $1,100 million in the third quarter of 2012, an increase of $45 million, or 4%, compared to cost of sales, excluding depreciation and amortization, of $1,055 million in the third quarter of 2011. This increase is mainly attributable to the inclusion of cost of sales for a full quarter of Attends US and the inclusion of Attends Europe and EAM pursuant to the acquisitions, resulting in an increase in cost of sales of $70 million. Also contributing to the increase in cost of sales were higher costs due to lower efficiency mostly due to lack-of-order and maintenance downtime for pulp and paper of $16 million, higher shipments of pulp of $26 million, fiber costs of $7 million, chemicals costs of $6 million and energy costs of $2 million. These factors were partially offset by lower shipments for paper of $45 million, a decrease in deliveries in our Distribution segment of $26 million, lower maintenance costs of $7 million and lower freight costs of $6 million.

Depreciation and Amortization Depreciation and amortization amounted to $96 million in the third quarter of 2012, an increase of $3 million, or 3%, compared to depreciation and amortization of $93 million in the third quarter of 2011. This increase is primarily due to the inclusion of depreciation and amortization expenses for a full quarter for Attends US and the inclusion of Attends Europe and EAM pursuant to the acquisitions for a total of $5 million. Depreciation and amortization charges decreased in the Pulp and Paper segment by $1 million due to the write-off of assets following the closure of a paper machine at our Ashdown, Arkansas mill effective in the third quarter of 2011. In addition, depreciation and amortization expense for the Distribution segment also decreased by $1 million when compared to the third quarter of 2011.

Selling, General and Administrative Expenses (SG&A) SG&A expenses amounted to $80 million in the third quarter of 2012, an increase of $5 million, or 7%, compared to SG&A expenses of $75 million in the third quarter of 2011. This increase in SG&A is primarily due to the inclusion of selling, general and administrative expenses for a full quarter for Attends US and the inclusion of Attends Europe and EAM pursuant to the acquisitions, resulting in an increase of $6 million, as well as additional spending in our variable compensation program of $8 million. These increases were partially offset by the curtailment of the post-retirement benefit plan of $13 million.

Other Operating Income/ (Loss) Other operating loss amounted to $2 million in the third quarter of 2012, an increase of $4 million compared to other operating income of $2 million in the third quarter of 2011. This increase in other operating loss is primarily due to increased foreign exchange loss of $4 million and net gains in the third quarter of 2011 including, among others the sale of assets at Langhorne and Columbus facilities for $3 million and $2 million, respectively. This loss was partially offset by a decrease in environmental provision of $3 million in the third quarter of 2012.

Operating Income Operating income in the third quarter of 2012 amounted to $109 million, a decrease of $78 million compared to operating income of $187 million in the third quarter of 2011. This decrease is primarily due to the factors mentioned above and is partially offset by lower impairment and write-down of property, plant and equipment of $8 million mainly as a result of accelerated depreciation recorded in 2011 related to the closure of a paper machine at our Ashdown, Arkansas pulp and paper mill and higher closure and restructuring costs of $1 million.

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Interest Expense We incurred $20 million of interest expense in the third quarter of 2012, a decrease of $5 million compared to interest expense of $25 million in the third quarter of 2011. This decrease in interest expense is primarily due to the tender premium paid in 2011 due to the partial repurchase of $186 million aggregate principal amount of our outstanding 5.375% Notes due 2013, 7.125% Notes due 2015, 9.5% Notes due 2016, and 10.75% Notes due 2017, and the lower interest expense on those notes in 2012. This decrease was slightly offset by our issuance of $300 million aggregate principal amount of 4.4% Notes, due 2022 in March of 2012 and $250 million aggregate principal amount of 6.25% Notes due 2042 in August of 2012.

Equity Loss We incurred a $1 million loss , net of taxes of nil, with regards to our joint venture Celluforce Inc. in the third quarter of 2012 (2011- nil).

Income Taxes For the third quarter of 2012, our income tax expense amounted to $22 million, which was comprised of current tax expense of $17 million and deferred tax expense of $5 million, compared to tax expense of $45 million for the third quarter of 2011, which was comprised of current tax expense of $19 million and deferred tax expense of $26 million. We made income tax payments of $11 million during the third quarter of 2012. In the third quarter of 2012 our effective tax rate was 25% compared to an effective tax rate of 28% for the third quarter of 2011. The effective tax rate for the third quarter of 2012 was impacted by the recognition of additional tax benefits related to the finalization of certain estimates in connection with the filing of our 2011 tax returns. The effective tax rate for the third quarter of 2011 was impacted by the mix of earnings between jurisdictions and the recognition of specific tax benefits pertaining to prior tax years that were previously unrecognized for which the statute of limitations expired during the quarter.

Net Earnings Net earnings amounted to $66 million ($1.84 per common share on a diluted basis) in the third quarter of 2012, a decrease of $51 million compared to net earnings of $117 million ($2.95 per common share on a diluted basis) in the third quarter of 2011, mainly due to the factors mentioned above.

FIRST NINE MONTHS OF 2012 VERSUS FIRST NINE MONTHS OF 2011

Sales Sales for the first nine months 2012 amounted to $4,155 million, a decrease of $88 million, or 2%, from sales of $4,243 million in the first nine months of 2011. This decrease in sales was mainly attributable to lower shipments for paper of $202 million, lower pulp prices of $166 million as well as lower sales in our Distribution segment of $76 million. These factors were partially offset by higher sales for paper of $17 million, higher pulp shipments of $68 million and the inclusion of a full nine months of Attends US as well as the inclusion of Attends Europe and EAM pursuant to the acquisitions for a total increase of $271 million.

Cost of Sales, excluding Depreciation and Amortization Cost of sales, excluding depreciation and amortization, amounted to $3,263 million in the first nine months of 2012, an increase of $131 million, or 4%, compared to cost of sales, excluding depreciation and amortization, of $3,132 million in the first nine months 2011. This increase was mainly attributable to higher shipments for pulp of $62 million, higher fiber costs of $23 million, higher chemical costs of $24 million, lower efficiency mostly due to lack-of-order and maintenance downtime for pulp and paper of $41 million, increased salaries and wages of $15 million and the inclusion of a full nine months of Attends US as well as the inclusion of Attends Europe and EAM following the acquisitions for a total increase of $202 million. These factors were partially offset by lower shipments for paper of $134 million, a decrease in deliveries in our Distribution segment of $70 million, lower costs for energy of $17 million, lower purchased pulp of $8 million and the positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program of $4 million.

Depreciation and Amortization Depreciation and amortization amounted to $289 million in the first nine months 2012, an increase of $8 million, or 3%, compared to depreciation and amortization of $281 million in the first nine months of 2011. This increase was mainly due to the inclusion of depreciation and amortization

49 Table of Contents expenses for a full nine months of Attends US as well as the inclusion of amortization and depreciation of Attends Europe and EAM following the acquisitions for a total increase of $14 million. This was partially offset by lower depreciation and amortization charges in the Pulp and Paper segment of $6 million due to the write-off of assets following the closure of a paper machine at our Ashdown, Arkansas mill effective in the third quarter of 2011 for $2 million.

Selling, General and Administrative Expenses SG&A expenses amounted to $268 million in the first nine months of 2012, an increase of $15 million, or 6%, compared to SG&A expenses of $253 million in the first nine months of 2011. The increase is primarily due to the inclusion of SG&A expenses for a full nine months of Attends US as well as the inclusion of Attends Europe and EAM following the acquisitions for a total of $22 million. In addition, there were general increases in administration costs of $17 million which includes a $4 million increase in merger and acquisition costs. These factors were partially offset by lower costs related to our variable compensation program of $11 million and the curtailment of the post-retirement benefit plan of $13 million in the first nine months of 2012 when compared to 2011.

Other Operating Income (Loss) Other operating loss amounted to $6 million in the first nine months of 2012, a decrease of $9 million compared to other operating income of $3 million in the first nine months of 2011. The decrease is primarily due to gains recorded on assets and land in the first nine months of 2011 of approximately $5 million and an increase in foreign exchange loss of $7 million. The increase was partially offset by a decrease in environmental provision of $1 million.

Operating Income Operating income in the first nine months of 2012 amounted to $324 million, a decrease of $169 million compared to operating income of $493 million in the first nine months of 2011. This decrease is primarily due to the factors mentioned above as well as due to lower impairment and write-down of property, plant and equipment of $71 million and lower closure and restructuring costs of $11 million in 2012 as compared to 2011. For more details on the impairment and write-down of property, plant and equipment, refer to Item 1, Financial Statements and Supplementary Data, Note 11, of this Quarterly Report on Form 10-Q.

Interest Expense We incurred $109 million of interest expense in the first nine months of 2012, an increase of $42 million compared to interest expense of $67 million in the first nine months of 2011. This increase in interest expense is primarily due to the partial repurchase of our 10.75% Notes, 9.5% Notes, 7.125% Notes and 5.375% Notes, on which we incurred tender offer premiums of $47 million and $3 million of additional charges as a result of the extinguishment which was partially offset by lower interest expense on these particular issues. Interest expense also increased due to the issuance of the $300 million of 4.4% Notes due 2022, $250 million of 6.25% Notes due 2042.

Equity Loss We incurred a $5 million loss , net of taxes of nil, with regards to our joint venture Celluforce Inc. in the first nine months of 2012 (2011- nil).

Income Taxes For the first nine months of 2012, our income tax expense amounted to $57 million, which was comprised of $44 million of current tax expense and $13 million of deferred tax expense, compared to tax expense of $122 million for the first nine months of 2011, which was comprised of current tax expense of $66 million and deferred tax expense of $56 million. We made income tax payments of $60 million during the nine months of 2012. In the first nine months of 2012 our effective tax rate was 27% compared to an effective tax rate of 29% for the first nine months of 2011. The effective tax rate for the first nine months of 2012 was impacted by the tax benefit of the $50 million of debt premium and repurchase costs, as well as the recognition of additional tax benefits related to the finalization of certain estimates in connection with the filing of our 2011 tax returns. The effective tax rate for the first nine months of 2011 was impacted by the mix of earnings between jurisdictions.

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Net Earnings Net earnings amounted to $153 million ($4.20 per common share on a diluted basis) in the first nine months of 2012, a decrease of $151 million compared to $304 million ($7.38 per common share on a diluted basis) in the first nine months of 2011 due to the factors mentioned above.

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PULP AND PAPER

Three months ended Nine months ended SELECTED INFORMATION September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 (In millions of dollars, unless otherwise noted) Sales Total sales $ 1,153 $ 1,246 $ 3,476 $ 3,776 Intersegment sales (42) (43) (137) (154) $ 1,111 $ 1,203 $ 3,339 $ 3,622 Operating income 103 189 306 489 Shipments Paper (in thousands of ST) 826 889 2,515 2,703 Pulp (in thousands of ADMT) 415 358 1,172 1,094

Sales and Operating Income Sales Sales in our Pulp and Paper segment amounted to $1,111 million in the third quarter of 2012, a decrease of $92 million, or 8%, compared to sales of $1,203 million in the third quarter of 2011. The decrease in sales is mainly attributable to decreased average selling prices for pulp of approximately 19% and lower shipments for paper of approximately 7%. These factors were partially offset by increases in pulp shipments by approximately 16%.

For the first nine months of 2012, sales in our Pulp and Paper segment decreased by $283 million, or 8%, compared to the first nine months of 2011. The decrease in sales is mainly attributable to decreased average selling prices for pulp of approximately 18% and lower shipments for paper of approximately 7%. These factors were partially offset by increases in pulp shipments by approximately 7% and slightly higher selling prices for paper.

Operating Income Operating income in our Pulp and Paper segment amounted to $103 million in the third quarter of 2012, a decrease of $86 million or 46%, when compared to operating income of $189 million in the third quarter of 2011. The decrease in operating results is due primarily to decreases in average selling prices for pulp of $57 million and paper of $12 million, higher fiber costs of $7 million, higher chemical costs of $6 million, higher energy costs of $2 million, lower paper shipments of $22 million and lower efficiency mostly due to lack-of-order and maintenance downtime of $16 million. These factors were partially offset by a decrease in maintenance costs of $7 million, lower freight costs of $6 million, lower purchased pulp of $5 million and the curtailment of the post-retirement benefit plan of $13 million.

For the first nine months of 2012, operating income in our Pulp and Paper segment decreased by $183 million, or 37%, compared to the first nine months of 2011. The decrease is mostly attributable to a decrease in average selling prices for pulp of $166 million, lower shipments for paper of $54 million and lower efficiency mostly due to lack-of-order and maintenance downtime of $41 million. Additional factors contributing to the decrease include higher fiber costs of $23 million, higher chemical costs of $24 million and higher fixed costs and other costs of $23 million. These factors were partially offset by lower energy costs of $17 million, lower impairment of goodwill and property, plant and equipment charges of $71 million, higher selling prices for paper of $3 million, lower restructuring charges of $12 million, higher pulp shipments of $6 million, lower freight costs of $5 million, lower purchased pulp of $8 million, lower depreciation of $6 million, lower SG&A costs of $11 million, the curtailment of the post-retirement benefit plan of $13 million as well as the favorable impact of a lower Canadian dollar of $4 million, net of our hedging program.

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Pricing Environment Overall average sales prices in our paper business experienced a decrease in the third quarter of 2012 when compared to the third quarter of 2011. Our overall average paper sales prices were lower by $15/ton, or 1% in the third quarter of 2012 compared to the third quarter of 2011.

For the first nine months of 2012, our average paper sales prices increased slightly when compared to the first nine months of 2011. Our average sales prices were higher by $1/ton, in the first nine months of 2012 compared to the first nine months of 2011.

Our average pulp sales prices experienced a decrease in the third quarter of 2012 compared to the third quarter of 2011. Our sales price decreased by $144/metric ton, or 19%, in the third quarter of 2012 compared to the third quarter of 2011.

For the first nine months of 2012, our average pulp sales prices decreased when compared to the first nine months of 2011. Our average sales prices were lower by $140/metric ton, or 18%, in the first nine months of 2012 compared to the first nine months of 2011.

Operations Shipments Our paper shipments decreased by 63,000 tons, or 7%, in the third quarter of 2012 compared to the third quarter of 2011. For the first nine months of 2012, our paper shipments decreased by 188,000 tons, or 7% when compared to the first nine months of 2011. The decrease in the first nine months of 2012 when compared to the first nine months of 2011 is primarily due to lower market demand.

Our pulp trade shipments increased by 57,000 metric tons, or 16%, in the third quarter of 2012 compared to the third quarter of 2011. For the nine months of 2012, our pulp trade shipment increased by 78,000 metric tons, or 7%, when compared to the first nine months of 2011. These increases are a result of lack- of-order downtime for paper. As such, we strategically increased our pulp production and third party sales.

Alternative Fuel Tax Credits The U.S. Internal Revenue Code of 1986, as amended (the “Code”) permitted a refundable excise tax credit, until the end of 2009, for the production and use of alternative biofuel mixtures derived from biomass. We submitted an application with the IRS to be registered as an alternative fuel mixer and received notification that our registration had been accepted in late March 2009. We began producing and consuming alternative fuel mixtures in February 2009 at our eligible mills. The amounts for the refundable credits are based on the volume of alternative biofuel mixtures produced and burned during that period. To date, we have received $508 million in refunds, net of federal income tax offsets. There has been no change in the Company’s status with respect to the alternative fuel tax credits previously claimed but we continue to assess the possibility of converting these credits into additional cellulosic biofuel producer credits. Any such conversion would require the repayment of any alternative fuel tax credit refund previously received in exchange for a credit to be used against future federal income tax.

During the second quarter of 2012, the IRS began an audit of our 2009 U.S. income tax return. The completion of the audit by the IRS or the issuance of authoritative guidance could result in the release of the provision or settlement of the liability in cash of some or all of these previously unrecognized tax benefits. As of September 30, 2012, we have gross unrecognized tax benefits and interest of $197 million and related deferred tax assets of $17 million associated with the alternative fuel tax credits. The recognition of these benefits, $180 million net of deferred taxes, would impact the effective tax rate.

During the third quarter of 2012, Office of Chief Counsel of the IRS issued a memo advising taxpayers who are eligible for and wish to convert all or a portion of these alternative fuel tax credits into the cellulosic biofuel producer credit, that the amount of the repayment would not be subject to interest. Taxpayers who wish to convert from the alternative fuel tax credit to the cellulosic biofuel producer credit must first repay the alternative fuel tax credit that they wish to convert. If the Company decides to convert alternative fuel tax credit to cellulosic biofuel producer credit, the repayment would result in Other Expense in the Company’s Consolidated Statement of Earnings and the corresponding portion of unrecognized tax benefits discussed above would be removed, resulting in a tax benefit. The Company has until March 15, 2013 to execute a conversion election.

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Labor In the U.S., a new umbrella agreement with the United Steelworkers Union (“USW”), expiring in 2015 and affecting approximately 2,900 employees at eight U.S. mills and one converting operation, was ratified effective December 1, 2011. This agreement only covers certain economic elements, and all other issues are negotiated at each operating location, as the related collective bargaining agreements become subject to renewal. The parties have agreed not to strike or lock- out during the terms of the respective local agreements. Should the parties fail to reach an agreement during the local negotiations, the related collective bargaining agreements are automatically renewed for another four years. Local labor negotiations have concluded in Ashdown and Rothschild with ratifications. Local negotiations still are in progress at our Plymouth mill.

Agreements that expired in 2009 at our Dryden facilities in Canada were negotiated and ratified by the CEP. Negotiations at the Dryden mill with the International Union of Operating Engineers (“IOUE”) will commence in late October 2012. Negotiations at Ottawa/Hull dams with the CEP were concluded and ratified in July. The collective agreement with the CEP in Kamloops expired in the second quarter of 2012. A tentative agreement with the CEP in Kamloops was reached on October 3, 2012 and on October 9, 2012, a vote was conducted and the agreement was accepted.

In Canada, at the end of September 2012, there is one agreement that is outstanding covering 44 employees and ten agreements that are ratified covering approximately 1,886 unionized employees.

Closure and Restructuring During the third quarter of 2012, we incurred $2 million of other costs related to ongoing and previous closures. On June 13, 2012, we announced the signing of a Definitive Purchase and Sale Agreement with Energy Ottawa Inc. for the sale of our hydro assets in Ottawa, Ontario and Gatineau, Quebec for CDN $45 million. The assets have a carrying value of CDN $44 million classified as Property, plant and equipment and Intangible assets on the Consolidated Balance Sheets. The transaction includes three power stations (21MW of installed capacity), water rights in the area, as well as Domtar Inc.’s equity stake in the Chaudière Water Power Inc., a ring dam consortium. On June 26, 2012, Energy Ottawa Inc., the renewable energy subsidiary of Hydro Ottawa Holding Inc., assigned the Definitive Purchase and Sale Agreement to Chaudière Hydro Inc., its affiliate, which is now the purchaser. Energy Ottawa Inc. remains responsible for the purchaser’s obligation under the Definitive Purchase and Sale Agreement. Currently we have approximately 12 workers operating the hydro assets in Ottawa/ Gatineau who will become employees of Chaudière Hydro L.P., a subsidiary of Energy Ottawa Inc. upon closing of the transaction.

As a result of the signing of the definitive agreement, we assessed whether this transaction met the criteria for assets held for sale. Transfer of some of the water rights and subdivision of some lands require government consent. Given that the transfer of the water rights and the subdivision of some lands have a certain degree of uncertainty, we concluded the criteria for assets held for sale accounting was not met.

During the first quarter of 2012, we recorded a $2 million write-down of property, plant and equipment at our Mira Loma location, in Impairment and write- down of property, plant and equipment.

On March 29, 2011, we announced that we would permanently shut down one of four paper machines at our Ashdown, Arkansas pulp and paper mill. This measure reduced our annual uncoated freesheet paper production capacity by approximately 125,000 short tons. The mill’s workforce was reduced by approximately 110 employees. For the three and nine months ended September 30, 2011, we recorded $1 million recovery and $1 million expense, respectively, of inventory obsolescence and nil and $2 million, respectively, of severance and termination costs, as well as $8 million and $73 million, respectively, of accelerated depreciation on property, plant and equipment, a component of Impairment and write-down of property, plant and equipment. Operations ceased on August 1, 2011.

On February 1, 2011, we announced the closure of our forms plant in Langhorne, Pennsylvania, and recorded $4 million of severance and termination costs in the first quarter of 2011.

For the three and nine months ended September 30, 2012, we also incurred other costs related to previous and ongoing closures which include nil and $1 million, respectively, of severance and termination costs (2011 – $1 million and $2 million, respectively) and $2 million and $2 million, respectively, of other costs (2011 – $1 million and $5 million, respectively).

For more details on the closure and restructuring costs, refer to Item 1, Financial Statements and Supplementary Data, Note 11, of this Quarterly Report on Form 10-Q.

Closure and restructuring costs are based on management’s best estimates. Although we do not anticipate significant changes, actual costs may differ from these estimates due to subsequent developments such as the results of environmental studies, market participant interest in purchasing assets set to be dismantled and demolished and other business developments. As such, additional costs and further write-downs may be required in future periods.

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Other Cellulosic Biofuel Credit In July 2010, the U.S. Internal Revenue Service (“IRS”) Office of Chief Counsel released an Advice Memorandum concluding that qualifying cellulosic biofuel sold or used before January 1, 2010, is eligible for the cellulosic biofuel producer credit (“CBPC”) and would not be required to be registered by the Environmental Protection Agency. Each gallon of qualifying cellulose biofuel produced by any taxpayer operating a pulp and paper mill and used as a fuel in the taxpayer’s trade or business during calendar year 2009 would qualify for the $1.01 non-refundable CBPC. A taxpayer could be able to claim the credit on its federal income tax return for the 2009 tax year upon the receipt of a letter of registration from the IRS and any unused CBPC could be carried forward until 2015 to offset a portion of federal taxes otherwise payable.

We had approximately 207 million gallons of cellulose biofuel that qualified for this CBPC for which we had not previously claimed under the Alternative Fuel Mixture Credit (“AFMC”) that represented approximately $209 million of CBPC or approximately $127 million of after tax benefit to the Corporation. In July 2010, we submitted an application with the IRS to be registered for the CBPC and on September 28, 2010, we received our notification from the IRS that we were successfully registered. On October 15, 2010 the IRS Office of Chief Counsel issued an Advice Memorandum concluding that the AFMC and CBPC could be claimed in the same year for different volumes of biofuel. In November 2010, we filed an amended 2009 tax return with the IRS claiming a cellulosic biofuel producer credit of $209 million and recorded a net tax benefit of $127 million in Income tax expense (benefit) on the Consolidated Statement of Earnings for the year ended December 31, 2010. As of December 31, 2011, approximately $26 million of this credit remains to offset future U.S. federal income tax liability. We expect to use all of the remaining credit during 2012 to offset required federal income tax installments.

During the third quarter of 2012, Office of Chief Counsel of the IRS issued a memo advising taxpayers who are eligible for and wish to convert all or a portion of these alternative fuel tax credits into the CBPC, that the amount of the repayment would not be subject to interest. Taxpayers who wish to convert from the alternative fuel tax credit to the CBPC must first repay the alternative fuel tax credits they wish to convert. If the Company decides to convert alternative fuel tax credits to CBPC, the repayment would result in Other Expense, in the Company’s Consolidated Statement of Earnings. The additional CBPC, which is taxable, would result in a tax benefit to the Company, net of associated income tax expense. The Company has until March 15, 2013 to execute a conversion election.

Natural Resources Canada Pulp and Paper Green Transformation Program On June 17, 2009, the Government of Canada announced that it was developing a Pulp and Paper Green Transformation Program (“the Green Transformation Program”) to help pulp and paper companies make investments to improve the environmental performance of their Canadian facilities. The Green Transformation Program was capped at CDN$1 billion. March 31, 2012 marked the deadline for eligibility of costs under this program.

Eligible projects had to demonstrate an environmental benefit by either improved energy efficiency or increased renewable energy production. Although amounts have not been received in full, we have been allocated $145 million (CDN$143 million) through this Green Transformation Program, of which all have been approved. The funds were spent on capital projects to improve energy efficiency and environmental performance in our Canadian pulp and paper mills and any amounts received were accounted for as an offset to the applicable plant and equipment asset amount. As of September 30, 2012, we have received $132 million (CDN $130 million) since the inception of the plan, mostly related to eligible projects at our Kamloops, Dryden and Windsor pulp and paper mills. We still have a $13 million receivable (CDN $13 million) under the Program.

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DISTRIBUTION

Three months ended Nine months ended SELECTED INFORMATION September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 (In millions of dollars) Sales $ 167 $ 197 $ 528 $ 604 Operating loss (5) (1) (8) —

Sales and Operating Loss Sales Sales in our Distribution segment amounted to $167 million in the third quarter of 2012, a decrease of $30 million compared to sales of $197 million in the third quarter of 2011. This decrease in sales is mostly attributable to a decrease in deliveries of 16%, resulting from lower market demand.

For the first nine months of 2012, sales in our Distribution segment decreased by $76 million, or 13%, when compared to the first nine months of 2011, primarily due to the factors mentioned above as well as the sale of a business unit in the first quarter of 2011. Our deliveries in the first nine months of 2012 are lower by approximately 12% when compared to the first nine months of 2011.

Operating Loss Operating loss amounted to $5 million in the third quarter of 2012, an increase of $4 million when compared to operating loss of $1 million in the third quarter of 2011. In addition to lower market demand, the increase in operating loss is also due to increased closure and restructuring costs of $1 million due to our withdrawal from a U.S. multi-employer plan.

For the first nine months of 2012, operating loss in our Distribution segment increased by $8 million when compared to the first nine months of 2011, primarily due to the factors mentioned above, lower margins as well as a gain of sale on a business unit of $3 million recorded in the first quarter of 2011.

Operations Labor We have collective agreements covering six locations in the U.S. and four locations in Canada. As of September 30, 2012, we have no outstanding agreements and ten ratified agreements affecting approximately 155 employees in the U.S. and Canada. Of the ten ratified agreements, eight expire in 2013 and two expire in 2014, affecting 89 and 66 employees, respectively.

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PERSONAL CARE

Three months ended Nine months ended September 30, September 30, September 30, September 30, SELECTED INFORMATION 2012 2011 2012 2011 (In millions of dollars) Sales $ 111 $ 17 $ 288 $ 17 Operating income 12 — 32 —

Our Operations Our Personal Care business sells and manufactures adult incontinence products marketed primarily under the Attends ® brand name. We are one of the leading suppliers of adult incontinence products in North America and Northern Europe selling to hospitals (acute care) and nursing homes (long-term care) and we have a growing presence in the homecare and retail channels. We operate two manufacturing facilities, with each having the ability to produce multiple product categories. We also have a research and development facility and production lines which manufacture high quality airlaid and ultrathin laminated absorbent cores due to the acquisition of EAM.

Attends products are manufactured in the United States from one location in Greenville, North Carolina and in Northern Europe from one location in Aneby, Sweden. The research and development facility and production lines from our acquisition of EAM are located in Jesup, Georgia.

Our Raw Materials The primary raw materials used in our manufacturing process are nonwovens, pulp, super absorbent polymers, polypropylene film, elastics, adhesives and packaging materials.

Our Product Offering and Go-to-Market Strategy Our products, which include branded and private label briefs, protective underwear, underpads, light pads and washcloths, are available in a variety of sizes, as well as with differing performance levels and product attributes.

We serve four channels: acute care, long-term care, homecare, and retail. Through the utilization of our flexible production platform, manufacturing expertise and efficient supply chain management, we are able to provide a complete and high-quality line of branded and unbranded products reliably to customers across all channels.

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Sales and Operating Income Sales Sales in our Personal Care segment amounted to $111 million in the third quarter of 2012, an increase of $94 million compared to sales of $17 million in the third quarter of 2011. The increase is mainly due to the inclusion of results from operations for Attends Europe and EAM, following the completion of the acquisitions on March 1, 2012 and on May 10, 2012, respectively. A full quarter of operations from Attends US were also recorded in 2012, following the completion of the acquisition on September 1, 2011.

For the first nine months of 2012, sales in our Personal Care segment amounted to $288 million, an increase of $271 million, when compared to sales of $17 million in the first nine months of 2011. The increase is mainly due to the inclusion of results from operations for Attends Europe and EAM, following the completion of the acquisitions on March 1, 2012 and on May 10, 2012, respectively. In addition, a full nine months of results for Attends US were recorded in 2012.

Operating Income Operating income amounted to $12 million in the third quarter of 2012, an increase of $12 million compared to operating income of nil in the third quarter of 2011. The increase is mainly due to the inclusion of operating income for Attends Europe and EAM, following the completion of the acquisitions on March 1, 2012 and on May 10, 2012, respectively. A full quarter of operating income from Attends US was also recorded in 2012, following the completion of the acquisition on September 1, 2011.

For the first nine months of 2012, operating income in our Personal Care segment amounted to $32 million, an increase of $32 million, when compared to operating income of nil in the first nine months of 2011. The increase is mainly due to the inclusion of operating income for Attends Europe and EAM, following the completion of the acquisitions on March 1, 2012 and on May 10, 2012, respectively. In addition, a full nine months of results for Attends US were recorded in 2012.

Operations Labor We employ 817 employees in the Personal Care segment. Approximately 390 non-unionized employees are in North America, including 54 employees at EAM and 427 employees are in Europe of which the majority are unionized.

For more details on the Attends Europe and EAM acquisitions, refer to Item 1, Financial Statements and Supplementary Data, Note 3, “Acquisition of Businesses” of this Quarterly Report on Form 10-Q.

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STOCK-BASED COMPENSATION EXPENSE For the third quarter of 2012, compensation expense recognized in our results of operations was $4 million while in the first nine months of 2012, $16 million of compensation expense was incurred as a result of the mark to market impact related to the liability awards. This compares to income of $9 million and expense of $9 million in the third quarter and the first nine months of 2011, respectively. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

LIQUIDITY AND CAPITAL RESOURCES Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our contractually committed credit facility, of which $588 million is currently undrawn and available. Under extreme market conditions, there can be no assurance that this agreement would be available or sufficient. See “Capital Resources” below.

Our ability to make payments on and to refinance our indebtedness, including debt we could incur under the credit facility and outstanding Domtar Corporation notes, and for ongoing operating costs including pension contributions, working capital, capital expenditures, as well as principal and interest payments on our debt, will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our credit facility and debt indentures, as well as terms of any future indebtedness, impose, or may impose, various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

Operating Activities Cash flows provided from operating activities totaled $411 million in the first nine months of 2012, compared to $711 million in the first nine months of 2011, a decrease of $300 million. This decrease is primarily due to a decrease in profitability, increase in cash taxes, an increase in requirements for working capital and the impact of the $47 million tender premiums paid on the partial repurchase of our 10.75% Notes, 9.5% Notes, 7.125% Notes and 5.375% Notes.

Investing Activities Cash flows used for investing activities were $469 million in the first nine months of 2012 compared to cash flows used for investing activities of $308 million in the first nine months of 2011. This is mainly due to the acquisition of Attends Healthcare Limited for $232 million (€173 million) and the acquisition of EAM for $61 million partially offset by the prior year acquisition of Attends US for $288 million as well as the increase in additions to property, plant and equipment of $107 million.

Financing Activities Cash flows provided from financing activities were $207 million in the first nine months of 2012 compared to cash flows used for financing activities of $472 million in the first nine months of 2011, an increase of $679 million. This is a result of the issuance of $250 million of 6.25% Notes due 2042 in the third quarter of 2012 and the issuance of $300 million of 4.4% Notes due 2022, offset by the cash tender offer during the second quarter of 2012. In the tender offer, we repurchased $1 million of 5.375% Notes due 2013, $47 million of 7.125% Notes due 2015, $31 million of 9.5% Notes due 2016 and $107 million of 10.75% Notes due 2017, collectively $186 million aggregate principal amount of Notes, excluding accrued and unpaid interest. Also, we repurchased shares of our common stock for a total cost of $116 million in the first nine months of 2012 compared to $415 million in the first nine months of 2011.

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Capital Resources Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $625 million at September 30, 2012, compared to $404 million at December 31, 2011.

On August 20, 2012, we issued $250 million 6.25% Notes due 2042 for net proceeds of $247 million. The net proceeds from the offering of the Notes will be used for general corporate purposes.

As a result of a cash tender offer during the first quarter of 2012, we repurchased $1 million of the 5.375% Notes due 2013, $47 million of the 7.125% Notes due 2015, $31 million of the 9.5% Notes due 2016 and $107 million of the 10.75% Notes due 2017. We incurred a premium of $47 million and additional charges of $3 million as a result of this extinguishment, both of which are included in Interest expense in the Consolidated Statements of Earnings and Comprehensive Income.

On March 7, 2012, we issued $300 million 4.4% Notes due 2022 for net proceeds of $297 million. The net proceeds from the offering were used to fund a portion of the cash tender offer, including the payment of accrued and applicable early tender premiums, not funded with cash on hand, as well as for general corporate purposes.

The Notes are redeemable, in whole or in part, at our option at any time. In the event of a change in control, each holder will have the right to require us to repurchase all or any part of such holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes, plus any accrued and unpaid interest.

The Notes are general unsecured obligations and rank equally with existing and future unsecured and unsubordinated indebtedness. The Notes are fully and unconditionally guaranteed on an unsecured basis by direct and indirect, existing and future, U.S. 100% owned subsidiaries, which currently guarantee indebtedness under the Credit Agreement, as well as our other unsecured unsubordinated indebtedness.

On June 15, 2012, we amended and restated our existing Credit Agreement (the “Credit Agreement”), among us and certain of our subsidiaries as borrowers (collectively, the “Borrowers”) and the lenders and agents party thereto. The Credit Agreement amended our existing $600 million revolving credit facility that was scheduled to mature June 23, 2015.

The Credit Agreement provides for a revolving credit facility (including a letter of credit sub-facility and a swingline sub-facility) that matures on June 15, 2017. The maximum aggregate amount of availability under the revolving Credit Agreement is $600 million, which may be borrowed in U.S. Dollars, Canadian Dollars (in an amount up to the Canadian Dollar equivalent of $150 million) and Euros (in an amount up to the Euro equivalent of $200 million). Borrowings may be made by us, by our U.S. subsidiary Domtar Paper Company, LLC, by our Canadian subsidiary Domtar Inc. and by any additional borrower designated by us in accordance with the Credit Agreement. We may increase the maximum aggregate amount of availability under the revolving Credit Agreement by up to $400 million, and the Borrowers may extend the final maturity of the Credit Agreement by one year, if, in each case, certain conditions are satisfied, including (i) the absence of any event of default or default under the Credit Agreement and (ii) the consent of the lenders participating in each such increase or extension, as applicable.

Borrowings under the Credit Agreement will bear interest at a rate dependent on our credit ratings at the time of such borrowing and will be calculated at the Borrowers’ option according to a base rate, prime rate, LIBO rate, EURIBO rate or the Canadian bankers’ acceptance rate plus an applicable margin, as the case may be. In addition, we must pay facility fees quarterly at rates dependent on our credit ratings.

The Credit Agreement contains customary covenants for transactions of this type, including two financial covenants: (i) an interest coverage ratio as defined in the Credit Agreement that must be maintained at a level of not greater than 3.75 to 1. At September 30, 2012, we were in compliance with our covenants, and no amounts were borrowed (December 31, 2011 – nil).

At September 30, 2012, we had outstanding letters of credit amounting to $12 million under this credit facility (December 31, 2011 – $29 million).

All borrowings under the Credit Agreement are unsecured. Certain of our domestic subsidiaries will unconditionally guarantee any obligations from time to time arising under the Credit Agreement, and certain of our subsidiaries that are not organized in the United States will unconditionally guarantee any obligations of Domtar Inc., the Canadian subsidiary borrower, or of additional borrowers that are not organized in the United States, under the Credit Agreement, in each case, subject to the provisions of the Credit Agreement.

If there is a change of control, as defined under the Credit Agreement, the Credit Agreement will be terminated and any outstanding obligations under the Credit Agreement will automatically become immediately due and payable.

A significant or prolonged downturn in general business and economic conditions may affect our ability to comply with our covenants or meet those financial ratios and tests and could require us to take action to reduce our debt or to act in a manner contrary to our current business objectives.

A breach of any of our Credit Agreement covenants, including failure to maintain a required ratio or meet a required test, may result in an event of default under the Credit Agreement. This may allow the administrative agent under the Credit Agreement to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If this occurs, we may not be able to refinance the indebtedness on favorable terms, or at all, or repay the accelerated indebtedness.

The Company has a receivables securitization program that matures in November 2013, with a utilization limit for borrowings or letters of credit of $150 million.

At September 30, 2012, we had no borrowings and $46 million of letters of credit under the program (December 31, 2011 – nil and $28 million). The program contains certain termination events, which include, but are not limited to, matters related to receivable performance, certain defaults occurring under the credit facility, and certain judgments being entered against us or our subsidiaries that remain outstanding for 60 consecutive days.

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Domtar Canada Paper Inc. Exchangeable Shares Upon the consummation of a series of transactions whereby the Fine Paper Business of Weyerhaeuser Company was transferred to the Company and the Company acquired Domtar Inc. (the “Transaction”), Domtar Inc. shareholders had the option to receive either common stock of the Company or shares of Domtar (Canada) Paper Inc. that are exchangeable for common stock of the Company. As of September 30, 2012, there were 616,914 exchangeable shares issued and outstanding. The exchangeable shares of Domtar (Canada) Paper Inc. are intended to be substantially the economic equivalent to shares of the Company’s common stock. These shareholders may exchange the exchangeable shares for shares of Domtar Corporation common stock on a one-for-one basis at any time. The exchangeable shares may be redeemed by Domtar (Canada) Paper Inc. on a redemption date to be set by the Board of Directors, which cannot be prior to July 31, 2023, or upon the occurrence of certain specified events, including, upon at least 60 days prior written notice to the holders, in the event less than 416,667 exchangeable shares (excluding any exchangeable shares held directly or indirectly by us) are outstanding at any time.

OFF BALANCE SHEET ARRANGEMENTS In the normal course of business, we finance certain of our activities off balance sheet through operating leases.

GUARANTEES Indemnifications In the normal course of business, we offer indemnifications relating to the sale of our 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 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. At September 30, 2012, we are 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 provision has been recorded. These indemnifications have not yielded significant expenses in the past.

Pension Plans We have indemnified and held harmless the trustees of our 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 from us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At September 30, 2012, we have 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, Domtar Inc. (now a 100% owned subsidiary of Domtar 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 included a purchase price adjustment whereby, in the event of the acquisition by a third-party of more than 50% of the shares of Domtar Inc. in specified circumstances, Domtar Inc. may be required to pay an increase in consideration of up to a maximum of $122 million (CDN$120 million), an amount gradually declining over a 25- year period. At March 7, 2007, the maximum amount of the purchase price adjustment was approximately $112 million (CDN$110 million).

On March 14, 2007, we received a letter from George Weston Limited (the previous owner of E.B. Eddy and a party to the purchase agreement) demanding payment of $112 million (CDN$110 million) as a result of the consummation of the Transaction. On June 12, 2007, an action was commenced by George Weston Limited against Domtar Inc. in the Superior Court of Justice of the Province of Ontario, Canada, claiming that the consummation of the Transaction triggered the purchase price adjustment and sought a purchase price adjustment of $112 million (CDN$110 million) as well as additional compensatory damages. On March 31, 2011, George Weston Limited filed a motion for summary judgment. On September 3, 2012, the Court directed that this matter proceed to examinations for discovery and trial, rather than proceed by way of summary judgment. A trial is expected in 2013. We do not believe that the consummation of the Transaction triggers an obligation to pay an increase in

61 Table of Contents consideration under the purchase price adjustment and intend to defend ourselves vigorously against any claims with respect thereto. However, we may not be successful in our defense of such claims, and if we are ultimately required to pay an increase in consideration, such payment may have a material adverse effect on our financial position, results of operations, or cash flows. No provision is recorded for this matter.

RECENT ACCOUNTING PRONOUNCEMENT ACCOUNTING CHANGES IMPLEMENTED Comprehensive Income In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. We adopted the new requirement on January 1, 2012 with no impact on the Consolidated Financial Statements except for the change in presentation. We have chosen to present a single continuous statement of comprehensive income.

FUTURE ACCOUNTING CHANGES Intangibles—Goodwill and Other In July 2012, the FASB issued an update to Intangibles – Goodwill and Other, which simplifies how entities test indefinite-lived intangible assets for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If the entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, then it is required to perform the quantitative impairment test.

The amended provisions are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. This amendment impacts impairment testing steps only, and therefore adoption is not expected to have an impact on the Consolidated Financial Statements.

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FORWARD-LOOKING STATEMENTS The information included in this Quarterly Report on Form 10-Q may contain forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar Corporation’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”, “project”, “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 and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occurs, what effect they will have on Domtar Corporation’s results of operations or financial condition. These factors include, but are not limited to:

• conditions in the global capital and credit markets, and the economy generally, particularly in the United States, Canada, Europe and China;

• continued decline in usage of fine paper products in our core North American market;

• our ability to implement our business diversification initiatives, including strategic acquisitions;

• product selling prices;

• raw material prices, including wood fiber, chemical and energy;

• performance of the Company’s manufacturing operations, including unexpected maintenance requirements;

• competition from domestic and foreign producers;

• the effect of, or change in, forestry, land use, environmental and other governmental regulations (including tax), and accounting regulations;

• the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters;

• transportation costs;

• the loss of current customers or the inability to obtain new customers;

• legal or regulatory proceedings;

• changes in asset valuations, including write downs of property, plant and equipment, inventory, accounts receivable or other assets for

impairment or other reasons;

• changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar and Euro;

• the effect of timing of retirements and changes in the market price of the Company’s common stock on charges for stock-based compensation;

• performance of pension fund investments and related derivatives, if any; and

• the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2011.

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report on Form 10-Q. Unless specifically required by law, Domtar Corporation assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, 2011. There has not been any material change in our exposure to market risk since December 31, 2011. In the first nine months of 2012, we have updated the following disclosure.

COST RISK Cash flow hedges We purchase natural gas at the prevailing market price at the time of delivery. In order to manage the cash flow risk associated with purchases of natural gas, we may utilize derivative financial instruments or physical purchases to fix the price of forecasted natural gas purchases. We formally document the hedge relationships, including identification of the hedging instruments and the hedged items, the risk management objectives and strategies for undertaking the hedge transactions, and the methodologies used to assess effectiveness and measure ineffectiveness. Current contracts are used to hedge forecasted purchases over the next five years. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Accumulated other comprehensive loss within Shareholders’ equity, and is recognized in Cost of sales in the period in which the hedged transaction occurs.

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of September 30, 2012 to hedge forecasted purchases:

Notional contractual Notional contractual value Percentage of forecasted quantity under derivative contracts purchases under Commodity under derivative contracts (in millions of dollars) derivative contracts for 2012 2013 2014 2015 2016 Natural gas 12,180,000 MMBTU(1) $ 53 36% 27% 25% 14% 12%

(1) MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective for accounting purposes as of September 30, 2012. The critical terms of hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings and Other comprehensive income (loss) for the three and nine months ended September 30, 2012 resulting from hedge ineffectiveness (three and nine months ended September 30, 2011 – nil).

FOREIGN CURRENCY RISK Cash flow hedges We have manufacturing operations in the United States, Canada, Sweden and China. As a result, we are exposed to movements in the foreign currency exchange rate in Canada, Europe and Asia. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. As a result, our earnings are affected by increases or decreases in the value of the Canadian dollar and of other European currencies relative to the U.S. dollar. The Company’s Swedish subsidiary is exposed to movements in foreign currency exchange rates on transactions denominated in a different currency than its Euro functional currency. Our risk management policy allows us to hedge a significant portion of our exposure to fluctuations in foreign currency exchange rates for periods up to five years. We may use derivative instruments (currency options and foreign exchange forward contracts) to mitigate our exposure to fluctuations in foreign currency exchange rates or to designate them as hedging instruments in hedge of the subsidiary’s cash flow risk for purposes of the consolidated financial statements.

We formally document the relationship between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking the hedge transactions. Foreign exchange forward contracts and currency options contracts used to hedge forecasted purchases in Canadian dollars by the Canadian subsidiary, forecasted sales in British Pound Sterling and forecasted purchases in U.S. dollars made by the Swedish subsidiary are designated as cash flow hedges. Current contracts are used to hedge forecasted sales or purchases over the next 12 months. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Other comprehensive income (loss), and is recognized in Cost of sales or in Sales in the period in which the hedged transaction occurs.

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Net investment hedge We use foreign exchange currency option contracts to hedge the net assets of Attends Europe to offset the foreign currency translation and economic exposures related to its investment in the subsidiary. We are exposed to movements in foreign currency exchange rates of the Euro versus the U.S. dollar as Attends Europe has a Euro functional currency whereas we have a U.S. dollar functional and reporting currency. Current contracts are used to hedge the net investment over the next five months. The effective portion of changes in the fair value of derivative contracts designated as net investment hedges is recorded in Other comprehensive income (loss) as part of the Foreign currency translation adjustments.

The following table presents the currency values under contracts pursuant to currency options outstanding as of September 30, 2012 to hedge forecasted purchases, forecasted sales and the net investment:

Notional Percentage of forecasted net exposures Contract contractual under contracts for value 2012 2013 Currency options purchased CDN $ 425 50% 37% EUR € 176 97% 97% USD $ 29 100% 69% GBP £ 18 100% 62%

Currency options sold CDN $ 425 50% 37% EUR € 76 42% 42% USD $ 29 100% 69% GBP £ 18 100% 62% The currency options are fully effective as at September 30, 2012. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive income for the three and nine months ended September, 2012 resulting from hedge ineffectiveness (three and nine months ended September 30, 2011 – nil).

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ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2012, an evaluation was performed by members of management, at the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2012, our disclosure controls and procedures were effective.

Change in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS A discussion of material developments in the Company’s litigation and settlement matters occurring in the period covered by this report, if any, is found in Note 14 to the financial statements in this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS Our Annual Report on Form 10-K for the year ended December 31, 2011, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. There were no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Share repurchase activity under our share repurchase program was as follows during the three-month period ended September 30, 2012:

(d) Approximate dollar (c) Total number of value of shares shares purchased that may yet be (a) Total number as part of publicly purchased under the of (b) Average price announced Plans Plans or Programs Period shares purchased paid per share or Programs (1) (in 000’s) July 1 through July 31, 2012 219,819 74.78 219,819 369,641 August 1 through August 31, 2012 52,030 72.02 52,030 365,893 September 1 through September 30, 2012 320,745 76.60 320,745 341,326 592,594 75.52 592,594

(1) During the third quarter of 2012, the Company repurchased 592,594 shares at an average price of $75.52 per share, for a total cost of $45 million under its stock repurchase program (the “Program”) approved by the Board of Directors in May 2010 and amended in May 2011 and December 2011. We currently have $341 million of remaining availability under our Program. The Program may be suspended, modified or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock, from time to time, in part to reduce the dilutive effects of its stock options, awards, and employee stock purchase plan and to improve shareholders’ returns. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share. During October 2012, we repurchased 66,085 shares at an average price of $77.76 per share for a total cost of $5 million.

ITEM 3. DEFAULT UPON SENIOR SECURITIES Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES Not applicable.

ITEM 5. OTHER INFORMATION Not applicable.

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ITEM 6. EXHIBITS

Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges

Exhibit 31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 Certification by the Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 Exhibit 32.2 Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

DOMTAR CORPORATION

Date: November 2, 2012

By: /s/ Daniel Buron Daniel Buron Senior Vice-President and Chief Financial Officer

By: /s/ Razvan L. Theodoru Razvan L. Theodoru Vice-President, Corporate Law and Secretary

69 Exhibit 12.1

Domtar Corporation Computation of ratio of earnings to fixed charges (In millions of dollars, unless otherwise noted)

Three months ended Nine months ended September 30, September 30, September 30, September 30, 2012 2011 2012 2011 $ $ $ $

Available earnings: Earnings before income taxes 89 162 215 426 Add fixed charges: Interest expense incurred 20 20 57 58 Amortization of debt expense and discount 1 5 7 9 Interest portion of rental expense 2 2 6 6 Total earnings as defined 112 189 285 499 Fixed charges: Interest expense incurred 20 20 57 58 Amortization of debt expense and discount 1 5 7 9 Interest portion of rental expense 2 2 6 6 Total fixed charges 23 27 70 73 Ratio of earnings to fixed charges 4.9 7.0 4.1 6.8 Exhibit 31.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John D. Williams, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Domtar Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the

effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably

likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control

over financial reporting.

Date: November 2, 2012

/s/ John D. Williams John D. Williams President and Chief Executive Officer Exhibit 31.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel Buron, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Domtar Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the

effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably

likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control

over financial reporting.

Date: November 2, 2012

/s/ Daniel Buron Daniel Buron Senior Vice-President and Chief Financial Officer Exhibit 32.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies that to his knowledge, the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2012 (the “Form 10-Q”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John D. Williams John D. Williams President and Chief Executive Officer Exhibit 32.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies that to his knowledge, the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2012 (the “Form 10-Q”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Daniel Buron Daniel Buron Senior Vice-President and Chief Financial Officer