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Norbord (OSB)

Filed: 25 Mar 07, 8:00pm

U.S. Securities and Exchange Commission
Washington, D.C. 20549

FORM 40-F

  [     ]   Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934 or

 [ X ]  Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006

Commission file number 333-13174
 
Norbord Inc.
(Exact name of Registrant as specified in its charter)
 
N/A
(Translation of Registrant’s name into English (if applicable))
 
Canada
(Province or other jurisdiction of incorporation or organization)
 
267
(Primary Standard Industrial Classification Code Number (if applicable))
 
N/A
(I.R.S. Employer Identification Number (if applicable))
 
Suite 600, 1 Toronto Street, Toronto, Ontario M5C 2W4
Tel: (416) 643-8820
(Address and telephone number of Registrant’s principal executive offices)
 
CT Corporation System, 111 Eighth Avenue, New York, NY 10011
Telephone: (212) 894-8700
(Name, address (including zip code) and telephone number (including area code) of agent for
service in the United States
 

Securities Registered or to be registered pursuant to Section 12(b) of the Act.

N/AN/A
________________________________________________
Title of each className of each exchange on
 which registered

Securities Registered or to be registered pursuant to Section 12(g) of the Act

N/A
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

N/A
(Title of Class)

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

[ X ] Annual Information form                 [ X ] Audited financial statements

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

Common Shares – 143,745,881

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

Yes   X               82-3173             No ____


Material included in this Form 40-F:

1.     Audited Financial Statements of Norbord Inc. for the Twelve Months ended December 31, 2006; and

2.    Management’s Discussion and Analysis of Norbord Inc. for the Twelve Months ended December 31, 2006.

3.     The Annual Information Form of Norbord Inc. for the Twelve Months ended December 31, 2006.

Norbord Inc. is also referred to herein as the "Corporation", "we", "us", "our" and the Registrant.

CONTROLS AND PROCEDURES

Disclosure controls and procedures are defined by the Securities and Exchange Commission as those controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures and have determined that such disclosure controls and procedures are effective as of December 31, 2006.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that it has at least one audit committee financial expert serving on its audit committee. Mr. Pierre Dupuis has been determined to be such audit committee financial expert. The Securities and Exchange Commission has indicated that the designation of Mr. Dupuis as an audit committee financial expert does not make Mr. Dupuis an "expert" for any purpose, impose any duties, obligations or liability on Mr. Dupuis that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee. He is independent as that term is defined for purposes of the audit committee member independence requirements of the New York Stock Exchange.


OFF-BALANCE SHEET ARRANGEMENTS

Disclosure of off-balance sheet arrangements is made in Note 12 to the Audited Consolidated Financial Statements, contained herein.

CODE OF ETHICS

The Board of Directors of the Corporation has approved, and acts in accordance with, the Corporation’s Code of Business Conduct (the "Code"). All employees with supervisory responsibilities, members of the management team, and each Director have signed the Code. A copy of this Code can be found on the Corporation’s web site at www.norbord.com.

PRINCIPAL ACCOUNTING FIRM FEES

Ernst & Young LLP was the Corporation’s independent auditor in 2006 and 2005. In addition to audit services, Ernst & Young LLP also provided non-audit services to the Corporation and its subsidiaries. It is the Corporation’s policy not to engage its auditors to provide services in connection with financial information systems design and implementation of other services that may impair the objectivity of the auditors. The Corporation has implemented a procedure to ensure that any engagement of the auditors for non-audit services receives prior clearance by the Audit Committee. In approving any such engagement, the Audit Committee will consider whether the provision of such non-audit services is compatible with maintaining auditor independence.

The table below summarizes the fees paid to Ernst & Young LLP in 2005 and 2006:

Service 2006 2005
Audit$820,200$830,900
Audit-related 556,500 111,600
Tax 340,700 311,400
Other 73,100 40,700
Total$1,790,500$1,294,600

Descriptions of the services performed are provided below:

Audit services include the annual financial statement audit of the Corporation and certain of its subsidiaries. The fees include the review of the Corporation’s unaudited interim financial statements.

Audit-related services include audits of the Corporation’s pension plans, special purpose nonstatutory audits of divisions of the Corporation, comfort letters associated with regulatory filings and internal control reviews.

Taxation services include tax advisory and compliance services.

Other services include expatriate consulting and other business advisory services.


Auditor Independence

Ernst & Young LLP has advised the Audit Committee that it considers itself to be independent of the Corporation, and the Audit Committee has confirmed that it considers Ernst & Young LLP to be independent

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

Tabular disclosure of contractual obligations is made on page 13 of our "Management Discussion and Analysis" for the year ended December 31, 2006 contained herein.

UNDERTAKING

Norbord Inc. undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.

Norbord Inc.
  
By:/s/ John Tremayne                                   
 John Tremayne,
 Executive Vice-President &
 Chief Financial Officer
  
Dated:March 23, 2007

 



Norbord Inc. is an international producer of wood-based panels with assets of $1.3 billion. We employ approximately 2,800 people at 16 plant locations in the United States, Europe and Canada.

We are one of the world’s largest producers of oriented strand board (OSB).

In addition to OSB, we manufacture particleboard, medium density fibreboard (MDF), hardwood plywood and related value-added products.

Norbord is a publicly traded company listed on the TSX under the symbol NBD.

Norbord Mill Locations

Norbord Annual Report 2006 Environment, Health and Safety Report
1    | Financial Highlights56 | Selected Quarterly Information62 | MessagetoShareholders
   
2    | Letter to Shareholders58 | Six-Year Historical Review63 | EnvironmentPolicy
   
7    | 2006FinancialPerformance60 | Principal Operating64 | HealthandSafetyPolicy
   
8    | 2006FinancialPerformanceInterests65 | 2006ReportCard
   
Overview73 | Glossary 
   
9    | Management’s Discussion and Analysis74 | Board of Directors 
      
40 | Consolidated Financial Statements75 | Officers of the Company and Corporate Information 

This document includes forward-looking statements, as defined by applicable securities legislation. Often, but not always, forward-looking statements can be identified by the use of words such as "believes," "expects" or "does not expect," "is expected," "targets," "outlook," "plans," "scheduled," "estimates," "forecasts," "intends," "anticipates" or "does not anticipate" or variations of such words and phrases or statements that certain actions, events or results "may," "could," "would," "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

See the cautionary statement contained in the Forward-Looking Statements section of the Management’s Discussion and Analysis.


Financial Highlights

NORBORD

 

ANNUAL REPORT
2006

 
 

1

 

Financial Highlights

Years ended December 31

 

 

 

(US $ millions, except per share information, unless otherwise noted)

2006

2005

2004

Key Performance Metrics

 

 

 

Return on equity (ROE)

20%46%47%

Return on capital employed (ROCE)

25%53%73%

Cash provided by operating activities

191

314

562

Cash provided by operating activities per share

1.33

2.14

3.75

Net Sales and Earnings

 

 

 

Net sales

1,252

1,462

1,486

EBITDA

247

495

631

Earnings from continuing operations

97

248

332

Earnings

97

248

326

Per Common Share

 

 

 

Earnings from continuing operations (diluted)

0.67

1.61

2.19

Earnings (diluted)

0.67

1.61

2.14

Quarterlydividend(1)

0.36

0.34

0.31

Specialdividend(2)

0.89

0.79

0.79

Otherdistributionstoshareholders(3)

2.89

    

Book value

3.02

3.61

3.42

    

Stock price (TSX) (CAD $)

 

 

 

High

12.79

13.90

16.43

Low

7.77

9.82

10.18

Close

8.91

12.25

12.40

Average daily trading volume (000’sshares)

472

422

518

Key Statistics

 

 

 

OSB shipments (MMsf–3/8")

4,289

4,136

3,731

Average OSB price–North Central($/Msf–7/16")

217

320

369

Average OSB price–Europe(/m3)

208

199

222

(1)At December 31, 2006, the Board of Directors had declared 65 consecutive quarterly common dividends of CAD $0.10 per share.
(2)Norbord paid a special dividend of CAD $1.00 per share in each of the past three years. The special dividends were declared to preserve an efficient capital structure through the peak of the OSB price cycle.
(3)Distribution of shares of Fraser Papers to common shareholders valued using Fraser Papers’ closing price on July 7, 2004.

 


NORBORD

Letter to Shareholders

 

ANNUAL REPORT
2006

 

2

 

To Our Shareholders

J. Barrie Shineton
President and Chief Executive Officer

2006 Highlights

  • RECORDED EARNINGS OF $97 MILLION OR $0.67 PER SHARE

  • ACHIEVED 25% RETURN ON CAPITAL EMPLOYED

  • ACHIEVED 20% RETURN ON EQUITY

Norbord delivered earnings of $97 million or $0.67 per share and a return on equity of 20% in 2006. We paid a third consecutive CAD $1.00 per share special dividend and repurchased 2.7 million common shares. These actions demonstrate our confidence in Norbord's low cost position and ability to generate attractive cash flow throughout the business cycle. Our strategy of geographic diversification was validated as markets for our North American and European products headed in different directions during 2006.

Weaker North American Markets

After several robust years, North American OSB prices declined steadily during 2006 to their lowest levels since 2001. The decline was in response to softer US housing starts, a scenario we fully expected. On the supply side, significant new OSB capacity will ramp up over the next two years. Both will keep pressure on prices for the foreseeable future.

Our strategy of owning only low-cost assets and aligning ourselves with growth customers paid off in the second half of the year when prices dropped below trend levels. All our OSB mills generated positive cash flow and were able to sell all their production volume. The result is that every mill is running at full capacity with no inventory buildup.

During 2006, we completed the expansion of the Cordele, Georgia OSB mill. We started up the second line on time and on budget in December. In the absence of attractive acquisition opportunities, this project was a unique and logical opportunity for Norbord to continue its record of controlled growth in low-cost OSB capacity. The workforce for the second line trained alongside their experienced colleagues on the existing line and they are well prepared to ramp up to full capacity very quickly. Once ramped up, Cordele will be Norbord’s largest and lowest-cost OSB mill, further improving the Company's overall cost position.

Improving European Performance

European markets and prices are firming as a result of the significant improvement in the supply-demand balance across the region and the general strengthening of the continental European economy. In Germany, construction activity and investment is growing for the first time this decade.  We've been successful in focusing Norbord'sparticleboard sales on the construction sector, where about 75% of our European panel production is now directed. We experienced stronger demand and pricing across all our product lines during 2006. Although increases in selling prices were offset by higher input costs, particularly for resin and energy, operating cash flow improved due to our efforts to increase production volume and control raw material usage. Moreover, improving markets means customers are accepting both the pass-through of cost increases and the recovery of producers’ margins.


Letter to Shareholders

NORBORD

 

ANNUAL REPORT
2006

 
 

3

2006 Highlights

  • RECORDED EBITDA OF $247 MILLION
  • PAID THIRD SPECIAL DIVIDEND OF CAD $1.00/SHARE OR $128 MILLION
  • BOUGHT BACK 2.7 MILLION COMMON SHARES FOR $29 MILLION

Energy cost increases will be mitigated by the biomass heat energy system commissioned at our Cowie, Scotland operation in November and by a similar but larger project at our Genk, Belgium operation to be commissioned in the fourth quarter of 2007. These investments will reduce our European natural gas usage by about one-third – a great example of how we are getting more control over input costs.

Focus on Cost Position

We spent the last three years preparing our business to prosper through the down cycle by focusing on costs and improving product mix. We believe we’ve strengthened our competitive position by increasing our operating rates, reducing raw material usage and minimizing our reliance on natural gas. Being low-cost is vital as we believe it is the only way to ensure positive cash flow during weaker markets.

Our Margin Improvement Program (MIP), implemented in 1996,remains the cornerstone of Norbord’s efforts to "control the controllables." Selling a richer product mix and producing more volume from existing capacity were the biggest drivers of our 2006 MIP savings of $56 million. Put another way, our EBITDA would have been significantly lower with out our MIP efforts.

An important example of our cost control efforts is our investment in biomass heat energy systems.  Once projects currently underway at Nacogdoches, Texas, and Genk are complete, all our OSB process heat will come from wood waste, and we will only use natural gas for air emission control equipment.


NORBORD

Letter to Shareholders

 

ANNUAL REPORT
2006

 

4

 

2006 Highlights

  • GENERATED $56 MILLIONIN MARGIN IMPROVEMENTS
  • STARTED UP SECOND OSB LINE AT CORDELE, GEORGIA
  • ACHIEVED RECORD ANNUAL OSB PRODUCTION

Another example of cost containment is our streamlining of production capacity in Europe. We closed smaller, obsolete capacity and consolidated production on our newer, more efficient lines at our South Molton, England, and Cowie mills. We’ve already seen significant gains in production from the consolidated lines and expect these actions will result in higher overall margin contribution from our European business.

Strategy Unchanged

We continue to believe OSB is the industry’s best growth opportunity and that successful execution of our strategy will maximize value for our shareholders. Our strategy is simple and straightforward, and delivers results.

During 2006, we made excellent progress against our objectives:

1.    Grow our OSB business–We achieved record annual OSB production with a 4% increase over 2005 and started up a second line at our Cordele OSB mill on time and on budget.

2.    Own high-quality, well-located assets with industry-leading cost positions– We installed a biomass heat energy system at our Cowie mill, approved similar projects at Genk and Nacogdoches, and streamlined existing European production capacity by closing two older, less efficient lines.

3.    Maintain a margin-focused operating culture–We generated $56 million in margin improvements, more than off setting the impact of higher resin and energy prices on our input costs.

4.    Focus on customers who are growing their own market share–We increased North American OSB sales volume with key big box customers and secured new long-term panelboard business with leading UK home builders.

5.    Allocate capital with discipline–We returned $157 million to shareholders through a special dividend and share repurchases and invested $160 million in low-risk, high-return capital projects.


Letter to Shareholders

NORBORD

 

ANNUAL REPORT
2006

 
 

5

2006 Highlights

  • STREAMLINED EUROPEAN PRODUCTION CAPACITY
  • REDUCED DIRECT GREENHOUSE GAS EMISSIONS BY 23%

  • STARTED UP BIOMASS HEAT ENERGY SYSTEM AT COWIE, SCOTLAND

Workplace Safety and the Environment

We are committed to protecting our employees, the environment and the communities in which we operate. Last year, we set aggressive targets to help us meet our objectives of improving safety performance, working towards full compliance with environmental regulations, and minimizing our operations’ impact on the environment. While I’m pleased to report continued progress towards these objectives during 2006, a fatal incident late in the year reinforced the urgency of our actions to improve workplace safety. I invite you to review the Environment, Health and Safety Report included in the annual report to learn more about how we are managing these areas to ensure the long-term sustainability of our business.

Looking Ahead

Looking to 2007, we expect that our North American and European business results will continue to diverge. Continued weak US housing starts combined with the ramp-up of new capacity will keep North American OSB prices soft. Without additional closures of structural panel capacity, we don’t expect to see much price improvement. On the other hand, we anticipate further strengthening of demand in Europe and continued improvement in prices for our panel products. We also expect some moderation in the excessively high resin and energy prices experienced in Europe last year. While the diversification provided by our European business will not replace the reduced cash flow from our North American business, we believe it will help cushion the Company’s results through the bottom of the cycle.

Longer term, the fundamentals underpinning demand for structural panels remain compelling. Supportive demographics, increasing two-home ownership, larger house sizes, record turnover of homes and the aging of existing housing stock will ultimately return North American OSB demand to trend levels. In Europe, evolving homebuilding practices and the emergence of eastern European economic growth will keep panel demand growing at a healthy pace.


NORBORD

Letter to Shareholders

 

ANNUAL REPORT
2006

 

6

 

2006 Highlights

  • COMMENCED INSTALLATION OF BIOMASS HEAT ENERGY SYSTEMS IN GENK, BELGIUM AND NACOGDOCHES, TEXAS

  • INCREASED NORTH AMERICAN OSB SALES VOLUME WITH KEY BIG BOX CUSTOMERS

  • SECURED NEW LONG-TERM PANEL-BOARD BUSINESS WITH LEADING UK HOME BUILDERS

Norbord has a strong balance sheet and significant liquidity. This, combined with our low cost position, leaves Norbord well positioned to weather the down cycle in North American OSB and benefit quickly when prices improve.

Transitions

As previously reported, Don Wells, our Director and Audit Committee Chair, passed away in August. During his three-year tenure on our Board, Don’s financial acumen and wisdom were highly valued and he made a lasting contribution to our company for the benefit of all shareholders.

Creating Long-Term Shareholder Value

Norbord continues to focus on maximizing shareholder value. Norbord stock has provided a 19%compoundannualtotalreturntoshareholdersoverthepast five years, about half of this as cash dividends. We believe you will continue to be rewarded for your investment in Norbord throughout the business cycle.

On behalf of the entire Norbord team, thank you for your continued support.


J. Barrie Shineton
President and Chief Executive Officer


Financial Performance Overview

NORBORD

 

ANNUAL REPORT
2006

 
 

7

2006 Financial Performance

Management’s Discussion and AnalysisConsolidated Financial Statements
  
10 | Business Overview38 | Management’s Responsibility for theFinancial Statements
10 | Strategy39 | Auditors’ Report
12 | Summary40 | Consolidated Statements of Earningsand Retained Earnings
15 | Results of Operations41 | Consolidated Statements of Cash Flows
19 | Interest and Income Tax42 | Consolidated Balance Sheets
20 | Liquidity and Capital Resources43 | Notes to the Consolidated Financial Statements
21 | Investments and Divestitures 
22 | Capitalization 
23 | Selected Quarterly Information 
24 | Fourth Quarter Results 
25 | Common Shares 
25 | Transactions with Related Parties 
26 | Financial Policies 
27 | Significant Accounting Policies and Estimates 
28 | Accounting Developments 
28 | Risks and Uncertainties 
33 | Disclosure Controls and Procedures andInternal Controls over Financial Reporting 
33 | Outlook for 2007 
34 | Definitions 
37 | Forward-Looking Statements 
  

NORBORD

Financial Performance Overview

 

ANNUAL REPORT
2006

 

8

 

2006 Financial Performance Overview


Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

9

Management's Discussion and Analysis

Fiscal Year 2006

January 31, 2007

The Management's Discussion and Analysis (MD&A) provides a review of the significant developments that impacted Norbord's performance during 2006 relative to 2005. Some of the statements included or incorporated by reference in this MD&A constitute forward-looking statements within the meaning of applicable securities legislation. Forward-looking statements are based on various assumptions and are subject to various risks. See the cautionary statement contained in the Forward-Looking Statements section.

To enhance shareholders' understanding, certain five-year historical financial and statistical information is presented. Norbord's significant accounting policies and other financial disclosures are contained in the audited financial statements and accompanying notes. All financial references in the MD&A are stated in US dollars unless otherwise noted.

Certain historical financial and statistical information for the years 2004, 2003 and 2002 include information for the paper and timberlands business (Fraser Papers), which was distributed to Norbord's common shareholders on June 30, 2004, and thus may not be comparable with the information for the years 2006 and 2005.

EBITDA, EBITDA margin, operating working capital, total working capital, capital employed, ROCE, ROE, net debt, net debt to capitalization, book basis, net debt to capitalization, market basis and book value per share are non-GAAP measures described in the Definitions section. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. There are no directly comparable GAAP measures to any of these measures. Where appropriate, a quantitative reconciliation of the non-GAAP measure to the nearest comparable GAAP measure is also provided.

Additional information on Norbord, including the annual information form, is available on SEDAR at www.sedar.com.


NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

10

 

Business Overview

Norbord is an international producer of wood-based panels, with 16 plant locations in the United States, Europe and Canada. It is one of the world's largest producers of oriented strand board (OSB) with annual capacity of 5.0 billion square feet (3/8-inch basis). The core of Norbord's OSB business is located in the US South. The Company is a significant producer of wood-based panels in Europe. Norbord does not own any timberlands. It purchases wood fibre from third parties that include private landowners and government-owned timberlands. Norbord employed approximately 2,800 people at December 31, 2006.

Operations include 11 OSB mills, 3 particleboard plants, 2 medium density fibreboard (MDF) plants, 1 hardwood plywood mill, 1 I-joist mill, 2 laminating operations, and a furniture plant. The Company reports all operations as a single operating segment.

Norbord's OSB and particleboard panels are used primarily in the construction sector and its MDF and hardwood plywood panels serve the furniture and fixtures markets.

PRINCIPAL END USES

FOR NORBORD'S PANEL PRODUCTS

  

 

 

ORIENTED STRAND BOARD

MEDIUM DENSITY

(OSB)

FIBREBOARD (MDF)

- New home construction

- Fixtures

- Repair and remodel

-Furniture

- Light commercial construction

- Mill work

- Industrial applications

 

 

HARDWOOD PLYWOOD

PARTICLEBOARD

- Cabinetry and fixtures

- New home construction

-Furniture

- Repair and remodel

- Mill work

-Furniture and fixtures

 

Strategy

Norbord's business strategy is focused entirely on the wood panels sector – in particular OSB – in North America and Europe.

The Company's overall business strategy focuses on five key areas:

  1. Pursuing growth in OSB through optimization or expansion of existing assets and opportunistic acquisitions.
  2. Owning high-quality, well-located assets with industry-leading cost positions.
  3. Maintaining a margin-focused operating culture.
  4. Focusing customer service strategy on customers who are growing their own market share.
  5. Maintaining a disciplined approach to capital allocation.
Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

11

The Company is of the view that successful execution of this strategy will result in superior shareholder returns. Good progress was made in each of the strategic elements during the year, including the following highlights:

  • Started up $135 million expansion project at Cordele, Georgia OSB mill on time and on budget
  • Achieved record annual OSB production – a 4% increase over 2005
  • Streamlined European production capacity by decommissioning older, less efficient particleboard and MDF lines
  • Started up a new biomass heat energy system in Cowie, Scotland
  • Commenced installation of new biomass energy systems at Genk, Belgium and Nacogdoches, Texas
  • Improved European earnings trend
  • Generated $56 million in margin improvements
  • Expanded North American OSB sales volume with key big box customers
  • Secured new panelboard business with leading UK home builders
  • Paid third CAD $1.00 special dividend, in addition to the regular CAD $0.10 quarterly dividend
  • Completed the repurchase of 2.7 million common shares
  • Completed small shareholder buyback program

Norbord's financial goal is to achieve top quartile return on equity (ROE) and cash return on capital employed (ROCE) among North American forest products companies. Norbord believes that it has met this target in each of the past four years.

Maintaining investment grade debt ratings is an important element of Norbord's financing strategy. With investment grade debt ratings, Norbord believes that it should have the benefit of long-term access to public and private capital markets on attractive terms. Ratings on Norbord debt have been consistently investment grade since 1992.

Norbord manages its business to provide for a sustainable dividend to be paid quarterly to common shareholders throughout the business cycle, subject to Board approval. At December 31, 2006, the Board of Directors had declared 65 consecutive quarterly common dividends of CAD $0.10 per share. In addition, Norbord paid three special dividends of CAD $1.00 per share to common shareholders in each of the past three years. The special dividends were declared to preserve an efficient capital structure through the peak of the OSB price cycle.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

12

 

Summary

(US $ millions, except per share information, unless otherwise noted)20062005200420032002
      
Key Performance Metrics     
Return on equity (ROE)20%46%47%15%1%
Return on capital employed (ROCE)25%53%73%43%12%
Cash provided by operating activities

191

314

562

280

62

Cash provided by operating activities per share

$1.33

$2.14

$3.75

$1.92

$0.44

 

 

 

 

 

 

Net Sales and Earnings

 

 

 

 

 

Net sales

1,252

1,462

1,486

1,064

679

EBITDA

247

495

631

365

89

Earnings from continuing operations

97

248

332

166

7

Earnings

97

248

326

126

13

 

 

 

 

 

 

Per Common Share

 

 

 

 

 

Earnings from continuing operations per share (diluted)

0.67

1.61

2.19

1.12

0.04

Earnings per share (diluted)

0.67

1.61

2.14

0.85

0.08

Common dividends per share

1.25

1.13

1.10

0.29

0.26

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

Total assets

1,299

1,328

1,391

2,063

2,029

Long-term debt

480

440

450

657

658

Net debt

460

285

236

482

745

Net debt to capitalization, market basis27%17%13%32%49%
Net debt to capitalization, book basis51%35%30%35%48%
      
Key Statistics

 

 

 

 

 

OSB shipments (MMsf–3/8")

4,289

4,136

3,731

3,372

2,974

Average OSB price – North Central ($/Msf–7/16")

217

320

369

294

160

Average OSB price – Europe (/m3)

208

199

222

162

168

Fluctuation in the price of North American OSB is the most significant driver of changes in Norbord's results. Results in 2006 were negatively impacted by the steady decline in North American OSB prices – from $320 per Msf (North Central7/16-inch basis) at the beginning of the year to $158 per Msf at the end of the year, averaging $217 per Msf. Benchmark prices decreased from 2005 average prices of $320 per Msf in response to a slowing of US housing starts from 2005's record levels, as speculators and investors withdrew from the housing market and builders reacted to higher home inventories. A decline was fully expected, but the retreat from the highs seen in the past few years was earlier and deeper than anticipated.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

13

Throughout the cycle, Norbord took steps to prepare itself for this inevitable downturn by focusing on cost containment and by focusing product mix on higher margin products. The Margin Improvement Program (MIP) has helped Norbord to concentrate on improving its competitive position, generating over $185 million of savings in the past five years, including $56 million in 2006. These gains have helped to offset the impact of industry-wide rising input costs and management believes its relative competitive position has improved over this time. The benefit of the discipline exercised through the top of the cycle is that all Norbord mills generated positive EBITDA in the second half of the year when North American OSB prices traded well below the historical average.

In contrast to North America, markets in Europe showed steady improvement during 2006 as the economy expanded, particularly in Germany where construction activity and investment are growing for the first time this decade. Norbord's European business is exposed to different market dynamics than the North American business. The Company believes this provides meaningful earnings diversification, while capitalizing on Norbord's strength as a panel producer.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

14

 

EBITDA of $247 million was generated in 2006 versus a very strong $495 million in 2005. EBITDA margins were 20%, compared to 34% for the prior year. 2006 earnings were $97 million, or $0.67 per share, versus $248 million, or $1.61 per share, in 2005.

Return on equity (ROE) was 20% in 2006 compared to 46% in 2005. ROE is a measure for shareholders to determine how effectively their money is being employed. Capital initiatives, including the three CAD $1.00 special dividends paid in each of the past three years and the share repurchase program, have maintained the efficiency of Norbord's capital structure and contributed to the high ROE levels. The 2004 and prior ROE includes Fraser Papers, which was distributed to common shareholders in the third quarter of 2004. Pre-tax return on capital employed (ROCE) averaged 25% for the year compared to 53% in 2005. ROCE is a measurement of financial performance, focusing on cash generation and the efficient use of capital.

Norbord achieved record annual OSB production in 2006, increasing volume 4% over 2005 levels. OSB volume has more than doubled over the past five years, growing at a compound annual rate of 19%. Producing more volume from existing assets has contributed to Norbord's cost containment efforts. Norbord's OSB production is expected to increase by more than 10% in 2007, as a result of the ramp-up of the second line at Cordele and productivity improvements at existing mills.

Cash provided by operating activities totalled $191 million or $1.33 per share in 2006. In the past five years, over $1.4 billion in cash has been generated from operating activities. This cash has been used to reshape the Company from a traditional Canadian forest products company to a focused internationally-recognized leader in the structural panels sector. During this time, Norbord has:

  • Invested $610 million in growing the business
  • Reduced net debt and preferred shares outstanding by $160 million
  • Paid out $550 million in cash dividends
  • Invested $100 million to repurchase 10.2 million common shares
  • Distributed paper and timberlands business (Fraser Papers) to shareholders

This transformation has contributed to strong returns for shareholders. A CAD $100 investment in Norbord shares at the end of 2001 would have grown to CAD $234 by the end of 2006, assuming reinvestment of dividends and other distributions, representing a compound annual return of 19% per year.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

15

Results of Operations

Summary of Selected Financial Information

(US $ millions) 2006 2005 2004 2003 2002
Net sales$

1,252

$1,462$1,486$1,064$679
EBITDA 

247

 495 631 365 89
EBITDA margin 20% 34% 42% 34% 13%
Depreciation 

94

 89 82 76 71
Capital investments 

160

 115 67 31 15
OSB shipments (MMsf–3/8") 

4,289

 4,136 3,731 3,372 2,974
Average OSB price – North Central ($/Msf–7/16") 

217

 320 369 294 160
Average OSB price – Europe (/m3) 

208

 199 222 162 168

Markets

North American OSB accounts for two-thirds of Norbord's panel shipments by volume, therefore results of operations are most affected by volatility in the price of North American OSB. Comprising almost 30% of shipments by volume, the relative strength of European panel markets also affects results, although to a much lesser degree. North America is the principal market destination for Norbord's products.

 North 20062005
Shipments by market destinationAmericaEuropeTotalTotal
OSB (MMsf–3/8")3,7055844,2894,136
Particleboard (MMsf–3/8")(1)643643583
MDF (MMsf–3/8")149376525545
Hardwood plywood (MMsf–3/8")787877

(1)    Excludes particleboard consumed internally (2006 – 178 MMsf –3/8"; 2005 – 183 MMsf –3/8").

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

16

 

New home construction is the primary end use for OSB in North America, accounting for about 70% of OSB demand. US housing starts for 2006 were 1.8 million following 2.1 million in 2005, the highest annual level of starts since 1972. The long anticipated housing downturn unfolded more sharply than expected despite a relatively strong economic backdrop.

Interest rates and inflation in North America remained relatively low while GDP growth and consumer confidence remained relatively strong. Thirty-year US mortgage rates averaged 6.4% in 2006 compared to 5.9% in 2005. Most indicators suggest that the underlying demographics, driven by immigration, will continue to support a high level of housing demand throughout the coming decade. Canadian housing starts increased 1% over 2005 and remain robust at 0.2 million units.

The North American structural panel industry produced 42 billion square feet (3/8-inch basis) of panels in 2006. OSB production reached 26 billion square feet in 2006 and now represents approximately 62% of total North American structural panel production. Industry-wide OSB production was up 1% over 2005 while plywood production decreased 6%.

The North Central benchmark OSB price averaged $217 per Msf (7/16-inch basis) in 2006 compared to an average price of $320 per Msf in the prior year. Regional pricing variations, particularly in the US South, make the North Central benchmark price a useful, albeit imperfect, proxy for over-all North American OSB pricing. Further, the pricing lag effect of maintaining an order file, premiums obtained on value-added products, and volume and trade discounts cause realized prices to differ from the benchmark. Norbord's realized OSB prices or mill nets (net sales divided by shipments) were 102% of the benchmark in 2006 and 97% in 2005.

European markets showed steady improvement during 2006 as European construction market confidence improved, particularly in Germany. As a result, European OSB prices increased 5% over 2005 and averaged 8% above the five-year average.

The Company believes that improvement in the European economy in 2006 led to higher demand and prices for particleboard and MDF. Furthermore, Norbord successfully expanded particleboard sales to the construction sector, a focus selected to maximize synergies with its OSB sales strategy. While European results benefited from the higher price levels, these gains were tempered by continued high energy, resin and other input costs.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

17

 

    Net Sales   Shipments Average Mill Nets
   (US $ millions)   (MMsf–3/8") (US $ per Msf–3/8")
  2006 2005 2006 2005 2006 2005
OSB(1)$832$1,070 4,289 4,136$194$259
Particleboard(2) 116 98 643 583 180 167
MDF 110 107 525 545 211 197
Hardwood plywood 50 48 78 77 639 617
Other(3) 144 139        
Total$1,252$1,462        

(1)    Includes European net sales of $127 million (2005 – $114 million).
(2)    Excludes particleboard consumed internally (2006 – 178 MMsf –3/8"; 2005 – 183 MMsf –3/8").
(3)    Other sales include I-joist, laminated products, furniture components and ready-to-assemble furniture units.

Production

(MMsf–3/8")20062005200420032002
OSB4,3354,1723,8213,4022,986
Particleboard794777616586560
MDF517555598572524
Hardwood plywood7978797679

Eight of Norbord's 11 OSB mills established annual production records in 2006. Improvements delivered as a result of implementing best practices resulted in a 4% production increase. This follows a 9% increase in OSB production in 2005. Particleboard production increased 2% as compared to 2005 despite decommissioning the older and less efficient particleboard line at South Molton, England in the third quarter of 2006. The decrease in MDF production as compared to 2005 is the result of decommissioning the older MDF line at Cowie in the second quarter of 2006. Norbord's total European MDF production is expected to return to about 90% of its pre-closure volume by the end of 2007 as production at the remaining MDF facility is optimized.

Operating Results

In 2006, EBITDA was $247 million as compared with $495 million in 2005. The primary driver of the change in EBITDA was the lower North American OSB price. Benchmark OSB prices in 2006 averaged 32% below the highs seen in 2005 and 20% below the five-year average. The components of the EBITDA change are summarized in the following variance table. EBITDA margin was 20% compared to 34% for the prior year.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

18

 

(1)    The mill net variance represents the change in realized pricing across all products. Mill net is calculated as net sales divided by shipment volume.

(2)    Key inputs include fibre, resin and energy.

(3)    The volume variance represents the impact of shipment volume changes across all products.

(4)    Other category comprises all remaining variances including labour and benefits, supplies and maintenance, the impact of foreign exchange, and the $7 million refund of softwood lumber duty received in the fourth quarter of 2006.

North American OSB generated EBITDA of $215 million (2005 – $478 million). Other products contributed $41 million (2005 – $35 million) to EBITDA. These figures exclude unallocated corporate overhead relating to all product lines totalling $16 million (2005 – $18 million) and softwood lumber duty refunds of $7 million.

The global forest products industry continued to be challenged with significantly higher key input prices in 2006. The prices of energy, resin and fibre, which account for approximately 70% of production costs, have each increased more than 70% in the past five years. In 2006, while the rate of increase diminished, all of these input prices increased over 2005. Gains from the Margin Improvement Program (MIP) of $56 million in 2006, measured relative to 2005 at constant prices and exchange rates, limited the impact these higher input prices had on earnings. Mix, volume and key input usage initiatives were the largest contributors to MIP in 2006. Globally, Norbord expects to deliver MIP of $45 million for the full year 2007.

Despite these continued input price pressures, Norbord's North American per unit OSB production costs, before employee profit share, were in line with the prior year – the result of increased productivity and improved raw material usages.

The direct impact on operating costs of rising energy prices has been limited as the majority of Norbord's energy is provided by burning bark and other biomass. Natural gas and electricity satisfy the remainder of Norbord's energy requirements. The Company estimates the unfavourable impact of a $1 per mmbtu increase in the price of natural gas to negatively impact annual earnings by approximately $3 million, or lessthan 2 cents per share. Norbord continues to look for ways to improve its level of energy self-sufficiency. For example, the energy system at Cowie (operational November 2006) and energy systems at Genk and Nacogdoches (both scheduled to be operational fourth quarter 2007) should eliminate the use of natural gas to generate process heat across the Company's OSB operations.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

19

Net sales were $1,252 million, compared to $1,462 million in 2005. The impact on net sales of higher shipment volumes was offset by lower North American OSB prices.

EBITDA margins for non-OSB products averaged 6% in 2006 compared to 7% in 2005. MDF and particleboard costs were impacted by energy and resin price pressures. MDF and particleboard are more energy- and resin-intensive products than OSB.

Depreciation expense increased $5 million in 2006 to $94 million, due to the impact of recent capital investments.

Interest and Income Tax

Interest expense of $29 million in 2006 was down from $30 million in 2005. Interest of $7 million was capitalized in 2006 relating to the Cordele expansion completed in December. This offset the impact that higher average debt levels and increased short-term interest rates had on interest expense. Long-term debt ended the year at $480 million, up from $440 million at December 31, 2005.

The effective interest rate on Norbord's debt-related obligations, including the impact of interest rate swaps, was 7.7% at December 31, 2006, compared to 7.2% at year-end 2005. Approximately 80% of Norbord's net debt was subject to floating interest rates during the year. The increased average rate was the result of higher US money market rates in 2006.

From time to time the Company recoupons its portfolio of interest rate swaps to more efficiently manage cash flow and credit exposure. Any gains realized are deferred and amortized over the remaining term of the debt against which the swaps were designated as hedges. At December 31, 2006, $19 million of gains were deferred and included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheet. The amortization of $8 million in 2006 and $8 million in 2005 was included in interest expense. Interest income in 2006 amounted to $3 million compared to $5 million in 2005. Interest earned on cash and cash equivalents accounts for the majority of interest income. A tax expense of $17 million was recorded in 2006 on pre-tax earnings of $114 million. The effective tax rate of 15% is less than the statutory rate of 34% principally due to rate differences on foreign activities.

At December 31, 2006, the Company had tax operating loss carryforwards of approximately £36 million from UK operations that can be carried forward indefinitely. The Company has capital losses in Canada of CAD $66 million that can also be carried forward indefinitely. The Company also has approximately CAD $34 million of investment tax credits (ITCs) available to reduce future Canadian tax liabilities. The ITCs expire between 2007 and 2014. The loss carryforwards and the credits may be utilized over the next several years to eliminate cash taxes otherwise payable, and will enhance future cash flows. The future tax benefits of these temporary differences have been included in future income taxes in the consolidated financial statements.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

20

 

Liquidity and Capital Resources

(US $ millions, except per share information, unless otherwise noted)2006 2005 2004 2003 2002
Cash provided by operating activities$

191

$

314

$

562

$

280

$

62

Cash provided by operating activities per share 

1.33

 

2.14

 

3.75

 

1.92

 

0.44

Operating working capital 

33

 

19

 

2

 

(6)

 

-

Total working capital 

53

 

174

 

217

 

171

 

66

Capital investments 

160

 

115

 

67

 

31

 

15

Net debt to capitalization, market basis 27% 17% 13% 32% 49%
Net debt to capitalization, book basis 51% 35% 30% 35% 48%

Cash provided by operating activities was $191 million, or $1.33 per share, compared to $314 million, or $2.14 per share, in 2005. Changes in earnings is the principal driver of changes in cash provided by operating activities. Higher cash taxes in 2006 and 2005 following the utilization of the majority of the benefit of the North American tax operating loss carryforwards in 2004 also contributed to the lower level of cash provided by operating activities in these years.

Operating working capital, consisting of accounts receivable and inventory less accounts payable and accrued liabilities was $33 million at December 31,2006, compared to $19 million at December 31,2005. A higher accounts receivable balance due to an increase in non-trade receivables is the primary driver of the change in the operating working capital balance. Collections of trade receivables are in line with prior periods. The Company aims to minimize the amount of capital held as operating working capital. Total working capital at December 31,2006 was $53 million including $20 million in cash and cash equivalents. Total working capital is down significantly over 2005 principally due to the lower cash balance in 2006.

In addition to cash on hand and cash generated from operations, the Company has $200 million of committed unsecured revolving bank lines available to support short-term liquidity requirements, of which $44 million were utilized at December 31, 2006 – $40 million drawn as cash and $4 million drawn for letters of credit. These committed bank lines mature in 2010, bear interest at money market rates plus a margin that varies with the Company's credit rating, and contain certain financial covenants which the Company must comply with on a quarterly basis.

Cash dividends of $167 million or CAD $1.40 per share were paid in the year including the payment of a CAD $1.00 special dividend on July 14, 2006, the third special dividend in the past three years. Dividends were funded with cash from operations. Other uses of the cash from operations in the year include $160 million for capital investments and $29 million for common share repurchases. These initiatives are discussed in further detail in the Investments and Divestitures and Capitalization sections. In addition, $40 million of cash was received through the drawdown of the committed bank lines, which is reflected as an increase in long-term debt.

Norbord's net debt stood at $460 million at year-end, representing 27% of capitalization on a market basis and 51% of capitalization on a book basis. Net debt includes long-term debt of $480 million less cash and cash equivalents of $20 million.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

21

The Company's next term debt maturity is its $200 million 81/8% debentures due March 20, 2008. The $480 million long-term debt outstanding at year-end 2006 has an average term of 3.5 years.

At December 31, 2006, the Company had $365 million (2005 – $365 million) of interest rate swaps outstanding, and 84% (2005 – 74%) of Norbord's net debt was at floating interest rates.

The following table summarizes the aggregate amount of future cash outflows for contractual obligations:

  Payments Due by Period
    Less thanOne–Three Four–Five After Five
Contractual Obligations (US $ millions) Total One Year Years Years Years
Long-term debt$480$$200$40$240
Purchase obligations 99 35 38 26 
Operating leases 10 2 3 2 3
Total$589$37$241$68$243

Note: The above table does not include pension and post-retirement benefits plan obligations which are discussed in the Significant Accounting Policies and Estimates – Defined Benefit Pension Plans section.

Investments and Divestitures

Capital Investments

In December 2006, the second OSB line at Cordele was completed, on time and on budget, creating one of the largest and most efficient OSB manufacturing facilities in the world. The expansion added approximately 550 million square feet (3/8-inch basis) of production capacity at a capital cost of $135 million and increased Norbord's North American OSB production capacity by 15%. Once fully ramped up, this expansion will further strengthen Norbord's position as one of the largest OSB producers in the US South. In addition to the capital cost of $135 million, $8 million of interest and $5 million of start-up costs have been capitalized since construction began in the second quarter of 2005.

Capital investments in 2006, excluding the new Cordele OSB line, were $56 million, representing 60% of depreciation (2005 – 87%). Approximately 55% of the $56 million was invested in projects designed to enhance profitability. In addition, $97 million was invested in the Cordele mill expansion project and $7 million of interest was capitalized bringing the total capital investment in 2006 to $160 million.

At year-end 2006, commitments to projects in progress totalled $16 million. Norbord's 2007 capital investments are expected to be $30 million, representing committed capital and essential maintenance only. Should market conditions warrant, this could be increased to $40 million, or approximately 40% of depreciation. The 2007 capital investments will be funded with cash on hand, cash generated from operations and, if necessary, drawdowns under the Company's committed bank lines.

The following table summarizes Norbord's capital investments:

(US $ millions) 2006 2005 2004 2003 2002
Increased productivity$32$34$39$12$7
Greenfield and major expansion 97 38   
Environmental 6 28 11 6 1
Maintenance of business 18 14 17 13 7
Capitalized interest 7 1   
Total$160$115$67$31$15

 

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

22

 

Capital investment was higher for 2006 and 2005 as compared to prior years as the Company expanded capacity at the Cordele mill, accelerated capital projects focused on energy reduction and production enhancement and prioritized projects designed to meet MACT (Maximum Achievable Control Technology) requirements (see Risks and Uncertainties – Environmental Matters).

Provision for Non-Core Operation

In December 2006, the Company recorded a provision relating to the indefinite closure of the I-joist mill in Juniper, New Brunswick, following notification from the mill's major customer that its contract would not be renewed. The provision of $13 million ($0.06 per share) consisted of asset writedowns of $12 million and severances and other costs of $1 million. Earnings and balance sheet information relating to these assets follows:

  2006 

2005

Net sales$35$

44

EBITDA 2 (1)
Operating working capital 2 

9

Property, plant and equipment  

13

Notwithstanding the writedown taken, efforts to find replacement customers for the mill's product continue.

Capitalization

Dividends

Dividends to common shareholders totalled $178 million in 2006 and $166 million in 2005 including the payment of a CAD $1.00 per share special dividend in each of the third quarter of 2006 and the second quarter of 2005. In addition to the special dividends, the Company paid a regular dividend of CAD $0.40 in both 2006 and 2005.

Preferred share dividends totalled $1 million in 2005. All of the outstanding preferred shares were redeemed in the second quarter of 2005 (see Capitalization – Preferred Share Redemption).

Purchase of Common Shares

In 2006, the Company purchased and cancelled 2.7 million common shares at a cost of $29 million under a share repurchase program that expired on November 1, 2006. The share repurchase program was not renewed. In 2005, 5.7 million shares were purchased and cancelled at a cost of $54 million.

Preferred Share Redemption

During the second quarter of 2005, the Company redeemed all of the outstanding Class A Series I preferred shares at par (CAD $60 million). On redemption, a foreign exchange loss of $9 million was recorded as a charge to equity. This one-time charge did not impact earnings. However, the charge reduced earnings per share by $0.06 as it was included in the determination of earnings available to common shareholders, the numerator in the earnings per share calculation. Following the redemption, the Company's issued equity is comprised solely of common shares. The redemption eliminated the Company's financial obligation with the highest after-tax cost.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

23

Repurchase of Long-term Debt

In 2005, the Company repurchased and cancelled $10 million of the 71/4% debentures due 2012 and unwound a corresponding amount of interest rate swaps. The premium paid on repurchase was offset by the recognition of gains on the interest rate swaps.

Selected Quarterly Information

    2006   2005
(US $ millions, except per share4th3rd2nd1st4th3rd2nd1st
information, unless otherwise noted)QtrQtrQtrQtrQtrQtrQtrQtr
         
Key Performance Metrics        
Return on equity (ROE)(1)%6%27%43%41%38%45%62%
Return on capital employed (ROCE)

8%

15%33%46%45%41%53%65%
Cash provided by operating activities

54

37

70

30

121

55

98

40

Cash provided by operating

 

 

 

 

 

 

 

 

   activities per share

0.37

0.26

0.49

0.21

0.83

0.38

0.67

0.26

  

 

 

 

 

 

 

 

Net Sales and Earnings 

 

 

 

 

 

 

 

Net sales

259

291

334

368

351

338

369

404

EBITDA

22

35

79

111

110

100

128

157

Earnings

(1)

7

33

58

52

45

67

84

Per Common Share 

 

 

 

 

 

 

 

Earnings 

 

 

 

 

 

 

 

    Basic

0.05

0.23

0.40

0.36

0.31

0.39

0.56

    Diluted

(0.01)

0.05

0.23

0.40

0.36

0.31

0.39

0.55

  

 

 

 

 

 

 

 

Key Statistics 

 

 

 

 

 

 

 

OSB shipments (MMsf–3/8")

1,083

1,076

1,048

1,082

1,021

1,062

1,040

1,013

Average OSB price – North Central

 

 

 

 

 

 

 

 

   ($/Msf–7/16")

166

181

238

285

317

303

297

364

Average OSB price – Europe (/m3)

219

213

204

197

182

190

208

214

The price of North American OSB is the primary factor affecting the comparability of Norbord's results over the past eight quarters. Fluctuations in earnings during that time mirror fluctuations in the price of OSB in North America. The Company estimates the annualized impact of a $10 per Msf (7/16-inch basis) change in the North American OSB price on EBITDA in 2006 was approximately $30 million or approximately $0.14 per share. Regional pricing variations, particularly in the US South, make the North Central benchmark price a useful, albeit imperfect, proxy for overall North American OSB pricing. Further, the pricing lag effect of maintaining an order file, premiums obtained on value added products, and volume and trade discounts cause realized prices to differ from the benchmark.

Norbord has a relatively low exposure to the Canadian dollar due to a comparatively small manufacturing base in Canada, comprising 13% of its panel production capacity. The Company estimates the unfavourable impact of a US one-cent increase in the Canadian dollar to negatively impact annual earnings by approximately $1 million or less than $0.01 per share.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

24

 

Quarterly results are also impacted by seasonal factors such as weather and building activity. Market demand varies seasonally, as building activity and repair and renovation work, the principal end use for Norbord's products, are generally stronger in the spring and summer months. Adverse weather can also limit access to logging areas, which can affect the supply of fibre to Norbord's operations. Shipment volumes and commodity prices are affected by these factors as well as by global supply and demand conditions.

One-time items that had a significant impact on fourth quarter 2006 results include pre-tax income of $7 million ($0.03 per share) due to softwood lumber duty refunds, the $13 million provision ($0.06 per share) for non-core operation and tax recovery of $4 million ($0.03 per share) due to the resolution of several income tax audit items relating to prior taxation years. Foreign exchange on the redemption of preferred shares had a $0.06 per share negative impact in the second quarter of 2005.

Fourth Quarter Results

In the fourth quarter of 2006, results were driven by North American OSB prices which continued their downward trend in the quarter. Average North American OSB benchmark pricing for the fourth quarter was $166 per Msf (7/16-inch basis), 50% below the fourth quarter of 2005. Return on capital employed (ROCE) was 8% on an annualized basis for the quarter, compared to 15% and 45% for the third quarter of 2006 and the fourth quarter of 2005, respectively. ROCE is a measure of financial performance, focusing on cash generation and the efficient use of capital.

A loss of $1 million was generated in the fourth quarter as compared to income of $7 million in the previous quarter and income of $52 million in the fourth quarter of 2005. EBITDA of $22 million was generated in the fourth quarter of 2006, versus $35 million in the previous quarter and $110 million in the fourth quarter of 2005. The primary driver of the change in earnings and EBITDA is the change in North American OSB price. EBITDA changes are summarized in the variance table below. EBITDA margins were 8% in the quarter, compared to 12% for the previous quarter and 31% in the fourth quarter of 2005.

EBITDA Variance

(US $ millions)4th Qtr 2006 vs. 3rd Qtr 20064th Qtr 2006 vs. 4th Qtr 2005
EBITDA – current period$

22

$

22

EBITDA – comparative period 

35

 

110

Variance$(13)$(88)
Mill nets(1)$(27)$(121)
Volume(2) 

1

 

14

Key input prices(3) (9) (6)
Key input usage(3) (1) 

2

Other(4) 

23

 

23

 $(13)$(88)

(1)    The mill net variance represents the change in realized pricing across all products. Mill net is calculated as net sales divided by shipment volume.

(2)    The volume variance represents the of shipment volume changes across all products.

(3)    Key inputs include fibre, resin and energy.

(4)    Other category covers all remaining variances including labour and benefits, supplies and maintenance, the impact of foreign exchange, and the $7 million refund of softwood lumber duty received in the fourth quarter of 2006.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

25

Common Shares

At January 31,2007, there were 143.8 million common shares outstanding.

The weighted average number of common shares outstanding in the year has decreased 2% over the prior year. This decrease is principally due to share repurchases and has resulted in an improvement to earnings per share of approximately $0.02 per share.

Under the Dividend Reinvestment Plan, 1.4 million common shares were issued in 2006 compared to 0.5 million in 2005. The share repurchase program under which the Company purchased and cancelled 2.7 million common shares during the year expired November 1,2006 and was not renewed.

Shares issued under the Company's stock option plan totalled 0.3 million in 2006, generating proceeds of $1 million. Options on 0.7 million shares were exercised during 2005. Options on 1.8 million shares were outstanding at year-end 2006, with 38% vested. During the year, the exercise price on all outstanding options was decreased by CAD $1.00 to reflect the payment of a special dividend (CAD $1.00). The exercise price for these options ranges from CAD $0.01 to CAD $11.13, with expiry at various dates to 2015.

The following table summarizes common share information for each of the past five years.

Common Share Information as at December 31 

2006

 

2005

 

2004

 

2003

 

2002

Shares outstanding (millions) 

143.7

 

144.8

 

149.3

 

148.2

 

144.5

Dividends (US $ millions)$

178

$

166

$

166

$

43

$

36

Book value (US $ per share)$

3.02

$

3.61

$

3.42

$

5.79

$

5.30

Market price at year-end (CAD $ per share)$

8.91

$

12.25

$

12.40

$

10.85

$

8.25

Dividend yield(1) 4.5% 3.3% 3.2% 3.7% 4.8%

(1)    Calculated based on year-end closing share price and annual dividend excluding the special dividends of CAD $1.00 per share paid in each of the past three years.

Norbord's total shareholder return during 2006 was a loss of 16% as the CAD $1.40 in regular and special dividend payments were offset by a decline in share price. The average daily volume traded during 2006 was 0.5 million shares as compared to 0.4 million shares in 2005.

Transactions with Related Parties

The Company's major shareholder has various interests over which it has control or otherwise has significant influence (a "related company" or, collectively, "related companies").

In 2006 and 2005, the Company provided certain administrative services to a related company which were charged on a cost recovery basis. In addition, the Company periodically engages the services of related companies for various financial, real estate and other business advisory services. In 2006, the fees for these services were less than $1 million and were charged at market rates.

In 2006, the Company received a $3 million payment from a related company as final consideration pursuant to a 1999 Asset Purchase Agreement. The payment was contingent on the completion of an expansion project. In addition, Norbord paid $1 million to this related company for certain costs for which Norbord provided an indemnity under the same 1999 Asset Purchase Agreement. Total estimated future costs related to this indemnification total $1 million and are included in other liabilities in the consolidated balance sheet.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

26

 

Financial Policies

Capital Allocation

Norbord considers effective capital allocation to be critical to its success. Capital is invested only when Norbord expects returns to exceed pre-determined thresholds, taking into consideration both the degree and magnitude of the relative risks and rewards and, if appropriate, strategic considerations in the establishment of new business activities or maintenance of existing business activities. Post-investment reviews are conducted on capital investment decisions to assess the results against planned project returns.

Liquidity

Norbord strives to maintain sufficient financial liquidity at all times in order to participate in attractive investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances.

At year-end, Norbord had $156 million of unutilized committed unsecured revolving credit facilities with six international financial institutions available to support short-term liquidity requirements.

Credit Ratings

Debt ratings within investment grade categories are a key objective of Norbord's financing strategy and provide for long-term access to public and private capital markets on attractive terms. Current ratings on Norbord's senior unsecured debentures are:

 Dominion BondStandard & Poor'sMoody's
 Rating ServiceRatings ServicesInvestors Service
RatingBBBBBBBaa3
OutlookStableNegativeNegative

Ratings on the debentures have been investment grade since 1992.

Use of Financial Instruments

Norbord uses derivative financial instruments solely for the purpose of managing its interest rate, foreign exchange and commodity price exposures, as further detailed in the Risks and Uncertainties section. These activities are governed by Board-approved financial policies that cover risk identification, tolerance, measurement and reporting. Derivative transactions are executed only with approved highly rated counterparties under master netting agreements. Derivative contracts that are deemed to be highly effective in offsetting changes in the fair value, net investment or cash flows of hedged items are designated as hedges of specific exposures and, accordingly, all gains and losses on these instruments are recognized in the same manner as the item being hedged.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

27

Significant Accounting Policies and Estimates

Revenue Recognition

Net sales are recognized when the risks and rewards of ownership pass to the purchaser. This is generally when goods are shipped. Sales are recorded net of third-party transportation and discounts.

Sales are governed by contract or by standard industry terms. Revenue is not recognized prior to the completion of those terms. The majority of product is shipped via third-party transport on a freight-on-board shipping basis. In all cases, product is subject to quality testing by the Company to ensure it meets applicable standards prior to shipment.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, including capitalized interest. Government capital grants and investment tax credits received reduce the cost of related assets. Property, plant and equipment acquired in a business acquisition are recorded at fair value. Property, plant and equipment are depreciated on a straight-line basis. The rates of depreciation are intended to fully depreciate manufacturing and non-manufacturing assets over the following periods, which approximate their useful lives.

Buildings 20 to 40 years
Production equipment 10 to 15 years

These periods are assessed from time to time to ensure that they continue to approximate the useful lives of the related assets. Property, plant and equipment is tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

Future Income Taxes

Future income tax assets and liabilities are determined based on temporary differences between the carrying amount and tax basis of assets and liabilities as well as certain carryforward items.

Future income tax assets are recognized only to the extent that, in the Company's opinion, it is more likely than not that the future income tax assets will be realized. This opinion is based on certain estimates and assumptions. If these estimates or assumptions change in the future, the Company could be required to reduce or increase the value of the future income tax assets resulting in income tax expense or recovery. The Company evaluates its future income tax assets periodically.

Defined Benefit Pension Plans

Norbord's defined benefit pension plans are funded in accordance with all applicable regulatory requirements. Norbord's obligations under its defined benefit pension plans are determined periodically through actuarial valuations, which are the basis for calculating pension expense. The weighted average assumed return on assets is 7.8%, which is based on management's best estimate of the long-term expected rate of return on plan assets, including consideration of asset mix, equity risk premium and active investment management premium. The weighted average discount rate used to value year-end 2006 accrued benefit obligations is 5.0%, which is based on the market yield of high-quality corporate bonds of similar duration to the pension plan liabilities.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

28

 

At December 31, 2006, defined benefit pension plan assets were $49 million (2005 – $41 million) while the accrued benefit obligations were $69 million (2005 – $65 million), yielding an unfunded liability of $20 million (2005 – $24 million). Defined benefit pension expense for the year was $2 million (2005 – $3 million) and defined benefit employer contributions were $5 million (2005 – $1 million). Norbord anticipates 2007 net pension expense and employer contributions will be in line with 2006 levels.

Significant changes in assumptions, driven by changes in financial markets, asset performance different from the assumed rate of return, significant new plan enhancements, acquisitions, divestitures, changes in the regulatory environment, and the measurement uncertainty incorporated into the actuarial valuation process could materially affect Norbord's future plan assets, accrued benefit obligations, pension expense and pension contributions.

Stock-Based Compensation

The Company accounts for stock options using the fair value method. Under this method, compensation expense for options is measured at the grant date using the Black-Scholes option pricing model and recognized on a straight-line basis over the vesting period. In both 2006 and 2005, the Company recognized $1 million in compensation expense related to stock options.

Accounting Developments

In 2005, the CICA issued new accounting standards comprising handbook sections 3855, "Financial Instruments – Recognition and Measurement," 3865, "Hedges," and 1530, "Comprehensive Income" which will become effective for Norbord beginning in the first quarter of 2007.

These standards impact the measurement and presentation of financial instruments in the financial statements. The new standards also introduce the concept of other comprehensive income which will be included on the consolidated balance sheets as a separate component of shareholders' equity.

The changes in carrying value of financial instruments as a result of adopting these new standards, if any, will be recognized in opening retained earnings in the first quarter of 2007. The Company is currently evaluating the impact of adopting these standards.

Risks and Uncertainties

Norbord is exposed to a number of risks in the normal course of its business that have the potential to affect the operating performance of the Company. A discussion of some of the major risks and uncertainties follows.

Product Price Sensitivities

Oriented strand board (OSB) accounts for more than 75% of Norbord's panel production capacity. The price of OSB is one of the most volatile in the wood-based panels industry. Norbord's concentration in OSB increases Norbord's sensitivity to product pricing and will result in a high degree of sales and earnings volatility.

 

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

29

Norbord's financial performance is principally dependent on the selling price of its products. The markets for most of Norbord's products are highly cyclical and are characterized by periods of supply and demand imbalance during which its product prices have tended to fluctuate significantly. In addition, since many of Norbord's products are used for new home construction, seasonal and annual weather changes can affect demand and sales volumes. These imbalances, which may affect different areas of Norbord's business at different times, are influenced by numerous factors that are beyond Norbord's control and include changes in global and regional production capacity for a particular product or group of products; changes in the end use of those products or the increased use of substitute products; and the overall level of economic activity in the regions in which Norbord conducts business. Norbord has been negatively affected in the past by declines in product pricing and has occasionally taken market-related production downtime.

Based on operating at capacity, the following table shows the approximate annualized impact of changes in product prices on EBITDA.

  

Impact on

 Sensitivity

EBITDA

 Factor

($ millions)

OSB – North America$10 per Msf–7/16"$36(1)
OSB – Europe 10 per m3

7

Other panels$10 per Msf–7/16"

12

(1)    Calculated assuming the second OSB line at Cordele is fully ramped up. The sensitivity before taking account of the Cordele expansion was $30 million.

Norbord is exposed to commodity price risk on its products and monitors market developments. No liquid futures markets exist for the majority of Norbord's commodity outputs. Norbord is authorized to hedge a portion of its commodity price exposure up to Board-approved limits in order to reduce the potential negative impact of falling commodity output prices. Should Norbord decide to hedge any of this exposure, it will hedge physically with customers and, if that is unfeasible, purchase financial hedges where liquid markets exist.

Competition

The wood-based panels industry is a highly competitive business environment in which companies compete, to a large degree, on the basis of price. Norbord's principal market is the United States where it competes with North American and, in some instances, foreign producers. Norbord's European operations compete primarily with other European producers. Certain competitors may have lower-cost facilities than Norbord. Norbord's ability to compete in these and other markets is dependent on a variety of factors such as manufacturing costs, continued free access to markets, customer service, product quality, financial resources and currency exchange rates. As a result of this risk, a central element of Norbord's strategy is to endeavour to maintain assets that are high quality, well located and low cost. In addition, competitors could develop new cost-effective substitutes for Norbord's wood-based panels, or building codes could be changed to make the use of Norbord's products less attractive for certain applications.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

30

 

Manufacturing Inputs

Norbord is exposed to commodity price risk on most of its manufacturing inputs, principally wood fibre, resin and energy. These manufacturing inputs are purchased primarily on the open market in competition with other users of such resources and prices are influenced by factors beyond Norbord's control. Norbord may not be able to pass increased costs through to its customers.

Norbord is exposed to commodity price risk on manufacturing inputs and monitors market developments in all commodity prices to which it is materially exposed. No liquid futures markets exist for the majority of Norbord's commodity inputs but, where possible, Norbord will hedge a portion of its commodity price exposure up to Board-approved limits in order to reduce the potential negative impact of rising commodity input prices. Should Norbord decide to hedge any of this exposure, it will hedge physically with suppliers and, if that is unfeasible, purchase financial hedges where liquid markets exist.

At January 31, 2007, Norbord has hedged approximately 30% of its 2007 expected natural gas consumption by locking in the price directly with its suppliers. Approximately 55% of Norbord's electricity is purchased in regulated markets and Norbord has hedged approximately 25% of its 2007 deregulated electricity consumption. More than 65% of Norbord's energy requirements are met with biomass.

Fibre Resource

As Norbord does not own any timberland, it purchases timber, wood chips and other wood fibre as well as recycled materials on the open market in competition with other users of such resources where prices are influenced by factors beyond Norbord's control.

Norbord's wood fibre supply comes from several different sources. In the US, roundwood logs are primarily sourced from private and industry-owned woodlands. The MDF mill also purchases woodchips and sawdust from local sawmills. In Europe wood fibre is purchased from government-owned and private landowners. Fibre for OSB comes from roundwood logs while the MDF and particleboard mills source fibre in the form of roundwood logs, woodchips, sawdust and recycled wood. Norbord's Quebec and Ontario mills hold forestry licences and agreements to source approximately 880,000 cubic metres of poplar and birch from Crown timberland in those provinces. Most of this volume is harvested and delivered by third parties that also hold licences to operate in these areas.

The Crown licences require the payment of stumpage fees for the timber harvested and compliance with specified rehabilitation and silvicultural management practices. The licences cover periods ranging from 20 to 25 years and are renewed or extended every five years. They can be revoked or cancelled for non-performance. The licences also contain terms and conditions that could, under limited circumstances, result in a reduction of annual allowable timber that may be harvested by Norbord without any compensation.

Litigation

Norbord and eight other North American OSB producers have been named as defendants in several lawsuits filed in the United States District Court for the Eastern District of Pennsylvania. The lawsuits allege that these nine North American OSB producers violated United States and various state antitrust and other laws by allegedly agreeing to fix prices and reduce the supply of OSB from June 1,2002 through the present.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

31

The named plaintiffs seek to have the cases certified as class actions. One group of plaintiffs seeks to certify a class of persons and entities that purchased OSB in the United States directly from any of the named North American OSB producers between June 1, 2002 and the present. Other plaintiffs seek to certify one or more classes of persons and entities that purchased OSB in various states and the District of Columbia indirectly between June 1, 2002 and the present.

Norbord believes that the lawsuits are entirely without merit and intends to defend this matter vigorously. However, the lawsuits are in their early stages, the outcome of litigation is subject to inherent uncertainties and an adverse outcome to these litigations has the potential to materially and adversely affect Norbord's business, financial condition and results of operations.

Labour Relations

Norbord's US employees are non-unionized while its UK, Belgian and most of its Canadian employees are unionized – representing just under one-half of the workforce. All but one of Norbord's UK and Belgian union contracts are evergreen. Norbord's Cowie and Canadian union contracts typically cover a three- to five-year term. No labour union contracts expired in 2006 and contracts covering employees at our Val-d'Or, Quebec, and Cochrane, Ontario, mills expire during 2007. Norbord believes it will be able to negotiate acceptable contracts upon expiry, but strikes or work stoppages could result if Norbord is unable to do so.

Environmental Matters

Norbord's operations are subject to a range of general and industry-specific environmental laws and regulations relating to air emissions, wastewater discharges, solid and hazardous waste management, plant and wildlife protection, and site remediation. Norbord believes that all of its facilities are in substantial compliance with these matters. Failure to comply with applicable environment laws and regulations could result in fines, penalties or other enforcement actions which could impact Norbord's production capacity or increase Norbord's production costs.

Maximum Achievable Control Technology (MACT) regulations, designed to reduce hazardous air emissions, took effect in the US in 2004. The new standards apply to more than 200 mills manufacturing plywood, OSB, MDF, particleboard and other wood composite panels. Existing mills are required to demonstrate compliance by October 2008.

In 2004 and 2005, $29 million in emission control equipment was installed at the Nacogdoches; Bemidji, Minnesota and Deposit, New York mills to meet state requirements and increase production. With these investments, the Company believes that all US mills with the exception of the original Cordele line meet the compliance requirements of the MACT standards. Where necessary, permit applications will be submitted in 2007 to finalize compliance requirements. In 2008, a capital investment of $8 million may be required to bring the original Cordele line into compliance.

A separate MACT regulation has been approved to control the emissions of hazardous air pollutants from industrial boilers. Six Norbord operations are affected by these regulations. Capital requirements for compliance are not expected to be material.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

32

 

In Europe, regulations to control the risks of fire and explosion came into force in 2004 (the UK's Dangerous Substances and Explosive Atmosphere (DSEAR) regulations and Europe's Explosive Atmosphere (ATEX) Directive). In the UK, most compliance work was completed in 2006, with final minor upgrades scheduled in early 2007. In Genk, compliance work began in 2006 and will be completed during 2007 and 2008. To date, the Company's European operations have invested approximately $6 million in equipment and controls to comply with the regulations.

Tax Exposures

Norbord maintains reserves for known estimated tax exposures in all jurisdictions. These exposures are settled primarily through the closure of audits with the jurisdictional taxing authorities. Norbord believes its reserves are adequate to cover such exposures, but future settlements could differ materially from such reserves.

Currency Exposure

Norbord reports its financial results in US dollars. A portion of Norbord's product prices and costs are influenced by relative currency values (particularly the Canadian dollar, Pound Sterling and Euro). Significant fluctuations in relative currency values could negatively affect the cost competitiveness of Norbord's facilities, the value of its foreign investments, the results of its operations and its financial position.

Norbord's foreign exchange exposure arises from the following sources:

      Net investments in self-sustaining foreign operations, limited to Norbord's investment in its European operations

      Net Canadian dollar-denominated monetary assets and liabilities

      Committed or anticipated foreign currency transactions, primarily Canadian dollar costs in Norbord's Canadian operations and Euro revenues in Norbord's UK operations.

Norbord's policy is to hedge all significant balance sheet foreign exchange exposures. The Company may hedge a portion of foreign currency cash flows for periods up to three years in order to reduce the potential negative effect of a strengthening Canadian dollar versus the US dollar or a weakening Euro versus the Pound Sterling.

In 2006, Norbord was negatively impacted by the strengthening Canadian dollar, realizing an average exchange rate, relative to the US dollar, of US $0.882 (2005 – US $0.825) on its Canadian dollar costs.

The Euro was essentially flat versus the Pound Sterling with an average rate of £0.682 during 2006 and £0.684 during 2005, ending the year at £0.674.

There were no Canadian dollar cost hedges or Euro revenue hedges outstanding at December 31, 2006. Each US one-cent change in the value of the Canadian dollar impacted annualized after-tax earnings by approximately $1 million in 2006. Each Pound Sterling one-pence change in the value of the Euro impacted after-tax earnings by approximately £1 million in 2006.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

33

Disclosure Controls and Procedures and Internal Controls over Financial Reporting

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the President and Chief Executive Officer (CEO) and the Executive Vice President and Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding annual and interim financial statement disclosure.

An evaluation of the effectiveness of the design and operation of disclosure controls and procedures was conducted as of December 31, 2006 by Norbord's management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that Norbord's disclosure controls and procedures as defined in Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, and in Rule 13a-15(e) under theSecurities Exchange Act of 1934 are effective.

Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and compliance with Canadian generally accepted accounting principles. There have been no changes in Norbord's internal control over financial reporting during the year ended December 31, 2006, that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

Norbord's management, including the CEO and CFO, has evaluated the design of the Company's internal control over financial reporting using the framework and criteria established in "Internal Control – Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that the design of internal control over financial reporting was effective as of December 31,2006.

Section 404 of theSarbanes Oxley Act requires that a report on management's assessment of the effectiveness of internal controls over financial reporting be issued and that management's assessment be independently audited by the shareholders' auditors. Under rules as currently written and Norbord's status under US securities law, the timetable for Norbord to meet these requirements is December 31, 2007 for management's assessment of the effectiveness of internal controls over financial reporting and December 31,2008 for the independent audit of management's assessment. Based on the work done to date, the Company expects it will be able to comply with these requirements.

Outlook for 2007

Market statistics for new home sales activity and inventories indicate the US housing market may be bottoming, however, many industry forecasts predict that US housing starts will remain below the five-year average of 1.9 million starts during 2007. Industry forecasts also predict that spending on repair and remodelling will remain close to 2006 levels. Since housing starts account for about 55% of North American structural panel demand, Norbord expects that the slower new home construction market will drive lower structural panel consumption in 2007. OSB currently constitutes approximately 62% of North American structural panel usage, and Norbord anticipates further OSB substitution for plywood during this down cycle.

New North American OSB capacity started ramping up during 2006. The Company expects this will continue through the next two years. The impact of this new capacity should be tempered by the fact that some of Norbord's competitors have announced permanent and temporary market-related downtime at existing structural panel mills as well as slowdowns in new capacity construction.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

34

 

With slower housing starts and new OSB capacity ramping up, North American OSB prices are expected to remain below trend levels through 2007.

The Company expects that the European construction market, which drives demand for Norbord's OSB and particleboard products in Europe, will continue expanding in 2007. The improving economic climates in Germany, which accounts for about one-third of European panel demand, and eastern Europe are the principal drivers of this expansion. Norbord also expects that improving retail spending in Europe should improve demand for Norbord's European MDF and value-added furniture products, which are used principally in home furnishings and fixtures.

Norbord anticipates that its global OSB production will increase by more than 10% in 2007, as a result of the ramp-up of the second line at Cordele and productivity improvements at existing mills. Further, Norbord expects production of value-added products, which account for about one-quarter of Norbord's North American OSB sales volume to grow by 20% versus 2006 levels.

Capital investment in 2006 and 2005 reflects the construction of the second line at Cordele. Capital investment for 2007 is currently estimated at $30 million, which includes the completion of the biomass heat energy systems at Genk and Nacogdoches. If market conditions warrant, capital investment could be increased to $40 million, or 40% of depreciation.

Summary

Norbord believes that it will benefit from its geographic diversification strategy in 2007 as weaker North American OSB results are expected to be partially offset by stronger European panel results. The Company believes it is one of the lowest-cost OSB producers in North America, and with significant liquidity available, management is confident the Company is well positioned to weather the down cycle in North America.

The Company believes the fundamentals supporting demand for structural panels remain strong and it is committed to the strategy of pursuing growth in OSB through operational efficiency, strategic expansion of existing assets, well-priced and well-timed acquisitions, and investment in low-risk, high-return capital projects. Norbord believes this strategy should serve shareholders well in the future.

Definitions

The following non-GAAP measures have been used in this MD&A. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. There are no directly comparable GAAP measures to any of these measures. Each non-GAAP measure is defined below. Where appropriate, a quantitative reconciliation of the non-GAAP measure to the nearest comparable GAAP measure is provided.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

35

EBITDA is earnings from continuing operations before interest, premium on early extinguishment of debt, provision for non-core operation, income tax, depreciation and amortization. Norbord views EBITDA as a measure of gross profit and interprets EBITDA trends as an indicator of relative operating performance. EBITDA is presented as a useful indicator of a company's ability to incur and service debt and meet capital expenditure requirements. The following table reconciles EBITDA to the nearest comparable GAAP measure:

(US $ millions) 

2006

 

2005

 

2004

 

2003

 

2002

Earnings$

97

$

248

$

326

$

126

$

13

Less: Earnings from discontinued operations 

 

 

6

 

40

 (6)
Add: Premium on early extinguishment of debt, net 

 

 

9

 

 

Add: Provision for non-core operation 

13

 

 

 

 

Add: Interest expense 

29

 

30

 

31

 

37

 

37

Less: Interest and other income (3) (5) (6) (5) (6)
Add: Income tax 

17

 

133

 

183

 

91

 (20)
Add: Depreciation 

94

 

89

 

82

 

76

 

71

EBITDA$

247

$

495

$

631

$

365

$

89

EBITDA margin (%) is EBITDA as a percentage of net sales.

Operating working capital is accounts receivable plus inventory less accounts payable and accrued liabilities.

Total working capital is operating working capital plus cash and cash equivalents.

Capital employed is the sum of property, plant and equipment, operating working capital and other assets less any unrealized balance sheet losses included in other liabilities. The following table reconciles capital employed to the nearest comparable GAAP measure:

(US $ millions) 

2006

 

2005

 

2004

 

2003

 

2002

Property, plant and equipment$

1,008

$

921

$

927

$

833

$

857

Accounts receivable 

163

 

145

 

150

 

115

 

84

Inventory 

98

 

99

 

90

 

66

 

61

Accounts payable and accrued liabilities (228) (225) (238) (187) (145)
Other assets 

7

 

4

 

5

 

6

 

66

Unrealized net investment hedge losses(1) (25) 

 (16) (16) (1)
Capital employed$

1,023

$

944

$

918

$

817

$

922

(1)    Included in other liabilities. 

 

 

 

 

 

 

 

 

 

ROCE (return on capital employed) is EBITDA divided by average capital employed. ROCE is a measurement of financial performance, focusing on cash generation and the efficient use of capital.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Discussion and Analysis

 

ANNUAL REPORT
2006

 

36

 

ROE (return on common equity) is earnings available to common shareholders (earnings less preferred share dividends) divided by common shareholders' equity. ROE is a measure for common shareholders to determine how effectively their money is being employed.

Total shareholder return assumes the reinvestment of all dividends in shares of Norbord. The 2004 return assumes the shares of Fraser Papers received in the distribution were disposed on the first day of trading with the reinvestment of the proceeds in Norbord shares.

Net debt is long-term debt including the current portion and bank advances less cash and cash equivalents. Net debt is a useful indicator of a company's debt position. The following table reconciles net debt to the nearest comparable GAAP measure:

(US $ millions) 

2006

 

2005

 

2004

 

2003

 

2002

Long-term debt$

480

$

440

$

450

$

657

$

658

Current portion of long-term debt 

 

 

1

 

2

 

153

Bank advances 

 

 

 

 

1

Cash and cash equivalents (20) (155) (215) (177) (67)
Net debt$

460

$

285

$

236

$

482

$

745

Net debt to capitalization, book basis is net debt divided by the sum of net debt and shareholders' equity. Net debt to capitalization, book basis is a measure of a company's relative debt position. Norbord interprets this measure as an indicator of the relative strength and flexibility of its balance sheet.

Net debt to capitalization, market basis is net debt divided by the sum of net debt and market capitalization. Market capitalization is the number of common shares outstanding at period end multiplied by the trailing 12-month average per share market price. Market basis capitalization is intended to correct for the low historical book value of Norbord's asset base relative to its fair value. Net debt to capitalization, market basis is a key measure of a company's relative debt position and Norbord interprets this measure as an indicator of the relative strength and flexibility of its balance sheet. While the Company considers both book and market basis metrics, the Company believes the market basis to be superior to the book basis in measuring the true strength and flexibility of its balance sheet.

Book value per shareis common shareholders' equity divided by common shares outstanding.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

Management's Discussion and Analysis

NORBORD

 

ANNUAL REPORT
2006

 
 

37

Forward-Looking Statements

This document includes forward-looking statements, as defined by applicable securities legislation. Often, but not always, forward-looking statements can be identified by the use of words such as "believes," "expects," or "does not expect," "is expected," "targets," "outlook," "plans," "scheduled," "estimates," "forecasts," "intends," "anticipates" or "does not anticipate" or variations of such words and phrases or statements that certain actions, events or results "may," "could," "would," "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Examples of such statements include, but are not limited to, comments with respect to: (1) outlook for the markets for products; (2) expectations regarding future product pricing; (3) the outlook for operations; (4) expectations regarding mill capacity and production volumes; (5) objectives; (6) strategies to achieve those objectives; (7) expected financial results; (8) sensitivity to changes in product prices, such as the price of OSB; (9) sensitivity to key input prices, such as the price of natural gas; (10) sensitivity to changes in foreign exchange rates; (11) Margin Improvement Program targets; (12) expectations regarding income tax rates; (13) expectations regarding compliance with environmental regulations; (14) expectations regarding contingent liabilities and guarantees, including the outcome of pending litigation; and (15) expectations regarding the amount, timing and benefits of capital investments.

Although Norbord believes it has a reasonable basis for making these forward-looking statements, readers are cautioned not to place undue reliance on such forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. These factors include, but are not limited to: (1) assumptions in connection with the economic and financial conditions in the United States, Europe, Canada and globally; (2) risks inherent with product concentration; (3) effects of competition and product pricing pressures; (4) outcome of the OSB class action lawsuits; (5) risks inherent with customer dependence; (6) effects of variations in the price and availability of manufacturing inputs including continued access to fibre resources at competitive prices; (7) various events which could disrupt operations, including natural events and ongoing relations with employees; (8) impact of changes to or non-compliance with environmental regulations; (9) impact of any product liability claims in excess of insurance coverage; (10) risks inherent with a capital intensive industry; (11) impact of future outcome of certain tax exposures; and (12) effects of currency exposures and exchange rate fluctuations.

The above list of important factors affecting forward-looking information is not exhaustive. Additional factors are noted elsewhere and reference should be made to the other risks discussed in filings with Canadian securities regulatory authorities and the US Securities and Exchange Commission. Norbord does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company, whether as a result of new information, future events or otherwise, or to publicly update or revise the above list of factors affecting this information.

Some of the statements included in this MD&A constitute forward-looking statements that are based on various assumptions and are subject to various risks.
See the cautionary statement contained in the Forward-Looking Statements section.

NORBORD

Management's Responsibility for the Financial Statements

 

ANNUAL REPORT
2006

 

38

 

Management's Responsibility for the Financial Statements

The accompanying consolidated financial statements and all information in this annual report are the responsibility of management and have been approved by the Board of Directors.

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Financial statements are not precise since they include certain amounts based upon estimates and judgements. When alternative methods exist, management has chosen those it deems to be the most appropriate in the circumstances in order to ensure that the consolidated financial statements are presented fairly, in all material respects, in accordance with Canadian generally accepted accounting principles.

The Company maintains systems of internal controls, which are designed to provide reasonable assurance that accounting records are reliable and to safeguard the Company's assets.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility principally through its Audit Committee.

The Audit Committee is appointed by the Board and reviews the consolidated financial statements and management's discussion and analysis; considers the report of the external auditors; assesses the adequacy of the internal controls of the Company; examines the fees and expenses for audit services; and recommends to the Board the independent auditors for appointment by the shareholders. The Committee reports its findings to the Board of Directors for consideration when approving the consolidated financial statements for issuance to the shareholders.

January 23, 2007

J. Barrie ShinetonJohn Tremayne
President and Chief Executive OfficerExecutive Vice President and Chief Financial Officer
  

Auditors' Report

NORBORD

 

ANNUAL REPORT
2006

 
 

39

Auditors' Report

 

To the Shareholders of Norbord Inc.

We have audited the consolidated balance sheets of Norbord Inc. as at December 31, 2006 and 2005 and the consolidated statements of earnings and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.


Chartered Accountants

Toronto, Canada
January 23, 2007

 


NORBORD

Consolidated Statements of Earnings and Retained Earnings

 

ANNUAL REPORT
2006

 

40

 

Consolidated Statements of Earnings and Retained Earnings

Years ended December 31

 

 

 

 

(US $ millions, except per share information)

 

2006

 

2005

 

 

 

 

 

Earnings

 

 

 

 

Net sales

$

1,252

$

1,462

Earnings before interest, income tax, depreciation and provision for non-core operation

 

247

 

495

Provision for non-core operation(note 8)

 

(13)

 

Interest and other income

 

3

 

5

Interest expense(note 4)

 

(29)

 

(30)

Earnings before income tax and depreciation

 

208

 

470

Depreciation

 

(94)

 

(89)

Income tax(note 9)

 

(17)

 

(133)

Earnings

$

97

$

248

Earnings per common share(note 7)

 

 

 

 

Basic

$

0.68

$

1.62

Diluted

$

0.67

$

1.61

     
Retained Earnings

 

 

 

 

Balance, beginning of year

$

412

$

387

Earnings

 

97

 

248

Common share dividends

 

(178)

 

(166)
Repurchase of common shares(note 6)

 

(26)

 

(47)
Redemption of preferred shares(note 6)

 

 

(9)
Preferred share dividends

 

 

(1)
Balance, end of year

$

305

$

412

(See accompanying notes)
 

 

 

 

 


Consolidated Statements of Cash Flows

NORBORD

 

ANNUAL REPORT
2006

 
 

41

Consolidated Statements of Cash Flows

Years ended December 31

 

 

 

 

(US $ millions)

 

2006

 

2005

 

 

 

 

 

Cash provided by (used for):

 

 

 

 

Operating Activities

 

 

 

 

Earnings

$

97

$

248

Items not affecting cash:

 

 

 

 

Provision for non-core operation(note 8)

 

13

 

Depreciation

 

94

 

89

Future income taxes(note 9)

 

11

 

11

Other items(note 10)

 

(15)

 

(5)
 

 

200

 

343

Net change in non-cash working capital balances(note 10)

 

(9)

 

(29)
 

 

191

 

314

 

 

 

 

 

Investing Activities

 

 

 

 

Capital investments

 

(160)

 

(115)
Other(note 10)

 

(11)

 

13

 

 

(171)

 

(102)
 

 

 

 

 

Financing Activities

 

 

 

 

Dividends

 

(167)

 

(161)
Debt incurred (repaid)(note 4)

 

40

 

(1)
Repurchase of common shares(note 6)

 

(29)

 

(54)
Issue of common shares(note 6)

 

1

 

1

Redemption of preferred shares(note 6)

 

 

(47)
Repurchase of 71/4% debentures(note 4)

 

 

(10)
 

 

(155)

 

(272)
Increase (decrease) in cash and cash equivalents

$

(135)

$

(60)
 

 

 

 

 

Cash and cash equivalents is comprised of:

 

 

 

 

Cash

$

12

$

14

Cash equivalents

 

8

 

141

 

$

20

$

155

(See accompanying notes)
 

 

 

 

 


NORBORD

Consolidated Balance Sheets

 

ANNUAL REPORT
2006

 

42

 

Consolidated Balance Sheets

As at December 31    
(US $ millions) 2006 2005
     
Assets    
Current assets:    

Cash and cash equivalents

$20$155

Accounts receivable

 163 145

Inventory(note 2)

 98 99

Future income taxes(note 9)

 3 4
  284 403
     
Property, plant and equipment(note 3) 1,008 921
Other assets 7 4
 $1,299$1,328
     
Liabilities and Shareholders' Equity    
Current liabilities:    

Accounts payable and accrued liabilities

$228$225
     
Long-term debt(note 4) 480 440
Other liabilities(note 5) 44 31
Future income taxes(note 9) 113 110
Shareholders' equity(note 6) 434 522
 $1,299$1,328
(See accompanying notes)    
  
  
On behalf of the Board: 
  
Robert J. HardingJ. Barrie Shineton
ChairPresident and Chief Executive Officer
  

Notes to the Consolidated Financial Statements

NORBORD

 

ANNUAL REPORT
2006

 
 

43

Notes to the Consolidated Financial Statements
(in millions of US dollars, except per share information)

In these notes "Norbord" means Norbord Inc. and all of its consolidated subsidiaries and affiliates, and "Company" means Norbord Inc. as a separate corporation, unless the context implies otherwise.

Note 1. Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries.

Use of Estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles (GAAP) requires management to make estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses during a period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and investment grade money market securities and bank term deposits with a maturity of three months or less from the date of purchase. Cash and cash equivalents are recorded at cost, which approximates market value.

Inventories

Inventories of raw materials and operating and maintenance supplies are valued at the lower of cost and replacement cost, with cost determined on an average cost basis.

Inventories of finished goods are valued at the lower of cost and net realizable value, with cost determined on an average cost basis. Cost includes direct material, direct labour and an allocation of overhead.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis. The rates of depreciation are intended to fully depreciate the assets over the following periods which approximate their useful lives:

Buildings20 to 40 years
Production equipment10 to 15 years

Interest is capitalized on major capital projects during construction. Costs, net of revenues, incurred during the start-up period of major capital projects are deferred as other assets and amortized over the early productive life of the project.


NORBORD

Notes to the Consolidated Financial Statements

 

ANNUAL REPORT
2006

 

44

 

Employee Future Benefits

Norbord sponsors various defined benefit and defined contribution pension plans, which cover substantially all employees and are funded in accordance with applicable plan and regulatory requirements. The benefits under Norbord's defined benefit pension plans are generally based on an employee's length of service and the final five years' average salary, and the plans do not provide for indexation of benefit payments. Norbord also provides non-pension post-retirement benefits consisting of health care benefits to eligible retirees of certain former businesses, which are funded on a pay-as-you-go basis.

The measurement date for all defined benefit plans is December 31. The obligations associated with Norbord's defined benefit plans are actuarially valued using the projected unit credit method pro rated on services, management's best estimate assumptions for expected investment performance, salary escalation and health care cost trend rates, and a current market discount rate. For the purpose of calculating the expected return on plan assets, those assets are measured at fair value. Prior service costs related to plan amendments and transitional assets are amortized on a straight-line basis over the estimated average remaining service lives (EARSL) of the employee groups. The net actuarial gains or losses in excess of 10% of the greater of the accrued benefit obligation and the fair value of plan assets are amortized on a straight-line basis over EARSL.

Revenue Recognition

Net sales are recognized when the risks and rewards of ownership pass to the purchaser. This is generally when goods are shipped. Sales are recorded net of third party transportation and discounts.

Sales are governed by contract or by standard industry terms. Revenue is not recognized prior to the completion of those terms. The majority of product is shipped via third-party transport on a freight-on-board shipping basis. In all cases, product is subject to quality testing by the Company to ensure it meets applicable standards prior to shipment.

Stock Options

The Company accounts for stock options using the fair value method. Under the fair value method, compensation expense for options is measured at the grant date using the Black-Scholes option pricing model and recognized in earnings on a straight-line basis over the vesting period.

Income Taxes

The Company uses the liability method of accounting for income taxes. Accordingly, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In addition, the effect on future tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment or substantive enactment date.


Notes to the Consolidated Financial Statements

NORBORD

 

ANNUAL REPORT
2006

 
 

45

Translation of Foreign Currencies

The accounts of subsidiaries having a functional currency other than the US dollar are translated using the current rate method. Gains or losses on translation are deferred and shown as a separate item in shareholders' equity. Gains or losses on foreign currency-denominated balances and transactions that are designated as hedges of investments in these subsidiaries are reported in the same manner as translation adjustments.

Monetary assets and liabilities denominated in currencies other than an entity's functional currency are translated at the rate of exchange prevailing at year-end. Gains or losses on translation of these items are included in the consolidated statement of earnings. Gains or losses on transactions that hedge these items are also included in the consolidated statement of earnings.

Gains or losses on transactions that serve to hedge future foreign currency-denominated cash flows are recognized at their settlement dates and are reported in the same manner as the cash flows being hedged.

Financial Instruments

The Company utilizes derivative financial instruments solely to manage its foreign currency, interest rate, and commodity price exposures in the ordinary course of business. Derivatives are not used for trading or speculative purposes. All hedging relationships, risk management objectives, and hedging strategies are formally documented and periodically assessed to ensure the changes in the value of these derivatives are highly effective in offsetting changes in the fair values, net investment or cash flows of the hedged exposures. Accordingly, all gains and losses (realized and unrealized, as applicable) on such derivatives are recognized in the same manner as gains and losses on the underlying exposure being hedged. Any resulting carrying amounts are included in other assets if there is an unrealized gain on the derivative or other liabilities if there is an unrealized loss on the derivative.

The carrying value of financial instruments approximates fair value, except where disclosed in these notes. Fair values disclosed are determined using actual quoted market prices or, if not available, indicative prices based on similar publicly traded instruments. The fair value of derivative financial instruments reflects the estimated amount that the Company would have paid or received if forced to settle all outstanding contracts at year-end. This fair value represents a point-in-time estimate that may not be relevant in predicting the Company's future earnings or cash flows.

The Company is exposed to credit risk in the event of non-performance by its derivatives counterparties. However, the Company's Board-approved financial policies require that derivative transactions be executed only with approved highly rated counterparties under master netting agreements; therefore, the Company does not anticipate any non-performance.

Note 2. Inventory

  2006 2005
Raw materials$34$36
Finished goods 36 37
Operating and maintenance supplies 28 26
 $98$99
     

NORBORD

Notes to the Consolidated Financial Statements

 

ANNUAL REPORT
2006

 

46

 

Note 3. Property, Plant and Equipment

      2006     2005
   Accumulated Net Book  Accumulated Net Book
  CostDepreciation Value CostDepreciation Value
Buildings$263$99$164$250$84$166
Production equipment 1,560 716 844 1,368 613 755
 $1,823$815$1,008$1,618$697$921

Included in property, plant and equipment is construction in progress of $16 (2005 – $51). During the year, $7 (2005 – $1) of interest was capitalized.

Note 4. Long-Term Debt

  2006 2005
81/8% debentures due 2008$200$200
71/4% debentures due 2012 240 240
Other debt 40 
 $480$440

Maturities of long-term debt at December 31, 2006 were: 2007 – nil; 2008 – $200; 2009 – nil; 2010 – $40; 2011 – nil; and subsequent – $240.

The Company has committed unsecured revolving bank lines of $200 that mature in 2010, bear interest at money market rates plus a margin that varies with the Company's credit rating, and contain certain financial covenants which the Company must comply with on a quarterly basis. At December 31, 2006, $44 of these lines were utilized; $40 drawn as cash and $4 drawn for letters of credit. The balance of $156 is available to support short-term liquidity requirements.

At December 31, 2006, the Company had $365 (2005 – $365) of interest rate swaps outstanding. The terms of these swaps correspond to the terms of the underlying debentures. In 2005, the Company repurchased and cancelled $10 of the 71/4% debentures due 2012 and unwound a corresponding amount of interest rate swaps. The premium paid on repurchase was offset by the recognition of gains on the interest rate swaps.

The effective interest rate on the Company's debt-related obligations including the impact of the interest rate swaps was 7.7% at December 31, 2006 (2005 – 7.2%). The aggregate fair value of the Company's debt was $493, consisting of debt of $494 and gains on interest rate swaps of $1.

Interest expense on long-term debt for the year, including the impact of interest rate swaps, was $29 (2005 – $30). Total interest paid during the year was $42 (2005 – $36).

Note 5. Other Liabilities

  2006 2005
Unrealized net investment hedge losses(note 12)$25$
Deferred interest rate swap gains 11 19
Accrued pension and post-retirement benefits(note 11) 4 6
Other liabilities 4 6
 $44$31
     

Notes to the Consolidated Financial Statements

NORBORD

 

ANNUAL REPORT
2006

 
 

47

The unrealized net investment hedge losses are offset by unrealized gains on the underlying exposures being hedged.

Note 6. Shareholders' Equity

 

 

2006

 

2005

Capital stock:

 

 

 

 

Common shares

$

127

$

118

Retained earnings

 

305

 

412

Cumulative translation adjustment

 

2

 

(8)
 

$

434

$

522

As at December 31, 2006, the authorized capital stock of the Company was as follows:

– Class A preferred shares, an unlimited number.
– Class B preferred shares, an unlimited number.
– Non-voting participating shares, an unlimited number.
– Common shares, an unlimited number.

Summary of common share transactions:

 

 

 

2006

 

 

2005

 

Shares

 

Amount

Shares

 

Amount

Balance, beginning of year

144,781,477

$

118

149,283,888

$

118

Dividend reinvestment plan

1,386,644

 

11

462,579

 

6

Issue of common shares

302,360

 

1

681,120

 

1

Repurchase of common shares(2,724,600)

 

(3)(5,646,110)

 

(7)
Balance, end of year

143,745,881

$

127

144,781,477

$

118

In 2005, the Company redeemed all of the outstanding Class A series I preferred shares at par value (CAD $60). On redemption, a foreign exchange loss of $9 was recorded as a charge to retained earnings.

The Company declared a special dividend of CAD $1.00 per common share which was paid on July 14, 2006. In 2005, the Company declared a special dividend of CAD $1.00 per common share which was paid on May 20, 2005.

Under the Company's stock option plan, the Board of Directors of the Company may issue stock options to certain directors and employees of the Company. These options vest over a five-year period and expire 10 years from the date of issue. Included in cost of sales is $1 (2005 – $1) related to these options. During the year, the exercise price on all outstanding options was decreased by CAD $1.00 (2005 – CAD $1.00) to reflect the payment of the special dividend.


NORBORD

Notes to the Consolidated Financial Statements

 

ANNUAL REPORT
2006

 

48

 

The following table summarizes the changes in options outstanding during the year:

 

 

 

2006

 

 

2005

 

 

 

Weighted

 

 

Weighted

 

 

 

Average

 

 

Average

 

 

 

Exercise

 

 

Exercise

 

 

 

Price

 

 

Price

 

Options

 

(CAD $)

Options

 

(CAD $)
Balance, beginning of year

1,719,680

$

5.13

2,065,700

$

3.61

Options granted

415,300

 

12.13

456,700

 

11.77

Options exercised(302,360)

 

2.04

(681,120)

 

2.26

Exercise price adjustment

 

(1.00)

 

(1.00)
Options cancelled(46,700)

 

4.15

(121,600)

 

2.10

Balance, end of year

1,785,920

$

6.31

1,719,680

$

5.13

Exercisable at year end

677,972

$

2.83

603,604

$

2.09

The following table summarizes the weighted average exercise price and the weighted average remaining contractual life of the options outstanding at December 31, 2006:

 

 

Options Outstanding

Options Vested

 

 

Weighted

 

Weighted

 

 

Weighted

 

 

Average

 

Average

 

 

Average

 

 

Remaining

 

Exercise

 

 

Exercise

Range of Exercise

 

Contractual

 

Price

 

 

Price

Prices (CAD $)

Options

Life

 

(CAD $)

Options

 

(CAD $)
$0.01

109,100

3.76

$

0.01

109,100

$

0.01

$0.32–$0.54

204,340

5.26

 

0.51

157,472

 

0.51

$0.84–$1.17

206,380

4.97

 

0.93

151,460

 

0.97

$1.79–$2.59

12,800

0.27

 

2.09

12,800

 

2.09

$3.83

297,700

7.08

 

3.83

119,080

 

3.83

$8.73–$11.13

955,600

8.45

 

10.25

128,060

 

9.45

 

1,785,920

7.11

$

6.31

677,972

$

2.83

        

Notes to the Consolidated Financial Statements

NORBORD

 

ANNUAL REPORT
2006

 
 

49

Note 7. Earnings per Common Share

Earnings per common share were calculated as follows:

 

 

2006

 

2005

Earnings available to common shareholders:

 

 

 

 

Earnings

$

97

$

248

Less: Preferred share dividends

 

 

(1)

Less: Foreign exchange on preferred share redemption

 

 

(9)
 

$

97

$

238

Common shares (millions):

 

 

 

 

Weighted average number of common shares outstanding

 

143.4

 

146.7

Stock options

 

0.5

 

0.9

Diluted number of common shares

 

143.9

 

147.6

Earnings per common share:

 

 

 

 

Basic

$

0.68

$

1.62

Diluted

$

0.67

$

1.61

Stock options issued under the Company's stock option plan (note 6) were included in the calculation of diluted number of common shares to the extent the exercise price of those options was less than the average market price of the Company's common shares during the year.

Note 8. Provision for Non-Core Operation

In December 2006, the Company recorded a provision relating to the indefinite closure of an I-joist mill in Juniper, New Brunswick following notification from the mill's major customer that its contract would not be renewed. The provision of $13 consisted of asset writedowns of $12 and the accrual of severances and other costs of $1.

Note 9. Income Tax

Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and the amounts used for income tax purposes.

Income tax expense comprises the following:

  2006 2005
Current income tax expense$6$122
Future income tax expense 11 11
Income tax expense$17$133
     

NORBORD

Notes to the Consolidated Financial Statements

 

ANNUAL REPORT
2006

 

50

 

The differences between income tax computed using statutory tax rates and income tax as recorded are as follows:

 

 

2006

 

2005

Earnings before income tax

$

114

$

381

Income tax expense at combined statutory rates

 

39

 

127

Effect of:

 

 

 

 

Rate differences on foreign activities

 

(19)

 

8

Tax credits not previously benefited

 

1

 

(6)

Large corporations tax and other

 

(4)

 

4

Income tax expense

$

17

$

133

The income tax effects of temporary differences that give rise to future income taxes are as follows:

 

 

2006

 

2005

Benefit of tax loss carryforwards

$

41

$

29

Investment tax credits

 

19

 

20

Other future income tax liabilities

 

(2)

 

(2)
Property, plant and equipment

 

(168)

 

(153)
Future income taxes, net

$

(110)

$

(106)
Represented by:

 

 

 

 

Current future income tax asset

$

3

$

4

Long-term future income tax liability

 

(113)

 

(110)
 

$

(110)

$

(106)

Income and income-related taxes of $40 (2005 – $123) were paid during the year.


Notes to the Consolidated Financial Statements

NORBORD

 

ANNUAL REPORT
2006

 
 

51

Note 10. Supplemental Cash Flow Information

Other items under operating activities comprise:

 

 

2006

 

2005

Cash provided by (used for):

 

 

 

 

Amortization of deferred interest rate swap gains(notes 4 and 5)

$

(8)

$

(8)

Pension funding less than (greater than) pension expense(note 11)

 

(3)

 

2

Other

 

(4)

 

1

 

$

(15)

$

(5)
 

 

 

 

 

 

 

 

 

 

The net change in non-cash working capital balances comprises:
 

 

 

 

 

 

 

2006

 

2005

Cash provided by (used for):

 

 

 

 

Accounts receivable

$

(7)

$

(2)

Inventory

 

6

 

(13)

Accounts payable and accrued liabilities

 

(8)

 

(14)
 

$

(9)

$

(29)
 

 

 

 

 

 

 

 

 

 

Other under investing activities comprises:

 

 

 

 

 

 

 

 

 

 

 

2006

 

2005

Cash provided by (used for):

 

 

 

 

Realized net investment hedge gains (losses)(note 12)

$

(13)

$

12

Other

 

2

 

1

 

$

(11)

$

13


NORBORD

Notes to the Consolidated Financial Statements

 

ANNUAL REPORT
2006

 

52

 

Note 11. Employee Benefit Plans Pension Plans

Norbord has a number of pension plans in which participation is available to substantially all employees. Norbord's obligations under its defined benefit pension plans are determined periodically through the preparation of actuarial valuations, which are generally required every three years. The most recent actuarial valuation was conducted as of December 31, 2005. The date of the next required valuation is December 31, 2008, and Norbord may choose to perform an actuarial valuation at an earlier date. Information about these plans is as follows:

  

2006

 

2005

  

 

 

 

Change in Accrued Benefit Obligation During the Year: 

 

 

 

Accrued benefit obligation, beginning of year$

65

$

51

Employee contributions

 

1

 

1

Current service cost

 

2

 

2

Interest on accrued benefit obligation

 

3

 

3

Benefits paid

 (3) (3)

Net actuarial loss

 

 

11

Foreign currency exchange rate impact

 

1

 

Accrued benefit obligation, end of year(1)$

69

$

65

  

 

 

 

Change in Plan Assets During the Year: 

 

 

 

Plan assets, beginning of year$

41

$

39

Actual return on plan assets

 

5

 

3

Employer contributions

 

5

 

1

Employee contributions

 

1

 

1

Benefits paid

 (3) (3)

Foreign currency exchange rate impact

 

 

Plan assets, end of year(1)$

49

$

41

  

 

 

 

Reconciliation of Funded Status: 

 

 

 

Accrued benefit obligation$

69

$

65

Plan assets 

49

 

41

Accrued benefit obligation in excess of plan assets (20) (24)

Unamortized net actuarial loss

 

22

 

25

Unamortized prior service costs

 

1

 

1

Unamortized net transitional asset

 (5) (6)
Net accrued benefit liability (2) (4)
Recorded in: 

 

 

 

Other liabilities

$(2)$(4)
(1) All plans have accrued benefit obligations in excess of plan assets. 

 

 

 

     

Notes to the Consolidated Financial Statements

NORBORD

 

ANNUAL REPORT
2006

 
 

53

     
  

2006

 

2005

  

 

 

 

Components of Net Pension Expense: 

 

 

 

Current service cost$

2

$

2

Interest on accrued benefit obligation 

3

 

3

Actual return on plan assets 

(5)

 

(3)

Net actuarial loss 

 

11

Difference between actual and expected return on plan assets 

1

 

Difference between actual and recognized net actuarial gain (loss) 

2

 

(10)

Amortization of transition asset 

(1)

 

Net periodic pension expense$

2

$

3

  

 

 

 

Significant Weighted Average Actuarial Assumptions: 

 

 

 

Used in calculation of net periodic pension expense for the year:    

Discount rate

 5.0% 5.7%

Expected long-term rate of return on plan assets

 7.8% 7.8%

Rate of compensation increase

 3.7% 3.7%
Used in calculation of accrued benefit obligation, end of year: 

 

 

 

Discount rate

 5.0% 5.0%

Rate of compensation increase

 3.7% 3.7%
  

 

 

 

The weighted average asset allocation of Norbord's defined benefit pension plan assets is as follows:
  

 

 

 

Asset category: 

 

 

 

Equity investments

 61% 70%

Fixed income investments

 39% 30%
Total assets 100% 100%

Operating costs include $7 (2005 – $7) related to contributions to Norbord's defined contribution pension plans.

Post-Retirement Benefit Plans

Norbord funds health care benefits costs on a pay-as-you-go basis. Norbord's obligations under its post-retirement benefit plan are determined periodically through actuarial valuations. At December 31, 2006, the accrued benefit obligation related to this plan was $3 (2005 – $4) and the net accrued liability was $2 (2005 – $2). During the year, nil (2005 – nil) was included in operating costs related to this plan.

Post-Employment Benefits

Operating costs include $2 (2005 – $2) related to severance payments.

Note 12. Commitments & Contingencies

Softwood Lumber Duties

In 2006, the Company received $7 in refunded duties and interest pursuant to the Canada-US Softwood Lumber Agreement which is included in earnings before interest, income tax, depreciation and provision for non-core operation in the consolidated statement of earnings. The refund relates to duties paid by two sawmills sold in October 2003.


NORBORD

Notes to the Consolidated Financial Statements

 

ANNUAL REPORT
2006

 

54

 

Foreign Exchange Hedges

At year-end, the Company had outstanding forward foreign exchange contracts of £5 (2005 – £9) and59 (2005 –64) and cross-currency swaps of £125 (2005 – £125), which were designated as hedges against its net investments in Europe. In 2006, the Company realized a loss of $13 (2005 – gain of $12) on its matured net investment hedges and, at year-end, the Company had an unrealized loss of $25 (2005 – gain of $1) on its outstanding net investment hedges. These realized and unrealized losses were offset by realized and unrealized gains on the net investments being hedged.

In addition, at year-end, the Company had outstanding forward foreign exchange contracts of CAD $9 (2005 – CAD $42), which were designated as a hedge against certain Canadian dollar-denominated monetary liabilities. In 2006, the Company realized a loss of $1 (2005 – gain of $1) on its matured monetary liability hedges and, at year-end, the Company had an unrealized gain of nil (2005 – nil) on these outstanding hedges. These realized and unrealized gains were offset by realized and unrealized losses on the monetary liabilities being hedged.

The Company has entered into various commitments for capital expenditures and services in connection with capital investment projects. At year-end, the Company had outstanding forward foreign exchange contracts of4 (2005 –9) which were designated as hedges against certain of these commitments. No gains or losses were realized in 2006. At year-end the Company had an unrealized gain of nil on the outstanding hedges. Realized and unrealized losses, if any, are offset by realized and unrealized gains on the purchase commitments being hedged.

Guarantee of Certain Obligations of Fraser Papers

Norbord continues to guarantee certain obligations under operating lease commitments of Fraser Papers, which was distributed to common shareholders in 2004. The maximum potential amount of future payments that Norbord could be required to make under these obligations is estimated to be $7. No amounts have been recorded in the consolidated balance sheet with respect to these guarantees. As security for these ongoing financial commitments to Fraser Papers, Norbord has the right, at any time, to require Fraser Papers to provide a fixed first-charge security interest over Fraser Papers' manufacturing facilities. In 2006, the fee for providing these guarantees was less than $1.

Class Action Lawsuit

Norbord and eight other North American OSB producers have been named as defendants in several lawsuits filed in the United States District Court for the Eastern District of Pennsylvania. The lawsuits allege that these nine North American OSB producers violated United States and various state antitrust and other laws by allegedly agreeing to fix prices and reduce the supply of OSB from June 1, 2002 through the present.

The named plaintiffs seek to have the cases certified as class actions. One group of plaintiffs seeks to certify a class of persons and entities that purchased OSB in the United States directly from any of the named North American OSB producers between June 1, 2002 and the present. Other plaintiffs seek to certify one or more classes of persons and entities that purchased OSB in various states and the District of Columbia indirectly between June 1, 2002 and the present.

The Company believes that the lawsuits are entirely without merit and intends to defend this matter vigorously.

Other

The Company received tax advice and a tax ruling on certain tax matters related to the distribution of Fraser Papers. There can be no assurance that tax authorities will not challenge various tax filing positionstaken by the Company. Such a challenge could result in an income tax and/or a withholding tax liability. In addition to the foregoing, the Company is subject to various additional uncertainties concerning the interpretation and application of tax laws in operating jurisdictions that could affect the Company's cash flows.


Notes to the Consolidated Financial Statements

NORBORD

 

ANNUAL REPORT
2006

 
 

55

The Company has provided certain commitments and indemnifications, including those related to former businesses. The maximum amounts from many of these items cannot be reasonably estimated at this time. However, in certain circumstances, the Company has recourse against other parties to mitigate the risk of loss.

The Company has entered into various commitments for capital expenditures and the future supply of operating services and materials. Commitments under operating leases at December 31, 2006, were: 2007 – $2;2008 – $2;2009 – $1; 2010 – $1; 2011 – $1; and subsequent – $3.

Note 13. Related Party Transactions

The Company's major shareholder has various interests over which it has control or otherwise has significant influence (a "related company" or collectively "related companies").

In 2006 and 2005, the Company provided certain administrative services to a related company which were charged on a cost recovery basis. In addition, the Company periodically engages the services of related companies for various financial, real estate and other business advisory services.

In 2006, the fees for these services were less than $1 and were charged at market rates. In 2006, the Company received a payment of $3 from a related company as final consideration pursuant to a 1999 Asset Purchase Agreement. The payment was contingent on the completion of an expansion project. In addition, Norbord paid $1 to this related company for certain costs for which Norbord provided an indemnity under the same 1999 Asset Purchase Agreement. Total future costs related to this indemnification are estimated at $1 and are included in other liabilities in the consolidated balance sheet.

Note 14. Geographic Segments

The Company has a single reportable segment. The Company operates principally in North America and Europe. Net sales by geographic segment are determined based on the origin of shipment and therefore include export sales.

2006 

North
America

 

Europe

 

Unallocated

 

Total

Net sales$

823

$

429

$

$

1,252

EBITDA(1) 

221

 

35

 (9)(2) 

247

Depreciation 

59

 

34

 

1

 

94

Property, plant and equipment 

725

 

279

 

4

 

1,008

Capital investments 

138

 

22

 

 

160

  

 

 

 

 

 

 

 

2005 

North
America

 

Europe

 

Unallocated

 

Total

Net sales$

1,076

$

386

$

$

1,462

EBITDA(1) 

481

 

32

 

(18)

 

495

Depreciation 

55

 

33

 

1

 

89

Property, plant and equipment 

656

 

261

 

4

 

921

Capital investments 

92

 

22

 

1

 

115

(1) EBITDA is earnings before interest, income tax, depreciation and provision for non-core operation.
(2) Unallocated 2006 EBITDA made up of unallocated costs of $16 less $7 refund of softwood lumber duties and interest (note 12).
 

NORBORD

Selected Quarterly Information

 

ANNUAL REPORT
2006

 

56

 

Selected Quarterly Information

(unaudited)

 

 

 

 

 

 

 

 

 

2006

(in US $ millions, except per share information)

 

1st

 

2nd

 

3rd

 

4th

 

Total

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

 

 

 

 

 

 

 

 

 

Net sales

$

368

$

334

$

291

$

259

$

1,252

Earnings before interest, income tax, depreciation and provision for non-core operation

 

111

 

79

 

35

 

22

 

247

Provision for non-core operation

 

 

 

 

(13)

 

(13)

Interest and other income

 

1

 

2

 

 

 

3

Interest expense

 

(7)

 

(8)

 

(7)

 

(7)

 

(29)

Earnings before income tax and depreciation

 

105

 

73

 

28

 

2

 

208

Depreciation

 

(22)

 

(25)

 

(23)

 

(24)

 

(94)

Income tax

 

(25)

 

(15)

 

2

 

21

 

(17)

Earnings

$

58

$

33

$

7

$

(1)

$

97

Earnings per common share

 

 

 

 

 

 

 

 

 

 

Basic

$

0.40

$

0.23

$

0.05

$

$

0.68

Diluted

$

0.40

$

0.23

$

0.05

$

(0.01)

$

0.67

 

 

 

 

 

 

 

 

 

 

 

Common dividend per share

$

0.09

$

0.98

$

0.09

$

0.09

$

1.25

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities per share

$

0.21

$

0.49

$

0.26

$

0.37

$

1.33

Return on capital employed (ROCE)

 

46%

 

33%

 

15%

 

8%

 

25%
 

 

 

 

 

 

 

 

 

 

 

Net debt

 

309

 

314

 

455

 

460

 

 

Net debt to capitalization, market basis

 

18%

 

18%

 

24%

 

27%

 

 

Net debt to capitalization, book basis

 

36%

 

42%

 

51%

 

51%

 

 

 


Selected Quarterly Information

NORBORD

 

ANNUAL REPORT
2006

 
 

57

           
(unaudited)

 

 

 

 

 

 

 

 

 

2005

(in US $ millions, except per share information)

 

1st

 

2nd

 

3rd

 

4th

 

Total

 

 

 

 

 

 

 

 

 

 

 

Earnings

 

 

 

 

 

 

 

 

 

 

Net sales

$

404

$

369

$

338

$

351

$

1,462

Earnings before interest, income tax and depreciation

 

157

 

128

 

100

 

110

 

495

Interest and other income

 

1

 

2

 

 

2

 

5

Interest expense

 

(7)

 

(8)

 

(7)

 

(8)

 

(30)

Earnings before income tax and depreciation

 

151

 

122

 

93

 

104

 

470

Depreciation

 

(22)

 

(22)

 

(22)

 

(23)

 

(89)

Income tax

 

(45)

 

(33)

 

(26)

 

(29)

 

(133)

Earnings

$

84

$

67

$

45

$

52

$

248

Earnings per common share

 

 

 

 

 

 

 

 

 

 

Basic

$

0.56

$

0.39

$

0.31

$

0.36

$

1.62

Diluted

$

0.55

$

0.39

$

0.31

$

0.36

$

1.61

 

 

 

 

 

 

 

 

 

 

 

Common dividend per share

$

0.08

$

0.87

$

0.09

$

0.09

$

1.13

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities per share

$

0.26

$

0.67

$

0.38

$

0.83

$

2.14

Return on capital employed (ROCE)

 

65%

 

53%

 

41%

 

45%

 

53%
 

 

 

 

 

 

 

 

 

 

 

Net debt

 

246

 

356

 

361

 

285

 

 

Net debt to capitalization, market basis

 

14%

 

20%

 

20%

 

17%

 

 

Net debt to capitalization, book basis

 

29%

 

43%

 

43%

 

35%

 

 

 


NORBORD

Six-Year Historical Review

 

ANNUAL REPORT
2006

 

58 & 59

 

Six-Year Historical Review

(in US $ millions, except per share information)

 

2006

 

2005

 

2004

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

Statements of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

1,252

$

1,462

$

1,486

$

1,064

$

679

$

497

Earnings from continuing operations before interest, premium on early extinguishment of debt, income tax, depreciation and provision for non-core operation

 

247

 

495

 

631

 

365

 

89

 

50

Provision for non-core operation

 

(13)

 

 

 

 

 

Interest and other income

 

3

 

5

 

6

 

5

 

6

 

6

Interest expense

 

(29)

 

(30)

 

(31)

 

(37)

 

(37)

 

(33)

Earnings from continuing operations before premium on early extinguishment of debt, income tax and depreciation

 

208

 

470

 

606

 

333

 

58

 

23

Premium on early extinguishment of debt

 

 

 

(9)

 

 

 

Depreciation

 

(94)

 

(89)

 

(82)

 

(76)

 

(71)

 

(43)

Income tax

 

(17)

 

(133)

 

(183)

 

(91)

 

20

 

22

Earnings from continuing operations

 

97

 

248

 

332

 

166

 

7

 

2

Earnings from discontinued operations(1)

 

 

 

(6)

 

(40)

 

6

 

10

Earnings

$

97

$

248

$

326

$

126

$

13

$

12

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.68

$

1.62

$

2.16

$

0.85

$

0.08

$

0.07

Diluted

 

0.67

 

1.61

 

2.14

 

0.85

 

0.08

 

0.07

Summary Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities

$

191

$

314

$

562

$

280

$

62

$

23

Capital investments

 

(160)

 

(115)

 

(67)

 

(31)

 

(15)

 

(64)

Acquisitions and other investing activities

 

(11)

 

13

 

8

 

(4)

 

(277)

 

(38)

Debt incurred (repaid)

 

40

 

(11)

 

(218)

 

(154)

 

135

 

66

Dividends

 

(167)

 

(161)

 

(168)

 

(31)

 

(22)

 

(34)

Issue (repurchase) of shares

 

(28)

 

(100)

 

 

8

 

 

Other

 

 

 

 

23

 

24

 

10

Increase (decrease) in cash and cash equivalents from continuing operations

 

(135)

 

(60)

 

117

 

91

 

(93)

 

(37)

Increase (decrease) in cash and cash equivalents from discontinued operations(1)

 

 

 

(79)

 

19

 

44

 

47

Increase (decrease) in cash and cash equivalents

$

(135)

$

(60)

$

38

$

110

$

(49)

$

10

Summary Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

$

284

$

403

$

459

$

660

$

444

$

502

Property, plant and equipment

 

1,008

 

921

 

927

 

833

 

857

 

657

Other assets

 

7

 

4

 

5

 

570

 

728

 

670

Total assets

$

1,299

$

1,328

$

1,391

$

2,063

$

2,029

$

1,829

Current liabilities

$

228

$

225

$

239

$

314

$

418

$

209

Long-term debt

 

480

 

440

 

450

 

657

 

658

 

686

Other liabilities

 

44

 

31

 

52

 

199

 

155

 

122

Future income taxes

 

113

 

110

 

102

 

 

 

Shareholders’ equity

 

434

 

522

 

548

 

893

 

798

 

812

Total liabilities and shareholders’ equity

$

1,299

$

1,328

$

1,391

$

2,063

$

2,029

$

1,829

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

Book value

$

3.02

$

3.61

$

3.42

$

5.79

$

5.30

$

5.50

Dividends

 

1.25

 

1.13

 

1.10

 

0.29

 

0.26

 

0.26

Market price range (CAD $)

 

 

 

 

 

 

 

 

 

 

 

 

High

 

12.79

 

13.90

 

16.43

 

11.24

 

9.70

 

8.45

Low

 

7.77

 

9.82

 

10.18

 

7.01

 

7.13

 

6.30

Close

 

8.91

 

12.25

 

12.40

 

10.85

 

8.25

 

7.50

(1)     Discontinued operations represents the results of the paper and timberlands business (Fraser Papers), distributed in June 2004, and the Quebec sawmills, sold in October 2003.


NORBORD

Principal Operating Interests

 

ANNUAL REPORT
2006

 

60

 

Principal Operating Interests

Information regarding Norbord’s principal operating interests is set forth in the following table. The estimated annual production capacity is based on normal operating rates and normal production mixes under current market conditions, taking into account known constraints, such as permit restrictions. Market conditions, fluctuations in raw material availability, mechanical interruptions and the nature of current orders may cause actual production rates and mixes to vary significantly from the estimated production rates and mixes used to derive the estimated annual capacities shown.

 

Estimated

  
 

Annual Capacity

  
 

at Year-End

Production

 

2006

20062005
OSB (MMsf–3/8")

 

  
Bemidji, Minnesota

440

456437
Cordele, Georgia990(1)427441
Genk, Belgium

260

257220
Guntown, Mississippi

430

405412
Huguley, Alabama

500

488471
Inverness, Scotland

350

321319
Jefferson, Texas415(2)409374
Joanna, South Carolina

500

480460
La Sarre, Quebec375(2)371356
Nacogdoches, Texas

380

373345
Val-d’Or, Quebec

340

348337
 

4,980

4,3354,172
 

 

  
Particleboard (MMsf–3/8")

 

  
Cowie, Scotland

350

354337
Genk, Belgium

170

190193
South Molton, England225(3)250247
 

745

794777
 

 

  
MDF (MMsf–3/8")

 

  
Cowie, Scotland360(3)366407
Deposit, New York

160

151148
 

520

517555
 

 

  
Hardwood Plywood (MMsf–3/8")

 

  
Cochrane, Ontario

80

7978

(1) Includes second line completed December 2006 with estimated annual capacity of 550 MMsf (3/8-inch basis).
(2) Estimated annual capacity increased over prior year based on operational improvements, capital investment and other initiatives.
(3) Estimated annual capacity decreased over prior year as an older, less efficient line was decommissioned during 2006.


Environment, Health and Safety Report

NORBORD

 

ANNUAL REPORT
2006

 
 

61

Environment,
Health and Safety Report

62 | Message to Shareholders
63 | Environment Policy
64 | Health and Safety Policy
65 | 2006 Report Card

 

 


NORBORD

Environment, Health and Safety Report

 

ANNUAL REPORT
2006

 

62

 

Message to Shareholders

Norbord’s environment, health and safety activities are based on two fundamentally important beliefs: First we must provide a safe, injury-free workplace. Second, the management of environmental risk is an integral part of our business planning and success.

We apply these beliefs 24 hours a day, 365 days a year. It’s a full-time, constant commitment and one that we are always working to improve upon.

Health and Safety Performance

During 2006 our safety performance improved. But we are still short of the world class performance we know we can achieve. Most tragically, a fatal incident occurred at our Joanna, South Carolina OSB mill in November 2006 reinforcing the need for vigilance and continued learning throughout the organization.

On a positive note, we made several achievements:

  • We improved our OSHA recordable rate by more than 20% over 2005.

  • We polled every employee to identify barriers to eliminating injuries in the workplace and to help define a strategy for further improvement.

  • The Nacogdoches, Texas mill set a Norbord record with a 2006 OSHA recordable rate of zero – making it one of the safest OSB mills in the world. In addition, mills in Huguley, Alabama, Nacogdoches and Jefferson, Texas each celebrated more than one million hours worked without a lost time injury.

Management of Environmental Risk Shows Real Improvement

Core to our business and capital planning is the identification of risks and opportunities. Understanding these opportunities is essential to reducing the environmental impact of our operations while maintaining efficient manufacturing systems.

  • We continue to use more residual wood for energy production. We have invested $55 million to reduce dependence on fossil fuel and have reduced natural gas consumption and greenhouse gas emissions by30%.

  • We moved quickly toward compliance with new US environmental regulations – investing $29 million in air emission controls and reducing emissions from our US plants by more than 1,000 metric tons per year.

  • We achieved a 98% compliance rate as measured against our own leading indicators of environmental performance.

In this report we discuss the environment, health and safety risks that we feel have the greatest potential to impact the long-term sustainability of our business. For a more detailed review of our performance I invite you to explore the Compendium of Environment, Health and Safety Data available on our web site (www.norbord.com).


J. Barrie Shineton
President and Chief Executive Officer


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Environment Policy

Norbord recognizes that our environment is fundamental to our existence, and that our businesses and the communities where we operate depend on its health. We strive for excellence, leadership, sustainability and competitive advantage – with integrity – through continual improvement in our environmental performance and management of forest land. For Norbord, sustainable development means creating economic growth and caring for society and the environment, while taking into account the needs of future generations.

Norbord will integrate environmental protection into our business processes and decisions. Our belief in sustainable development means we are committed to:

Full Compliance: Comply fully with all applicable environmental legislation and regulations that affect our activities.

Forest Management: Manage forest resources in a manner consistent with the principles of sustainable forestry, this policy and applicable legislation.

Minimization of Environmental Impact: Improve our environmental performance as the expectations of society change. We shall do this by using forest, energy and other resources with increasing efficiency, and by reducing all forms of waste.

Risk Management: Continually identify, evaluate and control the environmental risks associated with our operations. We shall have procedures in place to prevent and respond to emergencies.

Environmental Management Systems: Implement systematic environmental management which supports this policy at every operation. We shall assign appropriate human and financial resources. Every year we shall establish measurable objectives and targets for environmental management and performance improvement.

Innovation: Support pollution prevention and environmental research, and implement findings consistent with this policy.

Performance Evaluation: Evaluate the environmental performance of our operations and personnel, and recognize achievements that support this policy. We shall provide our employees with information and training for them to fully integrate this policy into their responsibilities at work.

Communication with Stakeholders: Engage in constructive dialogue with the communities in which we operate and other key stakeholders, taking their needs into account when we make our decisions.

Open Government Relations:Work constructively with governments and regulators on the establishment of scientifically and economically sound requirements for our operations.

Audits: Conduct environmental audits at all our operations at a frequency appropriate to their risks.

Reports: Report regularly on our environmental performance to the management of the Corporation, the Board of Directors, our shareholders, employees and the communities in which we operate.

Norbord requires its operations to develop policies, systems, organizations, and competencies, and to embrace an environmental commitment consistent with these principles. Norbord requires all employees to take responsibility for environmental protection in their jobs.


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Health and Safety Policy

We are committed to safeguarding the health and well-being of our employees, contractors and visitors by creating and maintaining a safe working environment.

Beliefs

  • All injuries and occupational illnesses are preventable.
  • Health and safety is a top priority and an integral part of our business and decision-making.
  • Management is ultimately responsible for workplace health and safety.
  • Safe operating practices are a shared responsibility among management, employees, contractors and visitors.
  • Employees and contractors are accountable for their safety and that of fellow workers.
  • Working safely is a condition of employment.
  • Sharing best practices improves performance.

Practices

  • Design safe facilities.
  • Continually review and improve processes and procedures.
  • Identify hazards and assess risks.
  • Develop, implement and enforce safe work practices.
  • Ensure all facilities comply with applicable laws and regulations.
  • Provide employees with information and training to work safely.
  • Require employees and contractors to execute their work in accordance with legislative requirements and Norbord policy.
  • Establish and monitor health and safety objectives.
  • Take action to prevent recurrence of incidents.
  • Implement health and safety management systems to continually improve performance.
  • Conduct health and safety audits.
  • Report health and safety performance to senior management, the Board of Directors, shareholders, employees and the public.

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2006 Report Card

 

2006 Target

2006 Performance

2007 Target

Health and Safety• OSHA recordable rate of less•  OSHA recordable rate of• 2007 OSHA recordable
 

than 2.00, with an ultimate

2.59. A 20% improvement

rate of less than 2.00, with

 

goal of zero.

over 2005.

an ultimate goal of zero.

 • Increase participation in• Maintained health assess-• Increase employee
 

personal health assessment

ment participation rate at

participation in safety

 

program to 35% in the US.

20% in US mills.

activities.

Full Compliance• Finalize implementation•Environmental compliance• Full compliance
 

plans for Maximum

rate of 97.9%.

with Boiler MACT

 

Achievable Control

• Completed MACT compli-

requirements in the US.

 

Technology (MACT)

ance planning and submit-

• Complete DSEAR
 

compliance at US

ted Boiler MACT permit

initiatives at Genk,

 

operations.

applications at all affected

Belgium.

 • Complete implementation

operations.

 

 

of Dangerous Substances

• All areas identified with

 

 

and Explosive Atmospheres

potentially high explosive

 

 

Regulations (DSEAR) at

risks mitigated to comply

 

 

European operations.

with DSEAR.

 

Impact Minimization• Reduce fossil fuel• Reduced fossil fuel use• Reduce fossil fuel
 

dependence by 20%.

by 26% over 2005.

dependence by an

 • Further reduce volatile• Reduced direct greenhouse

additional 10%.

 

organic compound (VOC)

gas emissions by 23%.

• Start-up of Genk and
 

emissions by 5%.

• Reduced US criteria pollut-

Nacogdoches wood-fired

 

 

ant emissions (particulate

heat energy systems.

 

 

matter, nitrogen oxides,

 

 

 

VOC and carbon monoxide)

 

 

 

by 1,000 metric tons (9%),

 

 

 

including a 5% reduction

 

 

 

in VOC.

 

Environment, Health and• Complete EH&S audits• EH&S audits completed• Complete audits in
Safety (EH&S) Audits

at mills in: Genk;

at: Genk, Nacogdoches,

Val-d’Or; Cowie,

 

Nacogdoches; Cordele,

Cordele, La Sarre and

Scotland; Deposit, New

 

Georgia; La Sarre and

Guntown.

York; and Cochrane.

 

Val-d’Or, Quebec; and

• ISO 14001 registration• Train 10 new EH&S
 

Guntown, Mississippi.

completed at Genk.

auditors.

 • Achieve ISO 14001• Completed FSC Chain• Focus 2007 audits on
 

Environmental Manage-

of Custody certification

hazard assessment in

 

ment Systems standard

for Cochrane, Ontario

routine tasks and root

 

registration at Genk.

hardwood plywood mill.

cause analysis.

 

 

 

• ISO 14001 Environmental
 

 

 

Management System Stan-

 

 

 

dard registration at Cowie.

 


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Safety

Every Norbord employee has the right to work in a safe workplace where training, elimination of risk and individual and collective responsibilities for safety are central to management practices. In 2006 we made progress toward our goal of an injury-free workplace. Our 2006 OSHA recordable injury rate was 20% better than 2005 and 17% below our five-year average.

At the beginning of the year we polled every employee to identify the barriers to improved performance. More than 85% of employees participated, helping to define a strategy for improvement that will strengthen communication, increase opportunities for employee participation in safety activities, continually evaluate and reduce risk, and ensure that Norbord’s equipment and practices are in keeping with world class safety standards.

Health and Safety Data

2006

2005(2)

2004

2003

2002

Hours worked (000’s)

6,186

6,190

5,965

5,810

5,660

Lost time injuries and illnesses

24

37

15

34

48

Lost time frequency(1)

0.78

1.29

0.50

1.17

1.70

OSHA recordable injury rate(1)

2.59

3.23

2.62

3.03

4.18

(1)     Per 200,000 hours worked.
(2)     Genk mill acquired in 2004; figures included starting in 2005.

While progress has been made, we have yet to achieve world class performance. In November a process technician with seven years experience in the Joanna mill was performing a routine cleaning task when he was fatally injured. Internal and outside expertise was engaged to investigate the incident. We quickly communicated findings throughout the Company and have put in place corrective actions to respond to any issues that were identified.

On a more positive note, sustained vigilance and a motivated workforce have contributed to a 55% improvement in safety performance at the Genk operation. In addition, mills in Huguley, Nacogdoches and Jefferson have each surpassed one million hours worked without a lost time injury. The Nacogdoches mill recorded a perfect safety record during the year with zero recordable injuries, making it one of the safest OSB mills in the world.

Managing Environmental Risks

While industrial manufacturing activities do pose inherent risks, Norbord’s manufacturing processes and the regulatory requirements imposed on our operations ensure that there are no significant risks to the environment or the communities in which we operate. For example:

  • The majority of the wood fibre used in our products is from short rotation, sustainably managed forests or recycled sources.
  • Norbord’s manufacturing process uses residual wood fuel to provide heat and in some cases electrical energy consumed in manufacturing. More than 70% of the energy needed to make OSB is derived from residual wood fuel.

  • Chemical use in the panelboard manufacturing process is restricted to the use of relatively small quantities of phenol and urea formaldehyde based and polymeric methylene diphenyl diisocyanate (PMDI) based resins. The use of these resins is tightly controlled and monitored at all times to safeguard employees, customers and the surrounding community from exposure.


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  • Air emissions from the manufacturing process primarily consist of:

  • water vapour, volatile organic compounds (VOCs), fine wood particulates and natural wood-based materials such as terpenes, alcohols, acetaldehyde and acrolein that are released when wood is heated for drying;

  • fine particulate wood ash, nitrogen oxides, carbon monoxide and trace amounts of manganese from the combustion of wood and natural gas for the production of heat and electrical energy; and

  • formaldehyde and methanol from both the wood drying and panel pressing processes.

  • The panelboard manufacturing process uses and discharges very little water, most of which is a byproduct of steam production, wood chip washing, air emission scrubbing systems and non-industrial sewage. All process discharges are treated on-site using appropriate water treatment systems or are sent to municipal effluent treatment systems.

  • Wood ash, wood debris contaminated with soil and rocks and general trash are the primary wastes produced. Wherever possible, materials are reused or recycled including extensive use of wood ash as an approved agricultural supplement.

  • Norbord generates in total less than 2,000 metric tons of hazardous waste per year, which is properly characterized and disposed of under tight regulatory standards. Most of this hazardous waste consists of general cleaning products, paints, batteries and waste resins.

All production processes and emissions are subject to regulation and permit requirements imposed by jurisdictional government agencies. In the United States, strict environmental regulations are set federally and enforced through detailed state-issued permits. In Canada, provincial regulations require certificates of authorization defining the requirements of operation.

 And in Europe, federal, regional and local government bodies work together to develop detailed integrated operating permits for each plant. Compliance with these permits requires internal monitoring, routine reporting and annual government inspections.

Nonetheless, continual assessment and investment in risk reduction is integrated into Norbord’s business planning process. While risks vary between regions, sites and by specific manufacturing process, there are four general categories of environmental risk that play an important part in Norbord’s success in the near and long term:

  • Energy security and the management of greenhouse gas emissions.

  • New and proposed government regulations to limit air emissions.

  • Management and control of formaldehyde as a by-product of the manufacturing process, as a contaminant in our workplaces and as a component in our products.

  • Environmentally sound forestry practices and the sustainability of our fibre resources.

Norbord assesses where opportunities exist for reducing all existing and potential risks, gives careful consideration to risk reduction in the deployment of capital and measures progress regularly.


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Energy Use and Greenhouse Gases

In 2006, Norbord reduced dependence on fossil fuels, increased overall energy efficiency and subsequently reduced the emission of greenhouse gases. These measures, while obviously beneficial to the environment, were also an effective means of cost control, further enhancing Norbord’s industry-leading cost position.

All Norbord operations in the UK have entered into Kyoto climate change energy efficiency agreements which have, to-date, resulted in savings of more than £10 million through tax and energy efficiency cost savings. A "cap and trade" carbon trading scheme, rolled out across Europe in 2005, will create further potential for financial gains for Norbord’s Genk and Cowie mills.

While similar Kyoto-driven initiatives have been slower to develop in North America, Norbord has nonetheless aggressively pursued energy efficiency improvements. Norbord reduced natural gas usage by 30% in 2006 over 2005. Most of these gains are the result of a $30 million investment in the Jefferson heat energy system completed in late 2005. In 2006, Norbord invested more than $5 million in energy efficiency projects including:

  • Installation of a 10MW wood-fired energy system in Cowie that will significantly reduce overall natural gas use when it is fully ramped up.

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  • At Cordele, conversion of a regenerative thermal oxidizer (RTO) to a regenerative catalytic oxidizer (RCO) that is already reducing natural gas use for press air emission control by approximately one-third and saving over $700,000 per year.

  • Installation of new process controls for the Deposit wood-fired boiler which will increase reliability and reduce dependence on the gas-fired back-up boiler.

The full operational and financial benefits of these projects will be reflected in 2007. However, Norbord is moving forward on additional initiatives that will drive another 10% reduction in fossil fuel use. These projects include:

  • A $20 million investment in residual wood-fired heat energy systems for OSB dryers in Genk and Nacogdoches. After completion, all of Norbord’s OSB process heat energy needs will be met using residual wood fuel.

  • Installation of improved ash handling systems in Huguley and Joanna to increase the efficiency of their boilers.

Many of these projects have required significant capital investment but Norbord has also been successful with an incremental approach to energy efficiency. For example, over the last five years, the Inverness, Scotland mill has reduced the amount of natural gas and electricity needed to make each unit of product by more than 50%. This was achieved without significant capital investment by involving employees, setting stretch targets and using available low-cost technology.

We will continue to reduce our overall dependence on fossil fuels and decrease greenhouse gas emissions. However, environmental regulations in the United States continue to increase the need for air emission control equipment that depends on natural gas. Today 18% of our annual natural gas use goes towards operating air emission control equipment – RTOs and RCOs. This is enough energy to run one of our plants for six months.

Air Emissions and Regulatory Compliance

In 2006, Norbord continued to deliberately invest in early compliance with a changing regulatory landscape, specifically with respect to two Maximum Achievable Control Technology (MACT) standards that impact most of Norbord’s US operations. To date, the Company has spent $29 million on improved air emission control equipment to meet these standards. All of the affected US operations have completed the necessary assessments and submitted permit applications to comply with the Boiler MACT standards by the September 2007 compliance deadline. No additional capital will be required to meet the new boiler standards.


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Compliance with the more complex and more rigorous Plywood and Composite Wood Products (PCWP) MACT is not required until October 2008. Mills in Joanna, Deposit, Jefferson and Nacogdoches are currently in compliance with all MACT requirements. Additional capital investment to comply with PCWP MACT is not expected to exceed $8 million.

Norbord’s actions to comply with these regulations ahead of the compliance deadline have significantly reduced emissions while enhancing operational flexibility. This has allowed Norbord’s mills to increase production without restrictive production caps. In 2006, Norbord made significant progress in reducing US air emissions in every category. Annual emissions of criteria air pollutants in the US (including VOC, particulate, NOx and CO) were reduced by more than 1,000 metric tons last year, a reduction of 20% over 2004.

Norbord manages compliance by recording any deviation from a permit-required monitoring parameter. Most of these deviations are only minutes in duration and do not result in permit violations or harmful releases to the environment. Continuous monitoring allows us to react to emission control equipment malfunctions before there is a risk to the environment.

Environmental Compliance2006(1)2005(2)200420032002
Deviations from permit-required monitoring parameters529169230409164
Percent compliance97.999.298.998.098.1
Environmental penalties (US $ 000’s)140547711
Environment, Health and Safety capital (US $ 000’s)(3)21,00028,00011,0006,0001,000

(1)    Of the 529 deviations reported in 2006, 70% were from Nacogdoches where new air emission control equipment and associated permit requirements have required operators to adjust to new monitoring procedures. The new equipment is functioning well and has accounted for a 600 metric ton per year reduction in VOC and formaldehyde emissions. The mill is in compliance with all permit emission limits.

(2)    Genk mill acquired in 2004; figures included starting in 2005.

(3)    2006 environmental capital investment includes approximately $15 million for environmental equipment for the expansion of the Cordele OSB mill.

Additional permit requirements and increasingly sophisticated abatement equipment mean that the number of parameters controlled by Norbord operators is always increasing. In 2006, Norbord took over 26,000 compliance measurements. Of these, 529 did not meet our operating criteria accounting for an overall environmental compliance rate of 97.9%. Seventy percent of the deviations reported in 2006 are from the Nacogdoches mill where new air emission control equipment and associated permit requirements have required operators to adjust to new monitoring procedures. The new equipment is functioning well and has accounted for a 600 metric ton per year reduction in VOC and formaldehyde emissions.

Formaldehyde

Formaldehyde exists naturally in wood, the human body and the atmosphere. It is present in very low concentrations in the adhesive used in our panel products and is released from wood in the drying process.

While formaldehyde emissions from OSB are similar to the emissions from natural wood, products are nonetheless tested to ensure that they comply with agreed standards for formaldehyde content and emissions. Standards for all our products are well below the levels associated with any observed health effects and Norbord works with industry associations and resin suppliers in North America and Europe to set more demanding product quality targets.


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Employee exposure to formaldehyde is assessed regularly and compared to our own rigid standards. In addition, we conduct periodic health evaluations to ensure that employees are not experiencing any adverse health effects.

Prior to the start-up of a new mill or a new production line, we develop models to predict formaldehyde emissions and ensure that local communities will not be at risk. Pollution control equipment prevents most of the formaldehyde from ever reaching the atmosphere. The small amount released is closely monitored and publicly reported to the regulators. Improved controls have reduced formaldehyde emissions by 20% since 2002 or over 50 metric tons a year on a like-for-like basis.

Sustainable Wood Procurement

Norbord does not own forest land. Wood fibre is supplied through contracts with private or industrial landowners, other forest products companies with long-term leases on public lands or directly from public forest management agencies. In Quebec and Ontario, Norbord holds long-term licences that permit the annual harvesting of approximately 880,000 cubic metres of poplar and birch.

At all Norbord operations, wood is delivered to our mills under specific contracts with qualified, professional loggers. Norbord sets strict standards for wood quality and regularly monitors contractors to ensure they meet environmental standards.

We continue to increase the use of recycled wood in the manufacture of particleboard and MDF. Substitution of virgin fibre with recycled fibre conserves natural forest and reduces the amount of waste going to landfill. In addition, recycled material is drier than wood chipped from trees; therefore, the amount of energy needed to prepare the fibre for pressing can be reduced. In 2006, Norbord used approximately 400,000 metric tons of post-consumer wood fibre – material that was reclaimed after being used in crating, pallets, window and door frames and other building materials.

Norbord continues to support initiatives to monitor and certify the sustainability of forest management in our procurement areas. Third parties are engaged to certify that our wood procurement and forest management practices meet internationally recognized standards endorsed by the Sustainable Forestry Initiative® (SFI), Forest Stewardship Council (FSC) or the International Organization for Standardization (ISO), depending on the location of the mill. Nine of Norbord’s North American wood procurement operations are third-party certified to be in compliance with the SFI requirements and the Canadian forestry operations are also registered under the ISO 14001 Environmental Management System standard. The four European mills meet the FSC Chain of Custody standards. The Cochrane mill is third-party certified under all three systems.

Certification to these standards ensures that harvesting conforms to recognized best management practices including the protection of water quality and wildlife. Compliance also requires that sustainable forest practices are furthered through education, training and research.


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Environment, Health and Safety Audits

Since the early 1990s, Norbord has conducted internal environment, health and safety audits to track and improve performance across all operations. Each Norbord mill is audited at least once every three years by an experienced team. Corrective action plans are closely tracked and progress is reported on a quarterly basis.

During 2006, audits were completed at Nacogdoches, La Sarre, Guntown and Genk. Members of Norbord’s senior management team participate in these audits. In addition, internal EH&S auditors visited the Cordele expansion project twice to review contractor safety practices and to ensure a safe start-up.

The audit process covers a wide range of EH&S risks. In 2006, Norbord introduced revised environmental compliance auditing tools and increased attention to environmental permit requirements. In 2007, additional employees will be trained as auditors to expand the scope of expertise involved in the program. In addition to the ongoing review and assessment of known and potential EH&S risks, emphasis will be placed on monitoring progress towards a safety culture that identifies and eliminates hazards and further involves employees in all aspects of the EH&S process.

 

 

 

 


Glossary

NORBORD

 

ANNUAL REPORT

 

2006

 

73

 

Glossary

DSEARI-joistPanelboards
Dangerous Substances and ExplosiveAn "I"-shaped engineered woodOriented strand board, particleboard,
Atmospheres Regulations. Regulationsstructural product designed for use inmedium density fibreboard and
introduced in Europe in 2004 to reduceresidential and light commercial floorplywood.
the risk of explosions in industrialand roof construction. The product is 
environments.prefabricated using sawn lumber flangesParticleboard
 and wood panel webs, bonded togetherA panelboard produced by chemically
Emissionswith exterior grade adhesives.bonding clean sawdust, small wood
Residue material released into the particles and recycled wood fibre under
atmosphere by way of steam or smokem3heat and pressure.
discharged from manufacturingCubic metre. A measure of volume 
processes.equal to approximately 1,130 square feetParticulate Matter
 (3/8-inch basis).Total suspended particulate. A measure
Fossil Fuels of the solid particles (wood, process dust
Natural gas and fuels derived fromMACTand smoke) found in air emissions.
petroleum or coal such as diesel,Maximum Achievable Control Tech- 
gasoline or heating oil.nology. Regulations being introduced inPlywood
 theUS to limit the discharge of hazard-A panelboard produced by gluing
 ous air pollutants.together thin layers of solid wood
FSC veneers.
The Forest Stewardship Council is anMDF 
international non-profit organizationMedium density fibreboard. A panel-SFI®
that supports environmentally appropri-board produced by chemically bondingThe Sustainable Forestry Initiative®
ate management of the world’s forests.highly refined wood fibres of uniformprogram, managed by the American
It promotes an international labelingsize under heat and pressure.Forest and Paper Association, is a
scheme for forest products, which comprehensive system of principles,
provides a guarantee that the productMsf (MMsf)objectives and performance measures
comes from a well-managed forest, andMeasurement for panel products equaldeveloped by foresters, conservationists
meets internationally recognized criteriato a thousand (million) square feet.and scientists that combines the per-
of forest stewardship. petual growing and harvesting of trees
 Msf (MMsf) (3/8-inch basis)with the protection of wildlife, plants,
Greenhouse GasesMeasurement for panel products equalsoil and water quality.
A number of gases, including carbonto a thousand (million) square feet, 
dioxide (CO2), methane and nitrous3/8-inch thick.VOCs
oxides, that trap heat in the atmosphere. Volatile organic compounds. A large
Typically expressed as CO2 equivalentsOSBfamily of carbon-containing com-
to account for the different warmingOriented strand board. An engineeredpounds. When emitted into the atmo-
potential of the different greenhousestructural wood panel produced bysphere, some may contribute to ozone
gases. DirectGHG emissions are thosechemically bonding wood strands inlayer depletion and some may be toxic
generated onsite through the productiona uniform direction under heat andin high concentrations. Most contribute,
or combustion of energy.pressure.in varying degrees, to the formation of
  ground level ozone in highly populated
 OSHA Recordable Rateareas.
 TheUS Occupational Safety and 
 Health Administration index that tracks 
 the number of recordable work-related 
 health and safety injuries and illnesses 
 per 200,000 hours worked. 

 


NORBORD

Board of Directors

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2006

 

  

74

 

Board of Directors

  
Jack L. CockwellChair of the Human Resources Committee
Director since 1987Member of the Environment, Health and Safety Committee
Group Chair, Brookfield Asset Management Inc. 
  
Dian CohenChair of the Corporate Governance and Nominating Committee
Director since 1987Member of the Audit Committee
President, DC Productions Ltd.Member of the Environment, Health and Safety Committee
 Member of the Human Resources Committee
  
  
Pierre DupuisChair of the Audit Committee
Director since 1995Member of the Environment, Health and Safety Committee
Former Chief Operating Officer,Member of the Human Resources Committee
Dorel Industries Inc. 
  
Gordon E. ForwardMember of the Audit Committee
Director since 1995Member of the Environment, Health and Safety Committee
Chairman Emeritus, United States Business Council forMember of the Human Resources Committee
Sustainable Development 
  
Dominic GammieroMember of the Environment, Health and Safety Committee
Director since 1998 
Chief Executive Officer, Fraser Papers Inc. 
  
Robert J. HardingChair of the Board
Director since 1998Member of the Corporate Governance and Nominating Committee
Chair, Brookfield Asset Management Inc.Member of the Environment, Health and Safety Committee
 Member of the Human Resources Committee
  
  
Margot NortheyChair of the Environment, Health and Safety Committee
Director since 2000Member of the Corporate Governance and Nominating Committee
Former Dean, Queen’s University School of BusinessMember of the Human Resources Committee
  
  
J. Barrie Shineton 
Director since 2004Mr. Shineton is not a member of any Board committees
President and Chief Executive Officer, Norbord Inc. 
  
Don S. Wells (Deceased)Mr. Wells was Chair of the Audit Committee and a member
Director from 2003–2006of the Corporate Governance and Nominating Committee, the
Former Executive Vice President, Strategic Investments,Environment, Health and Safety Committee and the Human
Royal Bank Financial GroupResources Committee
  

Officers of the Company and Corporate Information

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2006

 

75

 

Officers of the Company and Corporate Information

Michael BothaRobin LampardLynne C. Taylor
Vice President and ControllerVice President, TreasurerAssistant Corporate Secretary
Officer since 2004Officer since 2002Officer since 2004
   
Robert J. HardingKarl MorrisJohn Tremayne
ChairSenior Vice President,Executive Vice President
Officer since 2005European Operationsand Chief Financial Officer
 Officer since 2005Officer since 2002
Robert Kinnear  
Senior Vice President,J. Barrie ShinetonPeter Wijnbergen
Corporate ServicesPresident andSenior Vice President,
Officer since 2005Chief Executive OfficerMarketing, Sales and Logistics
 Officer since 1999Officer since 2005

 

 

Norbord Inc.Media and Investor RelationsShareholder Information
1 Toronto Street, Suite 600Anita VeelTransfer Agent & Registrar and
Toronto, OntarioDirector, Corporate AffairsDividend Reinvestment Plan
M5C 2W4416-643-8838CIBC Mellon Trust Company
416-365-0705 oranita.veel@norbord.comP.O. Box 7010
1-888-667-2673 Adelaide Street Postal Station
www.norbord.comInvestor InformationToronto, Ontario
info@norbord.com2007 Financial CalendarM5C 2W9
Stock symbol: NBD-TSX(dates on or about)416-643-5500 or 1-800-387-0825
  inquiries@cibcmellon.com
SalesQ1 Earnings Release April 25 
Toronto, OntarioQ2 Earnings Release July 25To receive additional copies of this
416-365-0705Q3 Earnings Release October 24report, please contact us at
1-800-387-1740Norbord Year-End December 311-888-667-2673, 416-365-0705
  or info@norbord.com.
Inverness, ScotlandAnnual Meeting of Shareholders 
011-44-1463-792424Wednesday, April 25, 2007 at 10:30 a.m. 
 National Club 
South Molton, England303 Bay Street 
011-44-1769-572991Toronto, Ontario 
   
Genk, Belgium  
011-32-8950-0329  

This report has been printed on paper stock that is FSC (Forest Stewardship Council) certified. FSC fibre used in the manufacture of the paper stock comes from well-managed forests independently certified by SmartWood according to Forest Stewardship Council rules.

 

  

 

 

 

 

NORBORD INC.

 

 

 

Management Proxy
Circular

 

 

 

Notice of
Annual Meeting
of Shareholders

 

 

March 1, 2007

 

 

 


 

NORBORD

Letter to Shareholders

MANAGEMENT

 

PROXY CIRCULAR

 

 

 

 

 

 

Letter to Shareholders

 

 

March 1, 2007

Dear Shareholder,

On behalf of the Board of Directors, I would like to invite you to attend common shareholders at The National Club, 303 Bay Street, Toronto, Ontario on Wednesday, April 25, 2007 at 10:30 a.m. local time.

The business to be considered at this Meeting is described in the accompanying Notice of Annual Meeting and Management Proxy Circular. It is important that you exercise your vote, either in person or by completing and sending in your proxy.

As always, you will have the opportunity at the Meeting to meet with the Directors and Management of the Corporation, who will be happy to answer your questions. If you are unable to attend the meeting in person, I invite you to log on to our web site at www.norbord.com and listen to our web cast.

I would also take this opportunity to advise you of the passing of a very valued Board member and Chair of our Audit Committee, Mr. Don S. Wells, on August 21, 2006. Mr. Wells had been a Director of the Corporation and Chair of the Audit Committee since April 2003. His expertise and wisdom will be greatly missed.

Sincerely,

Robert J. Harding
Chair


NORBORD

 

MANAGEMENT

Notice of Annual Meeting of Shareholders

PROXY CIRCULAR

 

 

 

  

 

 


Notice of Annual Meeting of Shareholders


 

Date:April 25, 2007
Time:10:30 a.m. (local time)
Place:The National Club, 303 Bay Street, Toronto, Ontario

Business of the Meeting

  1. To receive reports and financial statements.
  2. To elect Directors.
  3. To appoint auditors and to authorize the Directors to fix their remuneration.
  4. To consider and, if deemed advisable, to pass a resolution to approve amendments to the Norbord Inc. Stock Option Plan relating to blackout periods and amendment procedures.
  5. To transact such other business as may properly come before the Meeting or any adjournment or postponement thereof.

The Management Proxy Circular accompanying this Notice provides additional information relating to the matters to be dealt with at the Meeting and is incorporated into and forms part of this Notice.

Only holders of Common Shares of the Corporation of record at the close of business on March 1, 2007 are entitled to notice of and to vote at the Meeting and any adjournment or postponement thereof.

Shareholders are entitled to vote at the Meeting either in person or by proxy. Registered shareholders who are unable to attend the Meeting in person are asked to complete and return the enclosed proxy form so that their vote is represented. Proxies to be used at the Meeting must be deposited with Norbord Inc. c/o CIBC Mellon Trust Company, by mail at P.O. Box 721, Agincourt, Ontario M1S 0A1, or in person at 320 Bay Street, Banking Hall Level, Toronto, Ontario, at least 24 hours prior to the time of the Meeting. Shareholders may also vote by telephone or via the Internet. Instructions for telephone and Internet voting are located on the proxy form. Non-registered shareholders will be provided with voting instructions by the intermediaries who hold Common Shares on their behalf.

By order of the Board of Directors,

Lynne C. Taylor
Assistant Corporate Secretary
Toronto, Ontario
March 1, 2007


 

NORBORD

Table of Contents

MANAGEMENT

 

PROXY CIRCULAR

 

 

 

1

 

 

Table of Contents

 

 Page
SECTION I – GENERAL INFORMATION3

Date of Information

3

Common Shares Outstanding

3

Voting Shares and Principal Shareholders

3

Mailing of Circular

3

Reporting Concerns

4

Dividend Reinvestment Plan

4

Normal Course Issuer Bid

4

Shareholder Proposals

4

Annual Report

4

Additional Information

4
  
SECTION II – VOTING INSTRUCTIONS5

Solicitation of Proxies

5

Appointment of Proxyholders

5

Execution and Deposit of Proxy

5

Voting of Shares Represented by Management Proxy

5

Registered Shareholders

6

Non-registered Shareholders

6

Right of Revocation

7
  
SECTION III – BUSINESS OF THE MEETING8

Annual Report and Financial Statements

8

Election of Directors

8

Appointment of Auditors

8

Approval of Amendments to Stock Option Plan

9
  
SECTION IV – BOARD OF DIRECTORS11

Director Nominees

11

Director Attendance for Meetings Held in 2006

16

Change in Personal Circumstances

16

Director Compensation and Share Ownership

16

Deferred Share Unit Plan for Non-Employee Directors ("DSUP")

 

Stock Options

18

Directors’ and Officers' Liability Insurance

18

NORBORD

 

MANAGEMENT

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 Page
SECTION V – EXECUTIVE OFFICERS19

Named Executive Officers in 2006

19

Composition and Mandate of the Human Resources Committee

20

Report on Executive Compensation

20

Executive Share Ownership Guidelines

20

Base Salaries

21

Annual Incentive Plan

21

Long-Term Incentives

22

Stock Option Plan

22

Management Deferred Share Unit Plan

22

Restricted Stock Unit Plan

23

Compensation of President and Chief Executive Officer

23

Executive Compensation Table of Named Executive Officers

25

Option Grants During the Financial Year Ended December 31, 2006

25

Aggregate Option Exercises During the Financial Year Ended December 31, 2006

 

and Financial Year-End Option Values

26

Deferred Share Units

26

Securities Authorized for Issuance Under Equity Compensation Plans for the

 

Financial Year Ended December 31, 2006

27

Pension Arrangements

27

Pension Plan Table

27
  
SECTION VI – PERFORMANCE GRAPH29

Five-Year Cumulative Total Return on CAD $100 Investment

29
  
SECTION VII – CORPORATE GOVERNANCE30

Mandate of the Board

30

Board Composition

30

Director Independence

30

Board and Committee Meetings

31

Board Evaluation Systems

32

Audit Committee

32
  
Appendix A–Corporate Governance Practices34
Appendix B–Corporate Governance Disclosure40
Appendix C–Board of Directors–Terms of Reference45
Appendix D–Board Committees48
Appendix E–Audit Committee–Terms of Reference50
Appendix F–Reporting Package53

 

NORBORD

Section I - General Information

MANAGEMENT

 

PROXY CIRCULAR

 

 

 

3

 

Section I – General Information

This Management Proxy Circular is supplied in connection with the solicitation of proxies by the management of Norbord Inc. (the "Corporation" or "Norbord") for use at its Annual Meeting to be held at the The National Club on Wednesday, April 25, 2007 at 10:30 a.m. (local time) for the purposes outlined in this Circular under Section III – Business of the Meeting.

Date of Information

The information contained in this Circular is current as at March 1, 2007, unless otherwise stated.

Common Shares Outstanding

The number of Common Shares of the Corporation ("Common Shares") outstanding as at close of business on March 1, 2007 was 143,864,581. The Common Shares trade under the symbol NBD on the TSX.

Voting Shares and Principal Shareholders

Each registered holder of Common Shares, at the close of business on March 1, 2007 (the "Record Date"), will be entitled to one vote for each Common Share held on all matters to come before the Meeting or any adjournment thereof either in person or by proxy.

To the knowledge of the Directors and Officers of the Corporation, no person or company beneficially owns, directly or indirectly, or exercises control or direction over more than 10% of all Common Shares, except Brookfield Asset Management Inc. ("Brookfield"). As at March 1, 2007, Brookfield owned 54,423,303 Common Shares, representing approximately 38% of the outstanding Common Shares.

Brookfield is a public company with shares listed on the TSX and New York Stock Exchange. Brookfield's major shareholders are Partners Limited ("Partners") and Partners 49%-owned affiliate, BAM Investments Corp., which, together with the shareholders of Partners, collectively own, directly or indirectly, exercise control or direction over, or have options or warrants to acquire, approximately 69 million Class A Limited Voting Shares of Brookfield, representing approximately 17% of the Class A Limited Voting Shares on a fully diluted basis, and 85,120 Class B Limited Voting Shares of Brookfield, representing all of the Class B Limited Voting Shares. Messrs. Cockwell, Gammiero and Harding, Directors of the Corporation, and Mr. Tremayne, Executive Vice President and Chief Financial Officer of the Corporation, are shareholders of Partners.

Mailing of Circular

The mailing of this Circular will commence on or about March 23, 2007. The 2006 Annual Report is also being mailed to all registered shareholders and to those beneficial shareholders who requested a copy. Proxy materials will be delivered to brokers, custodians and fiduciaries who will be requested to promptly forward such material to the beneficial owners of Common Shares.


NORBORD

 

MANAGEMENT

Section I - General Information

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Reporting Concerns

Concerns relating to Norbord’s accounting practices, internal accounting controls or auditing matters may be directed to the Chair of Norbord’s Audit Committee at:

Norbord Inc.
Attn: Norbord Audit Chair
1 Toronto Street, Suite 600
Toronto, Ontario M5C 2W4

Telephone: 416-360-2254
Toll Free Telephone: 1-888-667-2673
Email: auditchair@norbord.com

Dividend Reinvestment Plan

Norbord has a Dividend Reinvestment Plan which enables shareholders who are residents of Canada to elect to purchase additional Common Shares of Norbord by reinvesting their cash dividends. You may view the full terms and conditions of Norbord’s Dividend Reinvestment Plan by visiting our website at www.norbord.com.

Normal Course Issuer Bid

The Corporation purchased a total of 2,724,600 Common Shares under its normal course issuer bid from November 2, 2005 until November 1, 2006. The Corporation has not renewed its normal course issuer bid.

Shareholder Proposals

Proposals of shareholders intended to be presented at the Corporation’s annual meeting of shareholders in 2008 and which such shareholders are entitled to request be included in the management proxy circular for the 2008 meeting, must be received at the Corporation’s head office at the address set out below not later than December 2, 2007.

Annual Report

If you are a registered shareholder, you will have received a copy of the 2006 Annual Report with this package. If you are a beneficial shareholder and your shares are held in the name of a nominee and you did not complete and return the card sent out last year with your package to specifically request a copy of Norbord's Annual Report, you will not receive a 2006 Annual Report. Copies of Norbord’s Annual Report may be obtained by accessing Norbord’s public filings on SEDAR at www.sedar.com or Norbord's website at www.norbord.com under "Investors" and "Financial Reports".

Additional Information

Additional information relating to the Corporation can be found on SEDAR at www.sedar.com. Shareholders may contact the Corporation by mail at 1 Toronto Street, Suite 600, Toronto, Ontario M5C 2W4, telephone (416-365-0705), fax (416-365-3292), or e-mail (info@norbord.com) to request copies of the Corporation's Annual Consolidated Financial Statements and Management’s Discussion and Analysis ("MD&A").

Financial information for the Corporation’s most recently completed financial year is provided in its Annual Consolidated Financial Statements and MD&A which are filed with SEDAR at www.sedar.com.


 

NORBORD

Section II - Voting Instructions

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Section II –Voting Instructions

Solicitation of Proxies

The management of the Corporation is soliciting your proxy. Solicitation is being made primarily by regular mail, but may be supplemented by telephone, the Internet and personally by regular employees of the Corporation. The costs of the solicitation will be paid by the Corporation.

Appointment of Proxyholders

A shareholder, including an intermediary who holds shares on behalf of a non-registered shareholder, may, by properly marking, executing and depositing the enclosed form of proxy, appoint as proxyholder the persons whose names are printed on the enclosed form of proxy or some other person, who need not be a shareholder, by inserting the name of the person in the space provided. The proxyholder may attend and act for the shareholder at the Meeting and any adjournment thereof.

Execution and Deposit of Proxy

If a shareholder is an individual, the form of proxy must be executed by the shareholder or a duly authorized attorney of the shareholder. If a shareholder is a corporation, the form of proxy must be executed in the presence of a duly authorized attorney or officer of the corporation. Where a form of proxy is executed by an attorney or officer of a corporation, the authorizing documents (or notarized copies thereof) should accompany the form of proxy. Executed forms of proxy must be deposited not less than 24 hours before the time of the Meeting, for registered shareholders, with Norbord Inc., c/o CIBC Mellon Trust Company, using either the enclosed proxy return envelope or by mailing the proxy to CIBC Mellon Trust Company at P.O. Box 721, Agincourt, Ontario M1S 0A1, Attention: Proxy Department, or for non-registered shareholders, with Norbord Inc., c/o ADP Investor Communications, Proxy Department, 5970 Chedworth Way, Mississauga, Ontario, L5R 4G5.

Voting of Shares Represented by Management Proxy

Shares represented by properly executed proxies in favour of the people whose names are printed thereon will be voted for or against or withheld from voting in accordance with the choice specified in the proxy on any ballot that may be called for but, if no choice is specified, such shares will be voted as follows:

  1. for the election as Directors of the Corporation for the individuals listed under the heading "Election of Directors" on page 8 of this Circular;

  2. for the appointment of KPMG LLP as auditors of the Corporation and authorizing the Directors to fix their remuneration; and

  3. for the approval of the amendments to the Stock Option Plan.

The person appointed as proxy has discretionary authority to vote on amendments or variations to the matters being voted on as identified in the Notice of Meeting and any other matters that may properly come before the Meeting. At the time of printing this Circular, the Management of the Corporation knows of no such amendments, variations or other matters to come before the Meeting.


NORBORD

 

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Section II - Voting Instructions

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Registered Shareholders

If you are a registered shareholder you can vote by proxy no later than 24 hours prior to the time of the Meeting, or in person at the Meeting.

There are four ways that you can vote by proxy:

  1. By Telephone
    Call 1-866-271-1207 from your touch-tone phone and follow the instructions (only available to residents of Canada or the United States). You will need the control number located on the enclosed proxy form. You do not need to return your proxy form. Please note that you may not appoint a person as a proxyholder other than the management nominees named in this proxy form when voting by telephone.
  2. Via the Internet
    Go to www.eproxyvoting.com/norbord and follow the on-screen instructions. You will need the control number located in the enclosed proxy form. You do not need to return your proxy form
  3. By Mail
    By completing, dating and signing the enclosed proxy form and returning same in the envelope provided
  4. By Fax
    By completing, dating and signing the enclosed proxy form and sending it via fax to 416-368-2502.

Non-registered Shareholders

Non-registered (or beneficial) shareholders hold their shares through a bank, trust company, securities broker or other intermediary. In accordance with the requirements of National Instrument 54-101, the Corporation has distributed copies of the accompanying Notice, this Management Proxy Circular, the enclosed proxy form and the Corporation’s 2006 Annual Report (which includes Management's Discussion and Analysis and Annual Consolidated Financial Statements for the fiscal year ended December 31, 2006) (collectively, the "Meeting Materials") to the intermediaries for onward distribution to non-registered shareholders.

In most cases, a non-registered shareholder will receive, as part of the Meeting Materials, a voting instruction form requesting voting instructions. If the non-registered shareholder does not wish to attend and vote at the Meeting in person (or have another person attend and vote on his or her behalf), the voting instruction form must be completed, signed and returned in accordance with the directions on the form. Voting instruction forms permit the completion of the voting instructions form by telephone, fax, mail or through the Internet.

Less frequently, a non-registered shareholder will receive, as part of the Meeting Materials, a form of proxy that has already been signed by the intermediary (typically a facsimile, stamped signature) which is restricted as to the number of shares beneficially owned by the non-registered shareholder but which is otherwise incomplete. If the non-registered shareholder does not wish to attend and vote at the Meeting in person (or have another person attend and vote on his or her behalf), the non-registered shareholder must complete the form of proxy and deposit it as set out in "Execution and Deposit of Proxy" on page 5 of this Circular.

If a non-registered shareholder who has received a form of proxy wishes to attend and vote at the Meeting in person (or have another person attend and vote on his or her behalf), the non-registered shareholder must strike out the names of the persons in the proxy and insert the non-registered shareholder's (or such other person's) name in the blank space provided. In the case of a voting instruction form, the non-registered shareholder should follow the directions in the form as to returning the form and meeting attendance.


 

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Non-registered shareholders should follow the instructions on the forms they receive and contact their intermediaries promptly if they need assistance.

Right of Revocation

A shareholder may revoke a proxy by voting again in any manner (telephone, Internet, mail or fax), including delivering another proxy form with a later date on it to the head office of Norbord Inc., Suite 600, 1 Toronto Street, Toronto, Ontario M5C 2W4 no later than 24 hours prior to the time of the Meeting, or with the Chair of the Meeting on the day of the Meeting or any adjournment thereof.


NORBORD

 

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Section III - Business of the Meeting

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8

 

Section III–Business of the Meeting

Annual Report and Financial Statements

The Meeting Materials are being mailed to both registered and non-registered shareholders. However, in the Meeting Materials provided to non-registered shareholders the Annual Report will only be included in the Meeting Materials mailed to those non-registered shareholders who indicated they wished to receive it.

Election of Directors

The articles of the Corporation provide that the Board of Directors will consist of a minimum number of eight and a maximum number of 20 Directors. The people named in the enclosed form of proxy intend, unless otherwise directed, to vote for the election of a Board of Directors (the "Board") composed of the nine nominees listed below to serve until the next Annual Meeting of the Corporation or until their successors are duly elected or appointed, unless any specified nominee is not available to act as a Director of the Corporation ("Director"), in which event a substitute may be nominated.

The nine nominees proposed for election as Directors are:

Jack L. CockwellGordon E. ForwardNeville W. Kirchmann
Dian CohenDominic GammieroMargot Northey
Pierre DupuisRobert J. HardingJ. Barrie Shineton

Management and the Board of Directors recommend that shareholders vote FOR these nominees. The persons named in the enclosed Proxy intend to vote FOR the election of each of these nominees unless the shareholder specifies that authority to do so is withheld.

The Board requires any Director to offer his or her resignation to the Board immediately following an annual meeting if he or she has not received at least 50% of the votes cast at the meeting in favour of his or her election to the Board. The Board will evaluate the impact of the change in the composition of the Board and accept or reject the resignation as deemed advisable.

Appointment of Auditors

The Audit Committee has reviewed and discussed the Corporation’s Annual Consolidated Financial Statements with Management, which has primary responsibility for the preparation of the Annual Consolidated Financial Statements. Ernst & Young LLP, the Corporation’s independent auditor for 2006, is responsible for expressing an opinion on the Corporation’s Annual Consolidated Financial Statements. The Audit Committee has reviewed with Ernst & Young LLP the matters that are required to be discussed, including financial statement disclosures, the quality of the Corporation’s financial reporting and significant accounting policies.

Based on the reviews, considerations and discussions outlined above, the Audit Committee recommended to the Board, and the Board approved, the Annual Consolidated Financial Statements of the Corporation and authorized their inclusion in the Corporation’s Annual Report for the year ended December31,2006.


 

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At the request of the Corporation, Ernst & Young LLP resigned as auditors of the Corporation on February28, 2007. KPMG LLP were appointed on February28, 2007 as auditors of the Corporation to replace Ernst& Young LLP.

It is proposed that KPMG LLP be appointed as the auditors of the Corporation to hold office until the next Annual Meeting of the Corporation.

In accordance with National Instrument–Continuous Disclosure Obligations ("51-102"):

  1. The Corporation has prepared and delivered to Ernst & Young LLP, KPMG LLP and the applicable Canadian securities regulatory authorities, a Notice of Auditor Change dated February 28, 2007 confirming, among other things, that there are no outstanding "reportable events" (as defined in 51-102) with respect to the Corporation;

  2. Ernst& Young LLP has confirmed in a letter dated March2, 2007 that they have reviewed the Notice of Auditor Change and agree with all matters included therein; and

  3. KPMG LLP has confirmed in a letter dated February 28, 2007 that they have reviewed the Notice of Auditor Change and do not disagree with any of the information contained therein (collectively, the "Reporting Package").

A copy of the Reporting Package is included as Appendix F.

The Audit Committee recommends that shareholders vote FOR the appointment of KPMG LLP as auditors of the Corporation and authorize the Directors to fix their remuneration. The persons named in the enclosed Proxy intend to vote FOR this appointment unless the shareholder specifies that authority to do so is withheld.

Approval of Amendments to Stock Option Plan

As a result of changes in the rules of the TSX and securities laws applicable to security based compensation arrangements, the Board of Directors approved amendments to the Norbord Inc. Stock Option Plan (the "SOP") at a meeting held on January 31, 2007. Two of the amendments were approved subject to shareholder approval as described below. The SOP, as amended, is described in "Report on Executive Compensation–Long-Term Incentives–Stock Option Plan".

The TSX rules require that the Corporation obtain the consent of its shareholders for amendments to the SOP (i) to extend the period of exercise of an option if the expiry date falls during or soon after a blackout period and (ii) the amending procedures.

The Corporation’s Disclosure Policy prohibits any officer or employee with material undisclosed information from trading in the securities of the Corporation. Therefore, it is proposed to amend the SOP to provide that (i) options must be granted effective after the end of a blackout period and (ii) if an option expires during or within 10 days after the last day of a blackout period, the expiry date will be the last day of such 10-day period.

The current amendment procedures for the SOP permit the Board to amend the SOP subject to receipt of any required regulatory approval and the consent of option holders materially prejudiced by the amendment. There is no requirement to obtain shareholder approval of any amendment. The Board proposes to amend the SOP to require the approval of security holders to any amendment to the SOP that would: (i) increase the maximum number of Common Shares issuable under the SOP (other than on a corporate reorganization); (ii) reduce the exercise price of options to less than the market price of Common Shares on the date of the option grant; (iii) reduce the exercise price of options for the benefit of an insider of the Corporation; (iv) extend the expiry date of options for the benefit of an insider of the Corporation; (v) increase the maximum number of Common Shares issuable to insiders of the Corporation under the SOP; or (vi) amend any of the limitations set out in (i) to (v). Apart from these limitations, the Board may continue to amend the SOP as it considers necessary or desirable for the purposes of the Corporation.


NORBORD

 

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Section III - Business of the Meeting

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10

 

 

At the Meeting the shareholders will be asked to consider and, if thought appropriate, pass a resolution approving the amendments to the SOP relating to blackout periods and amendment procedures.

The Board of Directors recommend that shareholders vote FOR the proposed amendments to the SOP relating to blackout periods and amendment procedures. The persons named in the enclosed Proxy intend to vote FOR the approval of such proposed amendments to the SOP unless the shareholder specifies otherwise. The resolution to approve such proposed amendments to the SOP must be passed by a majority of the votes cast on this resolution at the Meeting.


 

NORBORD

Section IV - Board of Directors

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Section IV – Board of Directors

Director Nominees

All of the Corporation’s current Directors with the exception of Mr. Neville W. Kirchmann were elected at the last annual general meeting on April 21, 2006, and all are Management nominees for election to the Board. Mr. Kirchmann was appointed Director on January 31, 2007, to fill the vacancy created by the passing of Mr. Don S. Wells on August 21, 2006. Common share ownership, deferred share units and options held are as at December 31st, 2006 and 2005.

JACK L. COCKWELL, Toronto, Ontario
Age: 66

Mr. Cockwell is Group Chair of Brookfield Asset Management Inc. ("Brookfield"), a global assetmanager. Mr. Cockwell was President and Chief Executive Officer of Brookfield from 1991 to 2002. Mr. Cockwell is a Director of Brookfield and a number of Brookfield-related companies, including Brookfield Properties Corporation and Fraser Papers Inc. and is also a Director of Astral Media Inc. Mr. Cockwell is also Chair of the Board of Trustees of the Royal Ontario Museum and a Director of the C.D. Howe Institute. Mr. Cockwell’s area of expertise is business management.
 

Director Since: 1987 

Independent Director
 

Chair of the Human Resources Committee
 
Member of the Environment, Health and Safety Committee 
 20062005
 26,928 Common Shares(1)26,928 Common Shares(1)

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DIAN COHEN, Toronto, Ontario 
Age: 74 

Ms. Cohen is President of DC Productions Ltd., an economist and a partner in her own economic consultancy. She is the author of a number of books on government, personal money management and social policy issues. Ms. Cohen is the recipient of many literary awards, as well as the Order of Canada. In addition to her role on the Norbord Board, Ms. Cohen is a Director of Dorel Industries Inc. and Fraser Papers Inc. Ms. Cohen is also a trustee of Great Lakes Hydro Income Fund and Treasurer of the University Women’s Scholarship Foundation. Ms. Cohen’s areas of expertise are economics and communications.
 

Director Since: 1987 

Independent Director
 

Chair of the Corporate Governance and Nominating Committee
Member of the Audit Committee 
Member of the Environment, Health and Safety Committee 
Member of the Human Resources Committee 
 20062005
 6,000 Common Shares6,000 Common Shares
 6,200 Stock Options6,200 Stock Options
 22,524 Deferred Share Units15,318 Deferred Share Units

PIERRE DUPUIS, Sutton, Quebec
Age: 62

Mr. Dupuis is the former Chief Operating Officer of Dorel Industries Inc., a global consumer product company, from 1999 to 2005. Prior to his appointment at Dorel, Mr. Dupuis was President and COO of Transcontinental Inc., a Canadian printing and publishing company. In addition to his role on the Norbord Board, Mr. Dupuis is a trustee of Great Lakes Hydro Income Fund and a Director of Stelco Inc. Mr. Dupuis’ areas of expertise are business management, strategic planning, marketing, product development and human resources.


Director Since: 1995

Independent Director

Chair of the Audit Committee
Member of the Environment, Health and Safety Committee
Member of the Human Resources Committee
 20062005
 5,367 Common Shares5,367 Common Shares
 8,200 Stock Options8,200 Stock Options
 13,399 Deferred Share Units10,613 Deferred Share Units

 

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Section IV - Board of Directors

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GORDON E. FORWARD, San Diego, California
Age: 70

Dr. Forward is the former Vice Chair of Texas Industries Inc., a position he held from 1998 to 2000. Prior to that, he was President and Chief Executive Officer of the Chaparral Steel Company. In addition to his role on the Norbord Board, Dr. Forward is a Director of Texas Industries Inc. Dr. Forward is also Chair Emeritus of the United States Business Council for Sustainable Development. Dr. Forward’s areas of expertise are business management, environment and strategy.
 

Director Since: 1995

Independent Director

Member of the Audit Committee
Member of the Environment, Health and Safety Committee
Member of the Human Resources Committee
 20062005
 1,000 Common Shares1,000 Common Shares
 8,200 Stock Options8,200 Stock Options
 30,555 Deferred Share Units22,546 Deferred Share Units

DOMINIC GAMMIERO, Mississauga, Ontario
Age: 58

Mr. Gammiero is Chief Executive Officer of Fraser Papers Inc., a specialty paper company. Prior to assuming this role, Mr. Gammiero was President and CEO of Norbord Inc. from 1999 to 2004. He has over 30 years’ experience in the forest products industry in North America and Europe. In addition to his role on the Norbord Board, Mr. Gammiero is a Director of Fraser Papers Inc. Mr. Gammiero’s areas of expertise are business operations and environmental sustainability.


Director Since: 1998

Non-Independent Director

Member of the Environment, Health and Safety Committee
 20062005
 240,000 Common Shares(1)240,000 Common Shares(1)

NORBORD

 

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Section IV - Board of Directors

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ROBERT J. HARDING, Toronto, Ontario
Age: 49

Mr. Harding is Chair of Brookfield Asset Management Inc. Mr. Harding is also a Director of Fraser Papers Inc., Western Forest Products Limited and Atomic Energy of Canada Limited. Mr. Harding is the Chair of the Board of Governors of the University of Waterloo and a member of the Board of Trustees of the Hospital for Sick Children, United Way of Greater Toronto, and the Art Gallery of Ontario. Mr. Harding’s areas of expertise are corporate governance, finance and business management.


Director Since: 1998

Independent Director

Chair of the Board
Member of the Corporate Governance and Nominating Committee
Member of the Environment Health and Safety Committee
Member of the Human Resources Committee
 20062005
 2,000 Common Shares(1)2,000 Common Shares(1)

NEVILLE W. KIRCHMANN, Toronto, Ontario
Age: 69

Mr. Kirchmann is President of Kirchmann Holdings Inc., a private investment company. He waspreviously President and CEO of Coca-Cola Canada and Coca-Cola Southern Africa and is currently Chair of the Princess Margaret Hospital Foundation. In addition to his role on the Norbord Board, Mr. Kirchmann is also a Director of Fibre Connections Inc. and Chair of the Board of the Princess Margaret Hospital Foundation. Mr. Kirchmann’s areas of expertise are corporate governance, finance, marketing and operations.


Director Since: 2007

Independent Director

Member of the Audit Committee
Member of the Corporate Governance and Nominating Committee
Member of the Environment, Health and Safety Committee
Member of the Human Resources Committee

 

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MARGOT NORTHEY, Victoria, British Columbia
Age: 67

Dr. Northey is the former Dean, Queen’s University School of Business from 1995 to 2002. Prior tothat, she was an Associate Professor at the University of Western Ontario’s business school. Dr. Northey is a widely respected author of numerous articles, books and reports on a broad range of contemporary topics in business, corporate affairs, communications and the humanities. In addition to her role on the Norbord Board, Dr. Northey is also a Director of Alliance Atlantis Communications Inc., British Columbia Transmission Corp., Fraser Papers Inc., Nventa Biopharmaceuticals Corporation and Wawanesa Insurance. Dr. Northey’s areas of expertise are communications and marketing.


Director Since: 2000

Independent Director

Chair of the Environment, Health and Safety Committee
Member of the Corporate Governance and Nominating Committee
Member of the Human Resources Committee
 20062005
 2,340 Common Shares2,340 Common Shares
 1,760 Stock Options1,760 Stock Options
 14,792 Deferred Share Units12,780 Deferred Share Units

J. BARRIE SHINETON, Toronto, Ontario
Age: 60

Mr. Shineton was appointed President and Chief Executive Officer of the Corporation in 2004. He has held various positions with Norbord, including Executive Vice President, Wood Products of Norbord Inc., President, Norbord Industries Inc. and Managing Director, Norbord Limited (UK). Mr. Shineton has more than 30 years’ experience in the forest products industry, having held senior marketing, sales and operations positions for companies in North America and Europe. Mr. Shineton does not sit on the Board of any other public company. Mr. Shineton’s areas of expertise are sales, marketing and operations management, both nationally and internationally.


Director Since: 2004

Non-Independent Director
 20062005
 51,362 Common Shares35,400 Common Shares
 389,000 Stock Options252,000 Stock Options
 187,226 Deferred Share Units143,968 Deferred Share Units

(1)    Management understands that, in addition to the shares listed above, Messrs. Cockwell, Gammiero and Harding also own shares indirectly through their ownership of Brookfield Common Shares. These indirect ownership interests exceed the minimum share ownership requirements for Directors as set out under "Director Compensation and Share Ownership" on page 16 of this Management Proxy Circular.


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Director Attendance for Meetings Held in 2006

During 2006 the Board held five meetings and its committees held 18 meetings. These included four regularly scheduled meetings of the Board and one strategic review meeting of the Board held offsite at a mill location in Jefferson, Texas. There were six Audit Committee meetings, six Corporate Governance and Nominating Committee meetings, three Environment, Health and Safety Committee meetings and three Human Resources Committee meetings. The following table summarizes attendance at these meetings.

     Corporate    
     GovernanceEnvironment,  
      andHealth and Human
 2006 Board AuditNominating SafetyResources
 MeetingsCommitteeCommitteeCommitteeCommittee
 No.%No.%No.%No.%No.%
Jack L. Cockwell(1)5/5100  3/31003/3100
Dian Cohen(2)5/51006/61006/61003/31003/3100
Pierre Dupuis(3)5/51006/6100 3/31003/3100
J. Bruce Flatt(4)2/2100  2/21001/1100
Gordon E. Forward5/51006/6100 3/31003/3100
Dominic Gammiero5/5100  3/3100 
Robert J. Harding(5)4/580 6/61003/31003/3100
Margot Northey(6)5/5100 6/61003/31003/3100
J. Barrie Shineton5/5100    
Don S. Wells(7)3/31003/31003/31003/31003/3100

(1) Denotes Chair of the Human Resources Committee.

(2) Denotes Chair of the Corporate Governance and Nominating Committee.

(3) Denotes Chair of the Audit Committee. Mr. Dupuis was appointed Chair of the Audit Committee on October 26, 2006.

(4) Mr. Flatt resigned from the Board on April 21, 2006.

(5) Denotes Chair of the Board.

(6) Denotes Chair of the Environment, Health and Safety Committee.

(7) Mr. Wells was a Director, Chair of the Audit Committee and member of the Corporate Governance and Nominating Committee, Environment, Health and Safety Committee and Human Resources Committee until his death on August 21, 2006.

Change in Personal Circumstances

Board policy requires any Director to offer his or her resignation if there has been a relevant change in his or her personal circumstances, or if he or she has not attended at least 75% of the regularly scheduled Board and relevant committee meetings in the most recent 12-month period. The Board will evaluate the impact of the change on the composition of the Board and accept or reject the resignation as deemed advisable.

Director Compensation and Share Ownership

Each Director who is not an employee of the Corporation is entitled to an annual retainer fee of CAD $40,000. The Chair of the Board receives an additional annual fee of CAD $60,000. The Chair of the Audit Committee receives an additional annual fee of CAD $5,000. The Chair of each other Board committee receives an additional annual fee of CAD $3,000. No fees are payable for committee membership or meeting attendance. Directors are reimbursed for travel expenses they incur to attend Board and Committee meetings.

Directors fees payable during 2006 to Messrs. Cockwell, Flatt and Harding and to Mr. Gammiero were paid to Brookfield and Fraser Papers Inc., respectively.


 

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The Board believes that directors can better represent shareholder interests if they are shareholders themselves. The Board requires all Directors to own, directly or indirectly, at least three times the annual retainer fee (approximately CAD $120,000) of Norbord Common Shares or deferred share units ("DSU"), based on the cost of the Common Shares or DSUs acquired. For new Directors, this minimum share ownership position must be achieved within five years of joining the Board. Existing Directors will have five years from the passage of the resolution in January 2004 to accumulate the minimum share ownership requirement. Directors are encouraged to accumulate the minimum share ownership in a systematic manner over the five-year accumulation period. As discussed in greater detail under "Deferred Share Unit Plan for Non-Employee Directors" below, non-employee Directors may elect to take part or all of their annual compensation in DSU's.

Deferred Share Unit Plan for Non-Employee Directors ("DSUP")

A deferred share unit plan for non-employee Directors was adopted by the Corporation in 2001. Directors of the Corporation who are not officers or employees of the Corporation or its affiliates may elect to take a percentage of their annual retainer in the form of DSUs. The number of DSUs are determined by dividing the amount of directors fees to be deferred by the fair market value of a share on the third business day following the next release of the Corporation’s quarterly or annual results. These DSU's are redeemed for cash when the holder ceases to be a Director. In addition, a Director who holds DSUs is credited with additional DSUs whenever cash dividends are paid on Common Shares.

The following table below shows the actual fees paid to the Directors in 2006 and the percentage of fees taken in the form of DSU’s

     Committee      
  BoardBoard Chair Chair     Total Fees
  Annual Annual Annual Total Fees Total Fees Credited in
  Retainer Retainer Retainer PayablePaid in Cash DSUs
Directors ($) ($) ($) ($) ($) (# of DSUs)
Jack L. Cockwell(1)$40,000 $3,000$43,000$43,000 N/A
Dian Cohen$40,000 $3,000$43,000 Nil 4,482
Pierre Dupuis(2)$40,000 $1,250$41,250$30,938 1,042
J. Bruce Flatt(1)(3)$20,000  $20,000$20,000 N/A
Gordon E. Forward$40,000  $40,000 Nil 4,169
Dominic Gammiero(4)$40,000  $40,000$40,000 N/A
Robert J. Harding(1)$40,000$60,000 $100,000$100,000 N/A
Margot Northey$40,000 $3,000$43,000$43,000 Nil
J. Barrie Shineton N/A   N/A N/A N/A
Don S. Wells(5)$30,000  $3,750$33,750$16,875 1,756
TOTAL$330,000$60,000$14,000$404,000$293,813 11,449

(1) Messrs. Cockwell, Flatt and Harding received no compensation for their roles on the Board and Committees of the Corporation. An aggregate payment of CAD $163,000 was made to Brookfield for their services.

(2) Mr. Dupuis was appointed Chair of the Audit Committee on October 26, 2006, replacing Mr. Wells, who passed away on August 21, 2006.

(3) Mr. Flatt resigned from the Board on April 21, 2006.

(4) Mr. Gammiero received no compensation for his role on the Board and Committees of the Corporation. An aggregate payment of CAD $40,000 was made to Fraser Papers Inc. for his services.

(5) Mr. Wells passed away on August 21, 2006.


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Stock Options

In January 2003 the Board made the decision to prohibit any further stock option grants to non-employee Directors. The following table reflects (i) the name of non-employee Directors who hold outstanding stock options, granted prior to January 2003; (ii) the expiry date of the options; (iii) the exercise price of the options; (iv) number of options granted; (v) number of options vested as at December 31, 2006; (vi) total vested options exercised in 2006; (vii) total number of vested options exercised; (viii) total number of vested options unexercised; and (ix) the value of unexercised options.

      For Vested Options At December 31, 2006
     Number of     
     Options     
 DateExpiryExercise Number ofVested atTotal   Value of
 GrantedDate

Price

OptionsDecember 31,ExercisedTotalTotalUnexercised
Name(mm/dd/yy)(mm/dd/yy)($)(1)Granted2006in 2006ExercisedUnexercised Options(2)
Dian Cohen07/17/9707/17/07

$ 2.59

1,2001,200NilNil6,200$50,652
 02/03/0002/03/10

$ 1.17

1,4001,400     
 02/01/0102/01/11$ 0.01(3)2,0002,000     
 01/31/0201/31/12

$ 0.54

1,6001,280     
Pierre Dupuis07/17/9707/17/07

$ 2.59

1,2001,200NilNil8,200$71,072
 02/04/9902/04/09$ 0.01(4)2,0002,000     
 02/03/0002/03/10

$ 1.17

1,4001,400     
 02/01/0102/01/11$ 0.01(3)2,0002,000     
 01/31/0201/31/12

$ 0.54

1,6001,280     
Gordon E.07/17/9707/17/07

$ 2.59

1,2001,200NilNil8,200$71,072
Forward02/04/9902/04/09$ 0.01(4)2,0002,000     
 02/03/0002/03/10

$ 1.17

1,4001,400     
 02/01/0102/01/11$ 0.01(3)2,0002,000     
 01/31/0201/31/12

$ 0.54

1,6001,280     
Margot Northey

 02/01/01

02/01/11$ 0.01(3)800800NilNil1,760$15,587
 01/31/0201/31/12

$ 0.54

960640     

(1) The exercise price reflects reductions due to special dividends paid by the Corporation on September 20, 2004, May 20, 2005 and July 14, 2006.

(2) The dollar value in this column is calculated on the basis of the difference between the market value of the shares as at December 31, 2006 ($8.91) and the exercise price of the options, multiplied by the number of unexercised options at December 31, 2006 and includes a cash settlement payable on options granted in 1999 and 2001.

(3) To reflect the special dividends paid by the Corporation, the holders of these options are provided with a cash payment of CAD $ 0.52 for each option exercised.

(4) To reflect the special dividends paid by the Corporation, the holders of these options are provided with a cash payment of CAD $1.29 for each option exercised.

Directors’ and Officers' Liability Insurance

The Corporation maintains Directors’ and Officers' Liability Insurance under policies arranged by Brookfield with a combined annual limit of CAD $50 million and reinstatement limit of CAD $25 million, subject to a corporate deductible of CAD $1 million per loss. The limit is not exclusive to each corporation insured under the policies. Under this insurance coverage, the Corporation is reimbursed for indemnity payments made to Directors or officers as required or permitted by law or under provisions of its by-laws as indemnity for losses, including legal costs, arising from acts, errors or omissions committed by Directors and officers during the course of their duties as such. This insurance also provides coverage to individual Directors and officers without any deductible if they are not indemnified by the Corporation. The insurance coverage for Directors and officers has certain exclusions including, but not limited to, those acts determined to be deliberately fraudulent or dishonest or which have resulted in personal profit or advantage. The cost of such insurance is borne by the Corporation and is currently CAD $47,000 annually.


 

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Section V–Executive Officers

Named Executive Officers in 2006

J. Barrie Shineton
President & Chief Executive Officer

Mr. Shineton was appointed President and Chief Executive Officer in June 2004, prior to which he was Executive VicePresident, Wood Products, and President, Norbord Industries Inc. since 2003. He also held the position of Managing Director of Norbord Limited (UK) from 1999 until 2003.

  
  
John Tremayne
Executive Vice President & Chief Financial Officer

Mr. Tremayne joined Norbord Inc. as Senior Vice President and Chief Financial Officer in June 2002 and was appointed Executive Vice President and Chief Financial Officer in June 2003.

  
  
Robert Kinnear
Senior Vice President, Corporate Services

Mr. Kinnear joined Norbord Industries Inc. as Vice President, Human Resources in 2001 and was appointed Vice President, Human Resources and Administration of Norbord Industries Inc. in June 2002. He was appointed Senior Vice President, Corporate Services, Norbord Inc. in January 2005.

  
  
Karl Morris
Senior Vice President, European Operations

Mr. Morris was appointed Managing Director of Norbord’s was appointed Senior Vice President, European Operations, Norbord Inc. in January 2005.

  
  
Peter Wijnbergen
Senior Vice President, Marketing, Sales and Logistics

Mr. Wijnbergen was appointed Senior Vice President, Marketing, Sales and Logistics of Norbord Inc. in January 2005, prior to which he was Vice President, Sales, Marketing and Logistics of Norbord Industries Inc.


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Composition and Mandate of the Human Resources Committee

The Corporation’s executive compensation program is administered by its Human Resources Committee. As part of its mandate, the Human Resources Committee administers the appointment and remuneration of the Corporation’s officers, including the Named Executive Officers. For the President and CEO, the Human Resources Committee makes compensation recommendations to be approved by the Board; for all other officers, the Human Resources Committee approves the compensation levels. The Human Resources Committee is also responsible for reviewing the design and general competitiveness of the Corporation's compensation and benefit programs. The Human Resources Committee met three times in 2006.

Mr. Shineton, the President and CEO of the Corporation, makes recommendations to the Human Resources Committee with respect to executive compensation policy and with respect to the compensation paid to senior officers of the Corporation, other than himself. Mr. Shineton did not participate in the Human Resources Committee meeting when his compensation was discussed or determined.

Members of the Human Resources Committee during 2006 were Mr. Cockwell (Chair), Ms. Cohen, Mr. Dupuis, Mr. Flatt, Dr. Forward, Mr. Harding, Dr. Northey and Mr. Wells. Mr. Flatt resigned as a Director on April 21, 2006, and Mr. Wells passed away on August 21, 2006. Messrs. Cockwell and Harding are officers of Brookfield.

Report on Executive Compensation

Through its total compensation program for executives, the Corporation aims to attract, retain and motivate top quality people at the executive level. Performance incentives that are tied directly to increases in shareholder value are essential components of the program.

With respect to general philosophy, the Human Resources Committee believes that senior executive incentive compensation should be driven primarily by performance relative to the established plans and strategy of the business. The Human Resources Committee focuses on rewarding performance, and not on entitlement or seniority.

The Corporation’s compensation policies are designed to motivate management to maximize the long-term value of the Corporation’s assets and business operations. In addition, the compensation policy is designed to provide an overall competitive compensation package with a high proportion for the most senior executives weighted to variable compensation tied to the Corporation’s performance. In the case of the Corporation's CEO, this is achieved by maintaining base salary and cash bonus awards below the median base salary level in the industry in return for an opportunity to participate at a higher level in the growth in value of the Corporation’s shares.

Executive Share Ownership Guidelines

In January 2005, the Board of Directors established guidelines for the minimum ownership of Common Shares of the Corporation, including for this purpose DSUs, to be held by Named Executive Officers. This amount is an investment of two times base salary for the President and CEO and one time base salary for the other Named Executive Officers, based on the cost of the Common Shares or DSUs acquired, to be attained over a five-year period from being designated as a Named Executive Officer. Named Executive Officers are encouraged to accumulate the minimum share ownership in a systematic manner over the five-year accumulation period.


 

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The following table sets forth for each Named Executive Officer the total number of Common Shares and DSUs of the Corporation held by the executive as at March 1, 2007:

   Total 
   Number ofTotal Value
 Number of Commonof Common
 CommonNumber ofShares andShares and
Named Executive OfficerSharesDSU'sDSU'sDSU's(1)
J. Barrie Shineton51,837187,225240,863$ 2,138,863
John Tremayne(2)159,62577,703237,328$ 2,107,473
Robert Kinnear10,51210,08920,601$    182,936
Karl Morris000$               0
Peter Wijnbergen36,12218,23454,356$    482,681

(1) The total value of Common Shares and DSUs is based on the closing price of Norbord’s Common Shares as at March 1, 2007 (CAD $8.88).
(2) In addition, Mr. Tremayne owns shares indirectly through his ownership of Brookfield Common Shares.

Management has retained Towers Perrin Inc., an external compensation consultant, in the most recent fiscal year to assist with preparing information and providing advice on executive compensation arrangements. The scope of services includes competitive reviews of senior executive compensation levels, assisting management with changes to the design of compensation programs, and other miscellaneous executive compensation assistance. In addition to the aforementioned services, retirement consulting services were also provided to Norbord.

The individual components of executive compensation and the Human Resources Committee's approach to each are as follows:

Base Salaries

Base salaries of the Corporation’s executives are reviewed annually to ensure that they are competitive and reflect the contribution of each executive. The Corporation believes that base salaries should reflect the median level of salaries paid to similar positions at comparable Canadian forest products companies, adjusted for size based on sales volumes. The base salary for the Corporation’s CEO is also adjusted to reflect a higher weighting to growth in value of the Corporation’s shares.

Annual Incentive Plan

The Corporation has an annual incentive plan that generates cash incentives for officers (including the Named Executive Officers) based on corporate and individual performance. Target awards, expressed as a percentage of base salary, have been established for each officer position at approximately the median level of annual incentive compensation plans administered by other Canadian forest products companies.

The annual incentive plan for all senior officers, including the President and CEO, is based on two factors:

  1. Two-thirds on corporate performance based on a Return on Capital Employed ("ROCE") calculation; and
  2. One-third on individual performance measured against established objectives and including contribution to overall results. ROCE targets and CEO and corporate objectives are reviewed with the Human Resources Committee at the beginning of each year and awards are approved by the Human Resources Committee based on the performance of each individual senior officer.


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Long-Term Incentives

The Corporation’s long-term incentive plan consists of the following components:

Stock Option Plan

The Corporation has had a stock option plan since 1991 (the "SOP"). The SOP was amended by the Board of Directors on January 31, 2007, subject to shareholder approval in the case of the amendments relating to blackout periods and the amending procedures.

The SOP is designed to focus executive attention on the long-term interests of the Corporation and growth in shareholder value. Options are granted periodically to executives and senior managers. The maximum number of Common Shares issuable under the SOP is 10 million (i.e. 7% of outstanding Common Shares). At December 31, 2006, 1,077,511 shares had been issued and 1,785,920 are issuable under options granted. The number of Common Shares (i) issuable to insiders of the Corporation, at any time, and (ii) issued to insiders, within any one year period, under the SOP and any other security-based compensation arrangement cannot exceed 10% of the outstanding Common Shares. To determine the size of grants, the Human Resources Committee takes into consideration data provided by external consultants on competitive market practices within the Canadian forest products industry and a wider grouping of industrial companies. The option price is the market price on the date of grant. Under the current terms of the option agreement, the option may be exercised for up to 10 years, subject to vesting at the annual rate of 20% per year beginning on the first anniversary of the date of grant. Unless otherwise determined by the Human Resources Committee, an option will expire immediately in the event of resignation or termination of employment for cause, within 90 days on termination of employment without cause and within six months after the death of an optionholder. Options may be transferred to permitted assigns of an optionholder as defined in National Instrument 45-106, i.e., the spouse of the optionholder, an entity controlled by the optionholder or spouse, an RRSP or RIFF of the optionholder or spouse or a trustee, custodian or administrator acting on behalf of or for the benefit of the optionholder or spouse. The proposed provisions of the SOP relating to blackout periods and the amendment procedures are described under "Business of the Meeting–Approval of Amendments to Stock Option Plan" on page 9 of this Circular.

Except in certain circumstances, stock options granted to Named Executive Officers after January 29, 2003 include a requirement to hold, for a minimum of one year, Common Shares having a value equivalent to the after-tax gain realized through the exercise of the options.

In January 2006, options to purchase a total of 415,300 shares were granted to 12 executives (including the CEO) at a market price of CAD $12.13 per share.

On July 12, 2006, option exercise prices were reduced by CAD $1.00 to coincide with the CAD $1.00 special dividend paid to common shareholders on July 14, 2006.

On January 31, 2007, the Board approved options to purchase a total of 848,000 shares for 13 executives (including the CEO) at CAD $9.16 per share, which was the closing price of a share on February 14, the day following the expiry of the blackout period.

Management Deferred Share Unit Plan

The Corporation has a deferred common share unit plan designed to focus executive attention on the long-term interests of the Corporation and growth in shareholder value. Participants can elect to take all or part of their Annual Incentive Plan bonus in deferred common share units ("DSUs") issued based on the closing price of the Corporation’s Common Shares on the award date, provided that if such date is during a blackout trading period, the closing price will be as of the first trading day immediately following the expiration of the blackout period. Holders of DSUs will be allotted additional DSUs as dividends are declared on the Corporation’s Common Shares. This is done on the same basis as if the dividends were reinvested pursuant to the Corporation’s dividend reinvestment plan. The DSUs are redeemable for cash after termination of employment at the market value of an equivalent number of the Corporation’s Common Shares on the date the notice of redemption is received by the Corporation. No Common Shares are issued in connection with this plan.


 

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Restricted Stock Unit Plan

The Corporation has a restricted stock unit plan to provide designated senior employees of the Corporation, or its subsidiaries, compensation opportunities that are consistent with shareholder interests. Units credited under this plan vest rateably over three years. Holders are credited with additional units as dividends are declared on the Common Shares. The value of vested units is determined by multiplying the number of vested units with the closing price at which a board lot of the Corporation’s shares traded on the TSX on the trading day such units vested. Such amount is paid in cash within 30 days. In January 2006, a total of 63,850 units were credited to 32 senior employees. On January 31, 2007 a total of 47,625 units were credited to 36 senior employees of the Corporation. No Common Shares are issued in connection with this plan.

Compensation of President and Chief Executive Officer

Mr. Shineton’s base salary is reviewed annually and is set below the median level for comparable companies within the Canadian forest products industry based on data provided by the Corporation’s external compensation consultants. Mr. Shineton’s below-market base salary is offset by an opportunity to participate at a higher level in the growth in value of the Corporation’s Common Shares.

Mr. Shineton participates in the Annual Incentive Plan for officers. The Human Resources Committee has established a target award of 50% of annual base salary payable based two-thirds on a ROCE calculation and one-third on the fulfillment of established individual performance criteria. These individual performance criteria include:

  • The strategic positioning of the Corporation for profitable growth and success;
  • The leadership of the organization; and
  • The management of succession plans to provide continuity of senior management, including that of the CEO.

In January 2007, Mr. Shineton was awarded an incentive payment of $287,334 commensurate with the achievement of corporate and individual objectives for 2006. The Committee’s assessment of Mr. Shineton’s performance included the following:

Financial

  • Achieved a ROCE of 25%, a ROE of 20% and delivered earnings of $97 million ($0.67 per share) in spite of the significant decline in North American OSB pricing;
  • Maintained a low cost position relative to industry peers through aggressive application of margin improvement initiatives with gains of $56 million;
  • Implemented internal compliance with Sarbanes-Oxley Act disclosure controls and procedure requirements;
  • Maintained balance sheet efficiency through the payment of a CAD $1.00 per share special dividend and the repurchase of 2.7 million Common Shares; and
  • Maintained investment grade credit ratings.

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Strategic/Operational

  • Completed, on time and on budget, construction of a $135 million project to more than double capacity at the Cordele, Georgia OSB mill with the first board pressed in December 2006;
  • Permanently closed a particleboard line at South Molton, England and an MDF line at Cowie, Scotland, consolidating production on newer, more efficient lines;
  • Increased OSB production by 4% with eight of 11 mills achieving new annual volume records; and
  • Strengthened senior management succession by hiring a Deputy Managing Director, Operations for the European business.

Environment, Health and Safety

  • Improved OSHA rate by 20% over 2005 but was disappointing versus a target of 2.0 or less. A fatal accident occurred at the Joanna, South Carolina operation;
  • Achieved 97.9% environmental compliance against operating permits. On track for MACT and DSEAR compliance; and
  • Started up biomass heat energy system project at Cowie. Approved similar projects to reduce natural gas use for drying in Nacogdoches, Texas and Genk, Belgium.

On January 31, 2007, the Board approved options for Mr. Shineton to purchase 400,000 Common Shares at CAD $9.16 per share, which was the closing price of a share on February 14, the day following expiry of the blackout period. The awards to Mr. Shineton under the Norbord Stock Option Plan and Deferred Share Unit Plan are consistent with the philosophy of the Corporation, which is to tie a significant portion of the CEO’s compensation to corporate performance and the achievement of growth in shareholder value.


 

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Executive Compensation Table of Named Executive Officers

CAD$, unless otherwise noted            
           Long Term 
        Annual Compensation Compensation 
             
     Annual Incentives     
     (Bonus) Other Shares Under 
        Other   Annual OptionsAll Other
     ReceivedReceivedDSUs  Compensation GrantedCompensation
Name and Principal PositionYear Salary in Cashin DSUsReceived  ($) (#)($)
J. Barrie Shineton(1)2006$397,083$100,567$186,767   150,000 
President and CEO2005$363,749$115,583$346,751   100,000 
 2004$341,666$112,306$336,918$    775,944    165,000£   22,215
             
John Tremayne(2)2006$299,304$0$166,484   62,00020,575
Executive Vice-President and2005$289,166$0$290,000   47,700 
Chief Financial Officer2004$279,166$0$276,267   65,000 
             
Robert Kinnear(3)2006$211,577$82,961$0   35,100 
Senior Vice-President2005$201,650$44,587$104,038   28,000 
Corporate Services2004$163,600$113,200$0   5,500 
             
Karl Morris(4)2006£138,067£61,400£0   35,100£   37,425
Senior Vice President2005£132,784£111,800£0   28,000£   26,674
European Operations2004£130,000£65,400£0 £    297 16,000£   73,236
             
Peter Wijnbergen(5)2006$223,333$46,237$46,237   35,100 
Senior Vice-President2005$201,620$74,825$74,825   28,000 
Marketing, Sales and2004$163,242$52,169$52,169   5,500 
Logistics            

(1) Mr. Shineton elected to take 65% of his 2006 annual incentive in DSU’s at $9.16 per unit. Mr. Shineton received an additional issuance of 66,094 DSU units at $11.74 per unit in 2004. In 2004, Mr. Shineton was granted 65,000 options at $11.24 and 100,000 options at $11.73.
(2) Mr. Tremayne elected to take 100% of his 2006 annual incentive in DSUs at $9.16 per unit. Under All Other Compensation, Mr. Tremayne also received $7,444 in contributions to the registered defined contribution plan and an allocation of $13,131 to the defined contribution supplemental employee retirement plan.
(3) Mr. Kinnear elected to take 100% of his 2006 annual incentive in cash.
(4) Mr. Morris’ 2005 and 2006 income includes employer contributions to the Norbord UK defined contribution retirement plan. Mr. Morris’ 2004 income included relocation expenses and employer contributions to the Norbord UK defined contribution retirement plan. These amounts are included under All Other Compensation. Other annual compensation of £297 in 2004 represented interest payable on a housing loan.
(5) Mr. Wijnbergen elected to take 50% of his 2006 annual incentive in DSUs at $9.16 per unit.

The value of perquisites and benefits for each Named Executive Officer is less than the lesser of $50,000 and 10% of total annual salary and bonus. There were no loans to officers outstanding as at December 31, 2006.

The following table sets forth individual grants of stock options during the financial year ended December 31, 2006 to the Named Executive Officers.

Option Grants During the Financial Year Ended December 31, 2006

     Market Value 
  % of Total   of Shares 
  Options  Underlying 
  Granted to  Options at 
 

Securities Under

Employees

Exercise Price

Date of Grant 
Name(1)Options Granted(2)in 2006(CAD $/Share)(3)(CAD $/Share)Expiration Date
J. Barrie Shineton

150,000

36.12%$

11.13

$12.13January 31, 2016
John Tremayne

62,000

14.93%$

11.13

$12.13January 31, 2016
Robert Kinnear

35,100

8.45%$

11.13

$12.13January 31, 2016
Karl Morris

35,100

8.45%$

11.13

$12.13January 31, 2016
Peter Wijnbergen

35,100

8.45%$

11.13

$12.13January 31, 2016

(1) The Named Executive Officers ("NEO") are required to hold Norbord Common Shares having a value equivalent to the after-tax gain realized through the exercise of these options for a 12-month period following exercise.
(2) All options were granted under the Norbord Stock Option Plan and entitle each Named Executive Officer to purchase Common Shares of the Corporation. The exercise price is the market price of the Common Shares on the date of the grant. All options are subject to vesting at the annual rate of 20% beginning on the first anniversary from the date of grant.
(3) Option exercise prices were reduced by CAD $1.00 to coincide with the CAD $1.00 special dividend paid to common shareholders on July 14, 2006.


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The following table sets forth details of each exercise of stock options during the financial year ended December 31, 2006 by the Named Executive Officers and the financial year-end value of unexercised options on an aggregate basis.

Aggregate Option Exercises During the Financial Year Ended December 31, 2006 and Financial Year-End Option Values

    Unexercised OptionsValue of Unexercised "In The
 Shares AcquiredAggregate Value at Period End Money" Options at Period End(2)
 on Exercise Realized(1)ExercisableNon-exercisableExercisableNon-exercisable
Name(#) (CAD $)(#)(#) (CAD $) (CAD $)
J. Barrie Shineton13,000$101,00060,000329,000$7,200$208,920
John Tremayne67,450$552,8089,540215,160 Nil$825,440
Robert Kinnear5,800$47,1847,80065,100$11,176$51,915
Karl MorrisNil Nil22,00071,400$116,206$83,919
Peter Wijnbergen19,700$152,541Nil65,100 Nil$51,915

(1) Determined on basis of market value at date of exercise.
(2) The closing price of Norbord Inc. Common Shares on the TSX on December 31, 2006 was CAD $8.91.

Deferred Share Units

The following table sets forth the Deferred Share Units Named Executive Officers elected to receive from their Annual Incentive Plan Bonus for the year ended December 31, 2006, and the total number owned and their value as of March 1, 2007. No DSUs were exercised in 2006 as they can only be exercised after termination of employment.

 

Deferred Share Units Elected for the

 Total Deferred Share Units Owned
 

Year Ended December 31, 2006

Number of Units  Market Value
 

 

Allotment

Allotment

 Owned at  of Units at
 

 

Price per

Value of

March 1, 2007  March 1, 2007(2)
 

 

Unit

Election

VestedNot Vested VestedNot Vested
 

(#)

(CAD $)(1)

(CAD $)

(#)(#) (CAD $)(CAD $)
J. Barrie Shineton

20,389

9.16

186,767

155,58931,636 1,381,630280,928
John Tremayne

18,175

9.16

166,484

77,703 690,002
Robert Kinnear

10,089 89,590
Karl Morris

 
Peter Wijnbergen

5,047

9.16

46,237

18,234 161,918

(1) Based on the closing price of common shares on February 14, 2007.
(2) The market value of a Deferred Share Unit on March 1, 2007 was CAD $8.88 based on the closing price of a common share on the TSX.


 

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Securities Authorized for Issuance Under Equity Compensation Plans for the Financial Year Ended December 31, 2006

    Number of securities
    remaining available for
 Number of securities toWeighted-averagefuture issuance under equity
 be issued upon exerciseexercise price ofcompensation plans
 of outstanding options,outstanding options,(excluding securities
 warrants and rightswarrants and rightsreflected in column (a))
 (a) (b)(c)
Equity compensation plans    
   approved by securityholders1,785,920(1)$6.318,922,489(2)
Equity compensation plans   

 

   not approved by securityholders

N/A

 N/A

N/A

Total

1,785,920

$6.31

8,922,489

(1) Represents approximately 1.2% of the outstanding common shares at December 31, 2006.
(2) Represents approximately 6.2% of the outstanding common shares at December 31, 2006.

Pension Arrangements

Messrs. Shineton, Tremayne, Kinnear and Wijnbergen participate in the defined benefit Retirement Annuity Plan for Canadian salaried employees. The following table shows the total annual retirement benefits payable under such retirement plan to participants in the specified compensation and years of service categories assuming retirement at age 65.

Pension Plan Table

           Years of Service
Remuneration (CAD $) 5 10 15 20 25 30 35
$200,000$16,750$33,525$50,275$67,050$83,800$100,550$ 117,325
$225,000 and above$18,950$37,900$56,850$75,800$94,725$113,675$ 132,625

Remuneration for the purposes of such pension plan includes base salary only. The pension benefit is based on 1.75% per year of service of the average of the best five years’ salary minus an adjustment for Canada Pension Plan benefits. Pension benefits are reduced for retirement earlier than age 65. These pension benefits are payable for life, guaranteed for five years. Upon death, payments continue to the surviving spouse reducing to 662/3% (basic option) at the end of the five-year guarantee.

Pension values that exceed the Canada Revenue Agency allowable limits are paid from a Supplementary Employee Retirement Plan (SERP). To limit the Corporation’s retirement benefit liability to employees under the plan, a remuneration level of CAD $225,000 has been established as the maximum average remuneration eligible for pension calculations. This maximum is to be reviewed periodically in both general application and application to individuals.


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The following table shows the service cost and accrued liability for 2006 as well as the estimated annual benefit payable at normal retirement date for each of the Named Executive Officers participating in the defined benefit Retirement Annuity Plan.

CAD $, unless otherwise noted      Estimated 
       AnnualYears of
      Years ofBenefitAccredited
 Accrued   AccruedAccreditedPayable atService at
 Liability atService ActuarialLiability atService atNormalNormal
 December 31,CostInterestLossesDecember 31,December 31,RetirementRetirement
Name2005for 2006Costfor 200620062006DateDate
J. Barrie Shineton$   71,982$35,910$ 5,395$ 113,2873$   30,1148
John Tremayne(1)$   68,695$ –$ 3,448$   72,4134$   14,5064
Robert Kinnear$ 134,232$29,196$ 8,171$ 171,5996$   37,70110
Peter Wijnbergen$ 359,961$19,294$18,963$ 398,21820$ 150,92441

(1) At age 65, Mr. Tremayne will receive the majority of his pension from the Corporation’s defined contribution pension plan.

The calculation of reported amounts uses actuarial assumptions and methods that are consistent with those used for calculating pension liabilities and annual expense as disclosed in the Corporation’s 2005 and 2006 consolidated financial statements. As the assumptions reflect the Corporation’s best estimate of future events, the values shown in the above table may not be directly comparable to similar estimates of pension liabilities that may be disclosed by other corporations.

Mr. Shineton, in addition to the SERP, is entitled to an annual supplementary pension payable on a joint and survivor basis, of $148,000, reduced by the actuarial equivalent of the appreciation in value of Norbord’s Stock Options granted to him in 2006 and subsequently.

Mr. Tremayne elected to participate in the Corporation’s defined contribution pension plan for Canadian salaried employees beginning in January 2006. In this plan, the Corporation provides a basic allocation of 4% of salary and bonus up to a cap of $225,000. Mr. Tremayne also receives a matching allocation based on his own contributions of 3%. The 7% company allocation to the registered defined contribution plan represented $7,444 in 2006. Mr. Tremayne also received an allocation of $13,131 to the defined contribution Supplemental Employee Retirement Plan. Pension allocations that exceed the Canadian Revenue Agency allowable limits are paid from a Supplementary Employee Retirement Plan. Mr. Tremayne’s service in the Corporation’s defined benefit plan is frozen at year-end 2005.

Mr. Morris participates in the UK defined contribution pension plan. Members are required to pay a contribution of 5% of the periodic payment of gross earnings up to Inland Revenue prescribed limits. The company allocates 15% of earnings where the employee makes the minimum contribution. In 2006 the company allocated £37,425 to Mr. Morris’ defined contribution pension plan.


 

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Section VI–Performance Graph

The following graph assumes that CAD $100 was invested on December 31, 2001 in Norbord’s Common Shares, the S&P/TSX Composite Index and the S&P/TSX Canadian Materials Index respectively. The computations assume that all dividends are reinvested on the dividend payment date. In the case of the distribution of Fraser Papers Inc., the computation assumes that Fraser Papers shares are sold at the closing price on the first day of trading and that Norbord Common Shares are purchased coincidently.

Five-Year Cumulative Total Return on CAD $100 Investment

Assuming Reinvestment of Dividends December 31, 2001 – December 31, 2006


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Section VII–Corporate Governance

Mandate of the Board

The Board of Directors of Norbord recognizes that in order to attain its objective of enhancing shareholder value in a manner that recognizes the concerns of other stakeholders in the Corporation, including its employees, suppliers, customers and the communities in which it operates, the Corporation must have sound corporate governance structures and policies. The Board and the Corporate Governance and Nominating Committee regularly review the terms of reference of the Board and each of the Committees of the Board (the "Committees"), and the role of the Chair, Chief Executive Officer ("CEO") and chairs of each Committee, to ensure that the Corporation complies with, or exceeds, all applicable corporate governance rules and standards. The Corporation’s corporate governance practices are set out in Appendix A to this Circular and can be viewed on the Corporation’s web site at www.norbord.com.

Pursuant to its terms of reference, the Board is responsible for supervising the business and affairs of the Corporation, which are conducted by its officers and employees under the direction of the CEO. The Board discharges this responsibility directly at regularly scheduled and special meetings of the Board and indirectly through Committees composed of independent Directors. The Board’s full terms of reference are set out in Appendix C to this Circular. The terms of reference of the Board and each of its Committees can be viewed on the Corporation’s web site at www.norbord.com.

The Norbord Board has approved, and acts in accordance with, the Corporation’s Code of Business Conduct (the "Code"). All employees with supervisory responsibilities, members of the management team, and each Director have signed the Code. A copy of this Code can be found on the Corporation’s web site at www.norbord.com.

Board Composition

The Corporate Governance and Nominating Committee has examined the size of the Board and has concluded that nine is an appropriate number of Directors to be elected by the shareholders. A nine-member Board allows for an appropriate mix of experience and skill and ensures that the majority of Directors will be "independent" within the meaning of section 1.4 of Multilateral Instrument 52-110.

Director Independence

The Board reviewed the relationships between each of its Director nominees and the Corporation and has determined that the proposed list of Director nominees fairly represents the share ownership interests in the Corporation and the requirements for Director independence of both Canadian and US securities regulators.

Messrs. Shineton and Gammiero, the former CEO of the Corporation, are considered to be non-independent Directors and the remaining Directors are independent Directors. Two of the remaining seven Director nominees, Messrs. Cockwell and Harding (the "Brookfield Directors"), are officers of Brook-field. The Board believes that neither Brookfield Director has a relationship which could be reasonably expected to interfere with the exercise of his independent judgement. The Board also considers that two Directors fairly reflect the relative investment of Brookfield and other shareholders in the Corporation.


 

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Two other Director nominees, Ms. Cohen and Mr. Dupuis, are trustees of Great Lakes Hydro Income Fund, in which Brookfield owns approximately a 50% indirect interest. The Board does not consider Ms. Cohen and Mr. Dupuis to have any relationship that could be reasonably expected to interfere with their exercise of independent judgement. The remaining Director nominees, Mr. Kirchmann, Dr. Forward and Dr. Northey have, in the view of the Board, no relationships that could be reasonably expected to interfere with their exercise of independent judgement.

All members of the Audit Committee are "independent" within the meaning of sections 1.4 and 1.5 of Multilateral Instrument 52-110.

Board and Committee Meetings

The Board conducts much of its business through Committees established by the Board. There are currently four standing Committees of the Board. These are the Audit, Corporate Governance and Nominating, Environment, Health and Safety and Human Resources Committees. In addition, from time to time, the Board has established special committees to assist the Board in respect of certain issues.

A summary of the responsibilities for each Committee is set out in Appendix D to this Circular. The terms of reference of the Audit Committee is set out in Appendix E. The terms of reference of all Committees and the Board are available on the Corporation’s web site at www.norbord.com. For additional information on the Audit Committee, see "Audit Committee" in the Annual Information Form of the Corporation dated March 1, 2007.

It is the policy of the Board that all Board meetings and Committee meetings should include a session without the presence of non-independent Directors. In the case of the Audit Committee, each meeting also includes a session with only the external auditors and the Committee.

All Board members may attend any committee meeting, with the exception of Mr. Shineton in respect of the Human Resources Committee.

The Chair of the Board, Mr. Harding, is an independent Director. He is responsible for:

  1. Managing the business of the Board and ensuring that the functions identified in the terms of reference of the Board are being effectively carried out by the Board and its Committees;
  2. Ensuring that all Directors receive the information required for the proper performance of their duties;
  3. Ensuring that the appropriate committee structure is in place and recommending appointments to such committees;
  4. Leading the annual review of Director and Board performance and making recommendations for changes when appropriate; and
  5. Working with the CEO and senior management to monitor progress on strategic planning, policy implementation and succession planning.

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Board Evaluation Systems

The Corporate Governance and Nominating Committee annually evaluates the Board, to ensure it is functioning effectively and in the best interests of shareholders. The evaluation includes a detailed questionnaire completed by each Director and one-on-one interviews with the Chair. The Chair reviews the results of the evaluation with the Corporate Governance and Nominating Committee and the Board. These evaluations assess the Board in four specific areas:

  • • Overall Board governance
  • • Managing management
  • • Strategy and corporate performance
  • • Board effectiveness

In 2006, this evaluation determined that the Board operates effectively.

In addition to the Board, the Corporate Governance and Nominating Committee annually evaluates the performance of each Committee of the Board. These evaluations focus on each Committee’s successes in meeting its terms of reference as well as its overall effectiveness as a Committee. In 2006, each of the Committees of the Board evaluated its performance as effective.

The Board has developed written position descriptions for the Chair of the Board, the Chair of each Committee and the CEO: see Appendix A.

The performance of individual Board members is also evaluated annually by the Corporate Governance and Nominating Committee and reviewed by his or her peers bi-annually. This review is conducted by the Chair and presented to the Corporate Governance and Nominating Committee for its consideration.

As part of the Board, Committee and individual Director evaluation processes, opportunities to improve are implemented as identified.

Audit Committee

The Audit Committee’s responsibilities are described in Appendix E of this Circular. The Audit Committee held six meetings during 2006.

Principal Accounting Firm Fees

Ernst & Young LLP was the Corporation’s independent auditor in 2006 and 2005. In addition to audit services, Ernst & Young LLP also provided non-audit services to the Corporation and its subsidiaries. It is the Corporation’s policy not to engage its auditors to provide services in connection with financial information systems design and implementation or other services that may impair the objectivity of the auditors. The Corporation has implemented a procedure to ensure that any engagement of the auditors for non-audit services receives prior clearance by the Audit Committee. In approving any such engagement, the Audit Committee will consider whether the provision of such non-audit services is compatible with maintaining auditor independence.

The table below summarizes the fees paid to Ernst & Young LLP in 2005 and 2006:

Service20062005
Audit$ 820,200$   830,900
Audit-related556,500111,600
Tax340,700311,400
Other73,10040,700
Total$1,790,500$1,294,600

 

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Description of Services

Audit services include the annual financial statement audit of the Corporation and certain of its subsidiaries. The fees include the review of the Corporation’s unaudited interim financial statements.

Audit-related services include audits of the Corporation’s pension plans, special purpose non-statutory audits of divisions of the Corporation, comfort letters associated with regulatory filings and internal control reviews.

Tax services include tax advisory and compliance services.

Other services include expatriate consulting and other business advisory services.

Auditor Independence

The Audit Committee has received representations from Ernst & Young LLP regarding their independence and has considered the relations described above in arriving at its determination that Ernst & Young LLP is independent of the Corporation.

The contents and the sending of this Circular have been approved by the Directors of the Corporation.

Lynne C. Taylor
Assistant Corporate Secretary
Toronto, Ontario
March 1, 2007


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Appendix A–Corporate Governance Practices

Norbord Inc. ("Norbord") is committed to following sound corporate governance policies and practices to ensure that the interests of our shareholders, employees and the communities in which we operate are continuously maintained.

Role of Board of Directors

The Board of Directors is responsible for overseeing the management of Norbord’s affairs directly and through its committees. At all times, the Board intends to act on behalf of the best interests of the shareholders of Norbord.

Among its principal responsibilities, the Board:

  • Reviews and approves Norbord’s overall business strategy and its annual business plan;
  • Reviews the risks and alternatives in Norbord’s business to ensure appropriate systems or plans are in place to manage these risks;
  • Reviews and approves strategic initiatives and capital investment plans to ensure Norbord’s proposed actions are consistent with shareholders’ objectives and expectations;
  • Appoints the Chief Executive Officer ("CEO") and approves the appointment of senior management;
  • Establishes a compensation plan for the CEO and approves the compensation of senior management;
  • Assesses management’s performance against approved business plans and key industry performance indicators;
  • Reviews succession and development plans for senior management;
  • Maintains integrity within Norbord by reviewing and monitoring disclosure controls and procedures, internal controls and procedures for financial reporting and compliance with the Code of Business Conduct;

  • Approves Norbord’s financial reports to shareholders;
  • Sets the Corporation’s dividend policy and approves quarterly dividends;
  • Ensures the effective operation of the Board and its committees;
  • Ensures policies and processes are in place to address key business issues of the Corporation including financial, environment, health and safety, business conduct, pension management and communications; and

  • Approves significant and material issues–in addition to those matters that must, by law, be approved by the Board, Norbord’s Board also provides approval on:

  • any capital disposition or expenditure in excess of $3 million and for any cost overrun on any of these projects in excess of 10% or $2 million whichever is less;

  • any new loan agreement or guarantee for an amount in excess of $10 million;

  • changes in senior management at the Corporation and its principal operating subsidiaries; and

  • any other material agreement or arrangement that is not in the ordinary course of business.


 

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Meetings of the Board

The Board of Directors meets at least quarterly, with additional meetings scheduled when required. While most Board meetings are held at the Norbord corporate office in Toronto, meetings are periodically held at an operating location. This gives the Directors an opportunity to improve their understanding of the operations of Norbord.

Composition and Size of the Board

The Corporate Governance and Nominating Committee has examined the size of the Board and has concluded that nine is an appropriate number of Directors to be elected by the shareholders. The nominees for the Board of Directors comprises nine Directors, including seven independent Directors, two of whom are associated with the Corporation’s major shareholder, Brookfield Asset Management Inc., and two non-independent Directors including the CEO. The Board considers that this combination leads to a constructive exchange of views in Board deliberations resulting in objective, balanced and informed decision-making.

The Corporation’s Directors represent a diverse base of business skills and experiences to ensure effective oversight and reporting.

Independent Directors                  seven of nine

Jack L. Cockwell
Dian Cohen
Pierre Dupuis
Gordon E. Forward
Robert J. Harding
Neville W. Kirchmann
Margot Northey

Non-independent Directors          two of nine

Dominic Gammiero
J. Barrie Shineton

It is the policy and practice of the Board that at each regular meeting, the independent Directors meet and discuss the Corporation’s affairs without non-independent Directors present.

Committees of the Board

Board committees assist in the effective functioning of the Corporation’s Board of Directors. The composition of the Board committees should ensure that the views of independent Directors are effectively represented.

Norbord’s Board of Directors has four standing Committees: the Audit Committee, the Corporate Governance and Nominating Committee, the Environment, Health and Safety Committee and the Human Resources Committee. It is the Board’s policy that each Committee meets without management Directors present at each of its meetings.

Special committees may be formed from time to time as required to review particular matters or transactions. Full terms of reference for each of the standing Committees are available on the Corporation’s web site at www.norbord.com.


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Role of Committee Chair

The Board of Directors has adopted the following written description for all Board committee chairs. The chair of each committee of the Board is appointed by the Board at the first Board meeting held after the annual shareholders meeting. The role of each committee chair is as follows:

  1. To ensure that the activities of the committee are consistent with the committee terms of reference;
  2. To ensure that the committee meets as many times as necessary to carry out its duties and responsibilities effectively;
  3. In co-operation with Norbord’s management team, as appropriate, to review meeting agendas to ensure all required business is brought before the committee to enable the committee to carry out its duties and responsibilities;

  4. To report to the Board at the next Board meeting following any committee meeting or upon the signing of a written resolution approving a decision or recommendation of the committee;
  5. To provide leadership to enable the committee to act as an effective team in carrying out its duties and responsibilities; and
  6. To carry out any other appropriate duties and responsibilities as assigned by the Board or delegated to the committee.

Audit Committee

The Audit Committee, composed entirely of independent Directors, assists the Board in meeting its fiduciary responsibilities relating to corporate accounting and reporting practices. Its duties include overseeing internal controls, reviewing risk management practices, and approving quarterly and annual financial filings.

Corporate Governance and Nominating Committee

The Corporate Governance and Nominating Committee, composed entirely of independent Directors, is responsible for the development and monitoring of the Corporation’s corporate governance practices. Its duties include the identification and recommendation of potential nominees or appointees to the Board, and the assessment of the effectiveness of the Board, its size and composition, its committee structure and the individual performance of its Directors. The Committee also has responsibility for the review of the Corporation’s communications policy and its Code of Business Conduct.

In considering and seeking potential nominees to the Board, the Committee assesses the skills and expertise of its current Board to determine the skills and experience that any potential candidates should possess. The Committee seeks candidates through recommendations sought from the current Board and Committee members and, when necessary, through recruitment firms. Once candidates have been identified, they are contacted to confirm their interest, credentials and availability to serve on the Board. Interviews of candidates are then conducted by members of the Committee and a recommendation is made to the Board.

In carrying out its role, the Corporate Governance and Nominating Committee has the following authority and responsibility:

1. Director Qualification and Nomination:

(a)    to consider and make recommendations to the Board from time to time on the appropriate size, composition and profile of the Board;

(b)    to establish criteria for the selection of Directors, to review and assess the competencies and skills of persons proposed for appointment or election to the Board and to submit to the Board the names of persons to be nominated for election as Directors at the annual meeting of shareholders, or to be appointed to fill vacancies between annual meetings;

(c)    to retain search firms for the recruitment of Director nominees as necessary;


 

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(d)    to ensure that there is an orientation and education program for new Directors and continuing education for all Directors including making recommendations on methods to improve Directors’ knowledge of the Corporation’s activities and their responsibilities as Directors; and

(e)    to recommend qualified directors for membership on the various committees of the Board;

2. Terms of Reference of Board and Committees:

(a)    to review and make recommendations to the Board at least annually on the terms of reference of the Board;

(b)    to review and make recommendations to the Board at least annually on the role of the Chair, the role of the Chief Executive Officer and the role of the chair of each standing committee of the Board; and

(c)    to review and make recommendations to the Board on the terms of reference of the standing committees of the Board;

3. Evaluation of Director, Board and Committee Performance:

(a)    to establish a process for annually reviewing Directors’ performance, and to provide input to the Chair of the Board, who is charged with the responsibility of carrying out such reviews;

(b)    to review and make recommendations to the Board at least annually on the performance and effectiveness of the Board; and

(c)    to review at least annually the performance of each of the Board committees and to bring forward recommendations to improve their effectiveness where appropriate.

4. Code of Business Conduct–to review at least annually the Corporation’s Code of Business Conduct and to recommend proposed changes to the Board for approval; and

5. Disclosure Policy–to review at least annually the Corporation’s Disclosure Policy and to recommend proposed changes to the Board for approval.

Environment, Health and Safety Committee

The mandate of the Environment, Health and Safety Committee is to assist the Board in carrying out its responsibilities with respect to health, safety and environmental issues. The Committee reviews compliance with relevant Board resolutions and with the Corporation’s environmental and health and safety policies, and assesses the effectiveness of the Corporation’s environmental management processes and health and safety programs including the review of internal audits of these processes and programs.

Human Resources Committee

The Human Resources Committee approves the Corporation’s compensation and benefits policy and monitors its implementation. It reviews management succession plans and considers appointments of officers of the Corporation. The Committee annually assesses the performance of the CEO against agreed targets and recommends the CEO’s compensation to the Board. For all other officers, the Committee approves the compensation levels. Together with the CEO, the Committee reviews the performance of senior officers of the Corporation and makes compensation recommendations to the Board. The Human Resources Committee is responsible for overseeing the funding, investment management and administration of Norbord Inc.’s employee retirement plans. The Committee also recommends compensation for Directors.

Norbord Management

The primary responsibility of management is to create value for its shareholders based on an approved business strategy and action plan. The Board of Directors is responsible for ensuring the performance of management is adequate and to bring about any management change that will enable Norbord to perform satisfactorily. Norbord’s corporate governance principles are intended to encourage autonomy and effective decision-making by management while ensuring scrutiny by Norbord’s Board of Directors and its committees.


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Role of Chair

The Board of Directors has adopted the following written description for the Chair of the Board. The Chair is appointed by the Board of Directors. The role of the Chair is as follows:

  1. Manage the business of the Board and ensure that the functions identified in the terms of reference of the Board are being effectively carried out by the Board and its committees;
  2. Ensure that all Directors receive the information required for the proper performance of their duties;
  3. Ensure that the appropriate committee structure is in place and recommend appointments to such committees;
  4. Lead in the annual review of Director and Board performance and make recommendations for changes when appropriate; and
  5. Work with the CEO and senior management to monitor progress on strategic planning, policy implementation and succession planning.

Role of President and CEO

The Board of Directors has adopted the following written description for the President and CEO. The President and CEO reports to and is accountable to the Board of Directors. The President and CEO’s role is as follows:

  1. Provide leadership of the Corporation and, subject to approved policies and direction by the Board, manage the operation, organization and administration of the Corporation;
  2. Present to the Board for approval a long-term vision for the Corporation together with strategies to achieve that vision, the risks and alternatives to these strategies and specific steps and performance indicators, that will enable the Board to evaluate progress on implementing such strategies;

  3. Propose to the Board for approval annual capital and operating plans that implement the Corporation’s strategies together with key financial and other performance goals for the Corporation’s activities and report regularly to the Board on the progress against these goals;

  4. Act as the primary spokesperson for the Corporation to all its stakeholders;
  5. Present to the Board for approval annually an assessment of the Corporation’s management resources together with a succession plan that provides for the orderly succession of senior management including the recruitment, training and development required;

  6. Recommend to the Board the appointment or termination of any officer of the Corporation other than the Chair; and
  7. Develop and implement the systems and processes to support the policies established by the Board.

Board Information

The information provided by Norbord management to the Board of Directors is critical to the Board’s effectiveness. In addition to reports presented to the Board at regular and special meetings, the Board is also informed on a timely basis by management of corporate developments and key decisions by management in pursuing Norbord’s strategic plan.

New Directors are provided with comprehensive information about Norbord.

All Directors have the opportunity to meet and participate in work sessions with management to obtain insight into the operations and business of the Corporation. Directors are also free to consult with members of management, whenever they so require, and to engage outside advisors with the Chair’s authorization.

Orientation and Continuing Education

The Chief Executive Officer and the Chief Financial Officer are responsible for providing an orientation and education program for new Directors. Each new Director is provided with information outlining the role of the Board, Committees and Directors. New Directors must, within three months of becoming a Director, spend one day at the head office of the Corporation for briefings by senior management on the Corporation’s strategic plan, major risks and other key business matters.


 

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The Corporation periodically holds off-site Board meetings at one of its mill locations, to provide the Directors with ongoing information on the Corporation’s operations. Speakers on specialized industry tropics are periodically invited to the quarterly Directors dinners, to provide Directors with current and detailed information on the market for the Corporation’s product. Directors are advised on an ongoing basis of changes in applicable laws and regulations.

Management Remuneration

Norbord’s remuneration policies are intended to provide a direct link between competitive industry compensation and Corporation and individual performance. Bonus compensation is reviewed annually by the CEO and Human Resources Committee and approved by the Board of Directors. Periodic reviews of compensation practices are carried out to ensure management is fairly rewarded, based on performance.

Communications Policy

Norbord keeps shareholders informed of its activities and progress through a comprehensive annual report, quarterly reports and news releases. A regularly updated web site (www.norbord.com) provides additional information about the Corporation, including statutory filings and supplemental information provided to financial analysts and investors.

Directors and management meet with Norbord shareholders at the annual meeting, held in Toronto, and are available to respond to shareholder questions.

Norbord’s investor relations program seeks to ensure that shareholder inquiries are responded to in a timely manner. Management meets on a regular basis with investment analysts and financial advisors to ensure that accurate information is available to investors, including quarterly conference calls and web casts to discuss Norbord’s performance. Norbord also endeavours to ensure news media is kept apprised of developments as they occur. All Norbord communications are carried out in accordance with the Corporation’s Disclosure Policy, which is posted on Norbord’s web site at www.norbord.com. This ensures fairness, accuracy and timeliness in reporting material information that is likely to affect the price of Norbord’s publicly-traded securities.

Code of Business Conduct

The Board of Directors has adopted a written code of business conduct prescribing the minimum moral and ethical standards of conduct required of all Directors, officers and employees of the Corporation and its wholly-owned subsidiaries. A copy of the Code is available on the Company’s web site at www.norbord.com.

The Corporate Governance and Nominating Committee is charged with reviewing the Code on an annual basis and recommending proposed changes to the Board for approval.

The Corporation provides, on an annual basis, a copy of the Code to designated employees, requiring them to sign an acknowledgment that they have received, read and understand the contents of the Code and agree to adhere to same.

All employees are required to disclose in writing to their supervisors, all activities, investments or businesses that might create an actual or potential conflict of interest with their duties for Norbord. Directors are to consult with the Chair of the Board with respect to potential conflicts and abstain from voting when such matter is before the Board for approval.

All violations of law or of the Code must be reported. The Corporation has implemented a whistle blowing policy, allowing Directors, officers and employees to report, in confidence, a violation of law or with the Code to the CEO or the Chair of the Audit Committee, whose contact information can be found on the Corporation’s web site at www.norbord.com.


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Appendix B–Form 58-101F1–Corporate Governance Disclosure

1.Board of DirectorsCompliant
(a)Disclose the identity of directors who are independentü
 Seven of the nine Director nominees are independent pursuant to section 1.4 of Multilateral 
 Instrument 52-110 and are identified on page 35 of this Circular. All members of the Audit Committee are 
 independent pursuant to sections 1.4 and 1.5 of that Instrument. 
(b)Disclose the identity of directors who are not independent, and describe the basis for thatü
 determination 
 Mr. Dominic Gammiero is not independent as he held the position of President and CEO of the 
 Corporation within the last three years. He may be considered independent as early as July 2007. 
   
 Mr. J. Barrie Shineton is not independent as he is the current President and CEO of the Corporation. 
(c)Disclose whether or not a majority of directors are independent, and describe the basis for thatü
 determination. 
 Seven of the nine Director nominees are independent, each having met the requirement for independence 
 pursuant to Section 1.4 of Multilateral Instrument 52-110. 
   
 Two of the seven independent Director nominees, Messrs. Cockwell and Harding, are officers of Brookfield 
 Asset Management Inc. ("Brookfield") (the "Brookfield Directors"). The Board believes that neither 
 Brookfield Director has a relationship which could be reasonably expected to interfere with the exercise of his 
 independent judgement. The Board also considers that two Directors fairly reflect the relative investment of 
 Brookfield in the Corporation. 
   
 In addition to the Brookfield Directors, two of the other five independent Director nominees, Ms. Cohen 
 and Dr. Northey, are directors of Fraser Papers Inc., in which Brookfield owns approximately a 49% 
 indirect interest. The Board does not consider Ms. Cohen and Dr. Northey to have any relationship that 
 could be reasonably expected to interfere with their exercise of independent judgement. 
   
 Two other Director nominees, Ms. Cohen and Mr. Dupuis, are trustees of Great Lakes Hydro Income 
 Fund, in which Brookfield owns approximately a 50% indirect interest. The Board does not consider 
 Ms. Cohen and Mr. Dupuis to have any relationship that could be reasonably expected to interfere with 
 their exercise of independent judgement. 
(d)If a director is presently a director of any other issuer that is a reporting issuer in a jurisdictionü
 or a foreign jurisdiction, identify both the director and the other issuer. 
 The directorships that each Director nominee currently holds are identified in their biographies set out 
 under "Election of Directors" on page 8 of this Circular. 

 

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1.Board of Directors (continued)Compliant
(e)Disclose whether or not the independent directors hold regularly scheduled meetings at whichü
 non-independent directors and members of management are not in attendance. If the 
 independent directors hold such meetings, disclose the number of meetings held since the 
 beginning of the issuer’s most recently completed financial year. If the independent directors 
 do not hold such meetings, describe what the board does to facilitate open and candid 
 discussion among its dependent directors. 
 It is the policy of the Board that all Board meetings and Committee meetings include a session without the 
 presence of non-independent Directors or members of management. In the case of the Audit Committee, 
 each meeting also includes a session with only the external auditors and the Committee. The number of 
 meetings held in 2006 are set out on page 16 of this Circular. 
(f)Disclose whether or not the chair of the board is an independent director. If the board has aü
 chair or a lead director who is an independent director, disclose the identity of the independent 
 chair or lead director, and describe his or her role and responsibilities. If the board has neither a 
 chair that is independent nor a lead director that is independent, describe what the board does 
 to provide leadership for its independent directors. 
 Mr. Harding is the Board Chair and is independent pursuant to section 1.4 of Multilateral 
 Instrument 52-110. 
   
 The role and responsibilities of the Board Chair are set out in the Corporation’s Corporate Governance 
 Practices, set out in Appendix A to this Circular and on the Corporation’s website at www.norbord.com. 
(g)Disclose the attendance record of each director for all board meetings held since the beginningü
 of the issuer’s most recently completed financial year. 
 The attendance of all directors at each Board meeting held in 2006 is set out in the table contained on 
 page 16 of this Circular. 
2.Board Mandate 
 Disclose the text of the board’s written mandate. If the board does not have a written mandate,ü
 describe how the board delineates its role and responsibilities. 
 The Terms of Reference for the Board of Directors are set out in Appendix C to this Circular. 
3.Position Descriptions 
(a)Disclose whether or not the board has developed written position descriptions for the chair andü
 the chair of each board committee. If the board has not developed written position descriptions 
 for the chair and/or the chair of each board committee, briefly describe how the board 
 delineates the role and responsibilities of each such position. 
 Written position descriptions have been developed for the Chair and the chair of each Board committee and 
 are described in the Corporation’s Corporate Governance Practices, set out in Appendix A to this Circular 
 and on the Corporation’s website at www.norbord.com. 
(b)Disclose whether or not the board and CEO have developed a written position description forü
 the CEO. If the board and CEO have not developed such a written position description, 
 briefly describe how the board delineates the role and responsibilities of the CEO. 
 A written position description has been developed for the CEO and is described in the Corporation’s 
 Corporate Governance Practices, set out in Appendix A to this Circular and on the Corporation’s website at 
 www.norbord.com. 

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4.Orientation and Continuing EducationCompliant
(a)Briefly describe what measures the board takes to orient new directors regarding (i) the role ofü
 the board, its committees and its Directors, and (ii) the nature and operation of the issuer’s 
 business. 
 The CEO and CFO are responsible for providing an orientation and education program for all new 
 Directors. New Directors must, within three months of becoming a Director, spend one day at the head 
 office of the Corporation for briefings by senior management on the Corporation’s strategic plan, major risks 
 and other key business matters. 
   
 The above information is set out in the Corporation’s Corporate Governance Practices, in Appendix A 
 to this Circular and on the Corporation’s website at www.norbord.com. 
(b)Briefly describe what measures, if any, the board takes to provide continuing education for itsü
 directors. If the board does not provide continuing education, describe how the board ensures 
 that its Directors maintain the skill and knowledge necessary to meet their obligations as 
 directors. 
 To provide the Directors with ongoing information on the Corporation’s operations, the Corporation 
 periodically holds off-site Board meetings at one of its mill locations and periodically arranges for speakers 
 to present on specialized industry topics. 
   
 The above information is set out in the Corporation’s Corporate Governance Practices, in Appendix A 
 to this Circular and on the Corporation’s website at www.norbord.com. 
5.Ethical Business Conduct 
(a)Disclose whether or not the board has adopted a written code for the directors, officers andü
 employees. If the board has adopted a written code: 
 The Board has approved, and acts in accordance with, the Corporation’s Code of Business Conduct 
 (the "Code") developed for employees with supervisory responsibilities, members of the management team, 
 and each Director. 
   
 (i) disclose how a person or company may obtain a copy of the code; 
 A copy of the Code can be found on the Corporation’s web site at www.norbord.com. 
   
 (ii) describe how the board monitors compliance with its code, or if the board does not 
 monitor compliance, explain whether and how the board satisfies itself regarding 
 compliance with its code; and 
 The Corporation’s Human Resources Department confirms compliance with the Code on an annual 
 basis by having the Code signed by designated employees. 
   
 (iii) provide a cross-reference to any material change report filed since the beginning of the 
 issuer’s most recently completed financial year that pertains to any conduct of a director or 
 executive officer that constitutes a departure from the code. 
 The Corporation has not had to file any material change report pertaining to any conduct of a director 
 or executive officer that constitutes a departure from the Code within the financial year of 2006. No 
 report of this nature has ever been filed by the Company. 

 

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5.Ethical Business Conduct (continued)Compliant
(b)Describe any steps the board takes to ensure directors exercise independent judgement inü
 considering transactions and agreements in respect of which a director or executive officer has 
 a material interest. 
 Independent judgement is exercised by the Board when Directors and/or executive officers advise the Board 
 that they may or do have a material interest in a matter being voted on, by asking that such Director(s) 
 and/or executive officer(s) leave the meeting room, so as not to participate in discussions and abstain from 
 voting on the matter. 
(c)Describe any other steps the board takes to encourage and promote a culture of ethical businessü
 conduct. 
 The Terms of Reference of each of the Board of Directors and Audit Committee together with the 
 Corporation’s Code of Business Conduct promotes a culture of ethical conduct. 
   
 The Corporation also provides a secure hotline for employees, shareholders and other outside parties to report 
 concerns relating to non-compliance with the Code of Business Conduct and/or accounting practices, 
 internal accounting controls or auditing matters directly to the Chair of the Audit Committee via telephone 
 or e-mail. Only the Chair is able to access the voice-mail and e-mail for the hotline. The Audit Committee 
 Chair provides the Board of Directors with a quarterly report on matters brought to his attention via the 
 hotline. 
6.Nomination of Directors 
(a)Describe the process by which the board identifies new candidates for board nomination.ü
 The Corporate Governance and Nominating Committee has the authority and responsibility to establish 
 criteria for the selection of Directors, to retain search firms for the recruitment of director nominees as 
 necessary, to review and assess the competencies and skills of persons proposed for appointment or election to 
 the Board and to submit to the Board the names of persons to be nominated for election as Directors at the 
 annual meeting of shareholders, or to be appointed to fill vacancies between annual meetings. 
(b)Disclose whether or not the board has a nominating committee composed entirely ofü
 independent directors. If the board does not have a nominating committee composed entirely 
 of independent directors, describe what steps the board takes to encourage an objective 
 nomination process. 
 The Corporate Governance and Nominating Committee is composed of four Directors, all of whom are 
 independent pursuant to section 1.4 of Multilateral Instrument 52-110. 
(d)If the board has a nominating committee, describe the responsibilities, operation and powersü
 of the nominating committee. 
 The Terms of Reference for the Corporate Governance and Nominating Committee are found on the 
 Corporation’s website at www.norbord.com. 

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7.CompensationCompliant
(a)Describe the process by which the board determines the compensation for the issuer’s directorsü
 and officers. 
 The Human Resources Committee is responsible for recommending compensation for the Directors, CEO 
 and other officers of the Corporation to the Board. 
   
 An external compensation consultant is retained to provide the Corporation with advice on executive 
 compensation arrangements. 
   
 Performance incentives are tied directly to increases in shareholder value and are essential components of the 
 Corporation’s total compensation program for executives. 
(b)Disclose whether or not the board has a compensation committee composed entirely ofü
 independent directors. If the board does not have a compensation committee composed 
 entirely of independent directors, describe what steps the board takes to ensure an objective 
 process for determining such compensation. 
 The Human Resources Committee is composed of seven Directors, all of whom are independent pursuant to 
 section 1.4 of Multilateral Instrument 52-110. 
(c)If the board has a compensation committee, describe the responsibilities, powers and operationü
 of the compensation committee. 
 The Terms of Reference for the Human Resources Committee are available from the Corporation’s website 
 at www.norbord.com. See also Appendix D "Board Committees". The Terms of Reference include the 
 responsibility of the committee to annually review, consider and recommend to the Board, senior managers’ 
 succession and compensation policies and CEO and Director compensation. 
8.Other Board Committees 
 If the board has standing committees other than the audit, compensation and nominatingü
 committees, identify the committees and describe their function. 
 In addition to the Audit Committee, Corporate Governance and Nominating Committee and Human 
 Resources Committee, the Board also has an Environment, Health and Safety Committee. The function of 
 the Environment Health and Safety Committee is set out in Appendix D to this Circular and its Terms of 
 Reference are available from the Corporation’s website at www.norbord.com. 
9.Assessments 
 Disclose whether or not the board, its committees and individual directors are regularlyü
 assessed with respect to their effectiveness and contribution. If assessments are regularly 
 conducted, describe the process used for the assessments. If assessments are not regularly 
 conducted, describe how the board satisfies itself that the board, its committees, and its 
 individual directors are performing effectively. 
 The Corporation’s Board evaluation systems are set out under "Board Evaluation Systems" on page 32 of 
 this Circular. 

 

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Appendix C–Board of Directors–Terms of Reference

Role of Board

The role of the Board of Directors is to supervise the business and affairs of the Corporation, which are conducted by its officers and employees under the direction of the chief executive officer ("CEO"), to enhance the long-term value of the Corporation for its shareholders. The Board is elected by the shareholders to oversee management to ensure that the best interests of the shareholders are advanced by enhancing shareholder value in a manner that recognizes the concerns of other stakeholders in the Corporation including its employees, suppliers, customers and the communities in which it operates.

Authority and Responsibilities

The Board of Directors meets regularly to review reports by management on the performance of the Corporation. In addition to the general supervision of management, the Board performs the following functions:

1.     Strategic Planning–overseeing the strategic planning process within the Corporation and reviewing, approving, on at least an annual basis, and monitoring the strategic plan for the Corporation including fundamental financial and business strategies and objectives;

2.     Risk Assessment–assessing the major risks facing the Corporation and reviewing, and monitoring appropriate systems to manage those risks;

3.     CEO–developing a position description for the CEO including the corporate objectives that the CEO is responsible for meeting, and selecting, evaluating and compensating the CEO;

4.     Senior Management–overseeing the selection, evaluation and compensation of senior management and monitoring succession planning;

5.     Communication–reviewing and monitoring communications by and to the Corporation including its disclosure policy and a system for receiving feedback from stakeholders in the Corporation;

6.     Maintaining Integrity–reviewing and monitoring the controls and procedures within the Corporation to maintain a culture of integrity including its internal controls and procedures for financial reporting, and compliance with its code of business conduct; and

7.     Corporate Governance–reviewing and maintaining the corporate governance principles and guidelines of the Corporation.

In addition to those matters that must, by law, be approved by the Board, specific board approval must be obtained for:

1.     Any capital disposition or expenditure in excess of $3,000,000 and any cost overrun on any project in excess of 10% or $2,000,000, whichever is less;

2.     Any new loan agreement or guarantee for an amount in excess of $10,000,000; and

3.     Any other material agreement or arrangement that is not in the ordinary course of business of the Corporation.


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Composition and Procedures

1.     Size of Board and Selection Process–The Directors of the Corporation are elected each year by the shareholders at the annual meeting of shareholders. The Corporate Governance and Nominating Committee proposes to the full Board the nominees for election to the Board and the Board proposes a slate of nominees to the shareholders for election. Any shareholder may propose a nominee for election to the board either by means of a shareholder proposal upon compliance with the requirements prescribed by theCanada Business Corporations Actor at the annual meeting. The Board also determines the number of Directors on the Board, subject to a minimum of eight and a maximum of 20. Between annual meetings, the board may appoint Directors to serve until the next annual meeting.

2.     Qualifications–Directors should have the highest personal and professional ethics and values and be committed to advancing the best interests of the shareholders of the Corporation. They should possess skills and competencies in areas that are relevant to the Corporation’s activities. A majority of the Directors will be "independent" Directors within the meaning of Section 1.4 Multilateral Instrument 52-110.

3.     Election of Directors–The Board requires any Director to offer his or her resignation if he or she has not received at least 50% of the votes cast at the Annual Shareholders Meeting in favour of his or her election to the Board. The Board will evaluate the impact of the change on the composition of the Board and accept or reject the resignation as appropriate.

4.     Change in Personal Circumstances–The Board requires any Director to offer his or her resignation if there has been a relevant change in his or her personal circumstances, or if he or she has not attended at least 75% of the regularly scheduled Board and relevant committee meetings in the most recent 12-month period. The Board will evaluate the impact of the change on the composition of the Board and accept or reject the resignation as appropriate.

5.     Orientation and Continuing Education–The Chief Executive Officer and the Chief Financial Officer are responsible for providing an orientation and education program for new Directors. Each new Director must, within three months of becoming a Director, spend one day at the head office of the Corporation for personal briefings by senior management on the Corporation’s strategic plan, major risks and other key business matters. The Directors are provided with information on an ongoing basis relating to the operations of the Corporation and changes in applicable law and tour the different facilities of the Corporation.

6.     Meetings–The Board has at least four scheduled meetings a year. The Board is responsible for its agenda. Prior to each Board meeting, the CEO will discuss agenda items for the meeting with the Chair of the Board. Materials for each meeting will be distributed to the Directors in advance and Directors are expected to review such materials prior to the meeting. The independent Directors have at least four scheduled meetings a year without management present.

7.     Committees–The Board has established the following standing committees to assist the Board in discharging its responsibilities–audit, corporate governance and nominating, environment, health and safety and human resources. Special committees are established from time to time to assist the Board in connection with specific matters. The chair of each committee reports to the Board following meetings of the committee. The terms of reference of the Board and each standing committee are reviewed annually by the Board.

8.     Evaluation–The Corporate Governance and Nominating Committee performs an annual evaluation of the effectiveness of the Board as a whole, the committees of the Board and the contributions of individual Directors.


 

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9.     Compensation–The Human Resources Committee recommends to the Board the compensation and benefits for non-management Directors. In reviewing the adequacy and form of compensation and benefits, the Committee seeks to ensure that the compensation and benefits reflect the responsibilities and risks involved in being a Director of the Corporation and align the interests of the Directors with the best interests of the shareholders.

10.    Access to Independent Advisors–The Board and any committee may at any time retain outside financial, legal or other advisors at the expense of the Corporation. Any Director may, subject to the approval of the Chair of the Board, retain an independent advisor at the expense of the Corporation.


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Appendix D–Board Committees

The Board has four standing committees with specific mandates to assist the Board in carrying out its responsibilities. These are the Audit Committee, the Corporate Governance and Nominating Committee, the Environment, Health and Safety Committee, and the Human Resources Committee. In addition, from time to time, the Board has established special committees to assist the Board in respect of certain issues.

All Board members have a standing invitation to attend all committee meetings with the exception of the President and CEO, who is not permitted at Human Resources Committee meetings when his compensation is discussed or determined.

Audit Committee

The role of the Audit Committee is to assist the Board in its oversight of the integrity of the financial and related information of the Corporation including its financial statements, the internal controls and procedures for financial reporting and the processes for monitoring compliance with legal and regulatory requirements and to review the independence, qualifications and performance of the external auditor of the Corporation. Management is responsible for establishing and maintaining those controls, procedures and processes and the Audit Committee is appointed by the Board to review and monitor them.

The current members of the Committee are:

Dian Cohen                                  Gordon E. Forward
Pierre Dupuis (Chair)                  Neville W. Kirchmann

Corporate Governance and Nominating Committee

The role of the Corporate Governance and Nominating Committee is to assist the Board on matters related to the effective governance of the Corporation, to propose new nominees to the Board and to assess the effectiveness of the Board, its Committees and individual Directors on an annual basis.

The current members of the Committee are:

Dian Cohen (Chair)                     Neville W. Kirchmann
Robert J. Harding                        Margot Northey

Environment, Health and Safety Committee

Sustainable economic development is the principal operating philosophy of the Corporation. All employees, including all levels of management and the Board, must actively participate in making this philosophy part of daily decisions. The role of the Environment, Health and Safety Committee is to assist the Board in overseeing the commitment of the Corporation to environmental, health and safety matters and to ensure that policies and procedures are in place so that the Corporation manages its responsibilities in these areas effectively.


 

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The current members of the Committee are:

Jack L. Cockwell                             Dominic Gammiero
Dian Cohen                                     Robert J. Harding
Pierre Dupuis                                  Neville W. Kirchmann
Gordon E. Forward                         Margot Northey (Chair)

Human Resources Committee

The role of the Human Resources Committee is to assist the Board in its oversight of the selection, development, evaluation and compensation of senior management of the Corporation and succession planning and, in particular, to monitor the performance of the CEO and to recommend compensation for the CEO, senior officers and Directors of the Corporation.

In addition to the above, the Committee is also to assist the Board in its oversight of the funding, investment management and related administration for all of the defined benefit and defined contribution employee retirement plans of the Corporation and its wholly-owned subsidiaries.

The current members of the Committee are:

Jack L. Cockwell (Chair)                Robert J. Harding
Dian Cohen                                     Neville W. Kirchmann
Pierre Dupuis                                  Margot Northey
Gordon E. Forward


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Appendix E–Audit Committee–Terms of Reference

Role of Audit Committee

The role of the Audit Committee is to assist the Board in its oversight of the integrity of the financial and related information of the Corporation including its financial statements, the internal controls and procedures for financial reporting and the processes for monitoring compliance with legal and regulatory requirements and to review the independence, qualifications and performance of the external auditor of the Corporation. Management is responsible for establishing and maintaining those controls, procedures and processes and the Audit Committee is appointed by the Board to review and monitor them.

Authority and Responsibilities

In carrying out its role, the Audit Committee has the following authority and responsibilities:

1. Financial information and reporting–

(a) to review and discuss with management and the external auditor, as appropriate:

(i) the annual audited financial statements and the interim financial statements including the accompanying Management’s Discussion and Analysis; and

(ii) earnings guidance and other releases containing information taken from the Corporation’s financial statements prior to their release; and

(b) to review the Corporation’s financial reporting and accounting standards and principles and any proposed material changes to them or their application;

2. Internal controls–to review, with the chief financial officer ("CFO"), the external auditor and others, as appropriate, the Corporation’s system of internal controls;

3. External audit–

(a) to recommend to the Board, for shareholder approval, the external auditor to examine the Corporation’s accounts, controls and financial statements on the basis that the external auditor is accountable to the Board and the Audit Committee as representatives of the shareholders of the Corporation;

(b) to evaluate the audit services provided by the external auditor, pre-approve all audit fees and recommend to the Board, if necessary, the replacement of the external auditor;

(c) to pre-approve any non-audit services to be provided to the Corporation or its subsidiaries by the external auditor and the fees for those services;

(d) to obtain and review at least annually a written report by the external auditor setting out the auditor’s internal quality control procedures, any material issues raised by the auditor’s internal quality control reviews and the steps taken to resolve those issues; and

(e) to review at least annually the relationships between the Corporation and the external auditor in order to establish the independence of the external auditor;

4. Risk management–to review and monitor the Corporation’s major financial risks and risk management policies and the steps taken by management to mitigate those risks; and


 

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5. Compliance –

(a)    to review the Corporation’s financial reporting procedures and policies to ensure compliance with all legal and regulatory requirements and to investigate any non-adherence to those procedures and policies; and

(b)    to establish procedures for the receipt and treatment of any complaint regarding accounting, internal accounting controls or auditing matters including procedures for the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters.

Composition and Procedures

1.     Size–The Audit Committee will consist of a minimum of three Directors. The members of the Committee are appointed by the Board upon the recommendation of the Corporate Governance and Nominating Committee and may be removed by the Board in its discretion.

2.     Qualifications–All members of the Committee must be "independent" within the meaning of sections 1.4 and 1.5 of Multilateral Instrument 52-110. All members of the Committee must be "financially literate", i.e., have the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the financial statements of the Corporation. At least one member of the Committee should have "accounting or related financial expertise", i.e., the ability to analyze and interpret a full set of financial statements, including the attached notes, in accordance with Canadian generally accepted accounting principles.

3.     Meetings–The Committee will meet at least five times a year and a portion of each meeting will be held without the presence of management.

4.     Review of Financial Statements–The Committee will review the Corporation’s annual audited financial statements with the CEO and CFO and then the full Board. The Committee will review the interim financial statements with the CEO and CFO. The external auditor will be present at these meetings.

5.     Review of CEO and CFO Certification Process–In connection with its review of the annual audited financial statements and interim financial statements, the Committee will also review the process for the CEO and CFO certifications with respect to the financial statements and the Corporation’s disclosure and internal controls, including any material deficiencies or changes in those controls.

6.     Review of Earnings and Other Releases–The Committee will review with the CFO any earnings guidance to be issued by the Corporation and any news release containing financial information taken from the Corporation’s financial statements prior to the release of the financial statements to the public. In addition, the CFO must review with the committee the substance of any presentations to analysts or rating agencies that contain a change in strategy or outlook.

7.     Approval of Audit and Non-Audit Services–In addition to recommending to the Board the external auditor to examine the Corporation’s financial statements and the compensation of the external auditor for audit services, the Committee must approve any use of that external auditor to provide non-audit services prior to its engagement. It is the Committee’s practice to restrict the non-audit services that may be provided by the external auditor in order to minimize relationships that could appear to impair the objectivity of the external auditor.

8.     Hiring Guidelines for Independent Auditor Employees–The Committee will adopt guidelines regarding the hiring of any partner, employee, reviewing tax professional or other person providing audit assurance to the external auditor of the Corporation on any aspect of its certification of the Corporation’s financial statements.


NORBORD

 

MANAGEMENT

Appendix E–Audit Committee–Terms of Reference

PROXY CIRCULAR

 

 

 

  

52

 

9.     Audit Partner Rotation–The Committee will ensure that the lead audit partner assigned by the external auditor to the Corporation, as well as the independent review partner charged with reviewing the financial statements of the Corporation, are changed at least every five years.

10.    Process for Handling Complaints about Accounting Matters–The Committee has established the following procedure for the receipt and treatment of any complaint received by the Corporation regarding accounting, internal accounting controls or auditing matters:

(a)    The Corporation will make available and make known special mail and e-mail addresses and telephone numbers for receiving complaints regarding accounting, internal accounting controls or auditing matters;

(b)    Copies of complaints received will be sent to the members of the Committee;

(c)    All complaints will be investigated by the Corporation’s finance staff, except as otherwise directed by the Committee. The Committee may request that outside advisors be retained to investigate any complaint; and

(d)    The status of each complaint will be reported on a quarterly basis to the Committee and, if the Committee so directs, to the full Board.

The Corporation’s Code of Business Conduct prohibits any Director, officer or employee of the Corporation from retaliating or taking any adverse action against anyone for raising or helping to resolve a complaint.

11.    Evaluation–The Committee will conduct and present to the Board an annual evaluation of the performance of the Committee and the adequacy of these terms of reference and recommend any proposed change to the Board for approval.

12.    Other Matters–The Committee will conduct reviews and, where appropriate, recommend action by the Board, on:

(a)    the annual information form to be filed by the Corporation;

(b)    regular reports on outstanding litigation that could have a material effect on the Corporation;

(c)    an annual certificate of the CEO attesting that senior management of the Corporation have received and agreed to be bound by the Corporation’s Code of Business Conduct and as to compliance with the Code;

(d)    an annual report on officers’ expenses;

(e)    an annual report on consulting and legal fees paid by the Corporation; and

(f)    an annual report on the Corporation’s insurance coverage and costs.


 

NORBORD

Appendix F–Reporting Package

MANAGEMENT

 

PROXY CIRCULAR

 

 

 

53

 

Appendix F–Reporting Package

Change of Auditor Notice
Pursuant to National Instrument 51-102, Section 4.11

On February 28, 2007, Ernst & Young LLP resigned as auditors of Norbord Inc. (the "Corporation") at the request of the Corporation. KPMG LLP were appointed as auditors of the Corporation to replace Ernst & Young LLP. The Audit Committee and the Board of Directors participated in and approved the decision to change theauditors.

The auditors’ reports of Ernst & Young LLP on the financial statements of the Corporation during the period commencing January1, 2005 and ending on February28, 2007 did not contain any reservation.

The Corporation is of the opinion that there are no "reportable events" as defined in National Instrument51-102.

The Corporation has decided to propose KPMG LLP for appointment as auditor at the annual meeting of shareholders to be held on April25,2007.

DATED February28, 2007.

Per:

John Tremayne
Executive VicePresident and Chief Financial Officer


NORBORD

 

MANAGEMENT

 

PROXY CIRCULAR

 

 

 

  

54

 

   
Ernst& YoungLLP
Chartered Accountants
Ernst& Young Tower
Toronto-Dominion Centre
P.O.Box251
Toronto, Canada M5K1J7
Phone: (416)864-1234
Fax: (416)864-1174

March 2, 2007

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Financial Services Commission (Securities Division)
Manitoba Securities Commission
Ontario Securities Commission
Autorité de Marchés Financiers du Québec
New Brunswick Securities Commission
Nova Scotia Securities Commission
Registrar of Securities, Prince Edward Island
Newfoundland and Labrador, Securities Division,
     Department of Government Services and Lands
Registrar of Securities, Government of the Yukon Territory
Registrar of Securities, Nanavut
Registrar of Securities, Northwest Territories

Dear Sirs/Mesdames:

Re: Norbord Inc.
       Change of Auditor Notice dated February 28, 2007

Pursuant to National Instrument51-102 (Part4.11), we have read the above-noted Change of Auditor Notice and confirm our agreement with the information contained in the Notice.

Yours sincerely,

cc: The Board of Directors, Norbord Inc.


 

NORBORD

 

MANAGEMENT

 

PROXY CIRCULAR

 

 

 

55

 
   
KPMG LLP
Chartered Accountants

Suite 3300 Commerce Court West
PO Box 31 Stn Commerce Court
Toronto ON M5L 1B2

Telephone (416) 777-8500
Fax (416) 777-8818
Internet www.kpmg.ca

Alberta Securities Commission
British Columbia Securities Commission
Saskatchewan Financial Services Commission–Securities Division
The Manitoba Securities Commission
Ontario Securities Commission
Autorité des marchés financiers
New Brunswick Securities Commission
Nova Scotia Securities Commission
Securities Office, Prince Edward Island
Department of Government Services–Newfoundland and Labrador
Registrar of Securities–Northwest Territories
Registrar of Securities, Nunavut
Registrar of Securities, Government of the Yukon Territories

Dear Sirs:

Re: Notice of Change of Auditors of Norbord Inc.

We have read the Notice of Norbord Inc. dated February 28, 2007 and are in agreement with the statements contained in such Notice.

Yours very truly,

Chartered Accountants
Toronto, Canada
February 28, 2007

KPMG LLP, a Canadian limited liability partnership is the Canadian
member firm of KPMG International, a Swiss cooperative.


 

www.norbord.com

 




 

 

 

 

 

 

 

 

 

 

 

 NORBORD INC.

 

 

  
  
  
  
 

Annual

 

Information

 

Form

 

 

 

 

  
  
  
 

March 1, 2007

 

 

  
  
  
 

 

 

 

 

 


Table of Contents

Annual
Information
Form

 

 

 
 

1

 

Table of Contents

 

 

Page

CORPORATE STRUCTURE

4

 

 

GENERAL DEVELOPMENT OF THE BUSINESS

5

Changes in the Business 2004-2006

5

Outlook

5

 

 

RISKS OF THE BUSINESS

6

Product Concentration

6

Product Prices

6

Competition

6

Customer Dependence

6

Manufacturing Inputs

7

Fibre Resource

7

Litigation

7

Labour Relations

7

Environmental Matters

8

Product Liability

8

Natural Events

8

Capital Intensity

8

Tax Exposures

8

Currency Exposures

8

 

 

LEGAL PROCEEDINGS

9

 

 

DESCRIPTION OF THE BUSINESS

10

Principal Products

10

Principal Plants

11

Fibre Resource

12

Research and Development

12

Environment, Health and Safety

13

Human Resources

14

 


Annual
Information
Form

Table of Contents

 

 

 

2

 

 

 

Page

DESCRIPTION OF CAPITAL STRUCTURE

15

Capital Resources

15

Description of Share Capital

15

Common Shares

16

Class A Preferred Shares

16

Class B Preferred Shares

16

Non-Voting Participating Shares

16

Description of Debt Securities

16

Credit Ratings

17

 

 

DIVIDENDS

18

 

 

MARKET FOR SECURITIES

19

 

 

DIRECTORS AND OFFICERS

20

Directors

20

Officers

22

Additional Disclosure for Directors and Officers

22

 

 

INTEREST OF MANAGEMENT AND OTHERS IN TRANSACTIONS

24

Material Contracts

24

Transfer Agent and Registrar

24

 

 

AUDIT COMMITTEE

25

Audit Fees

25

Audit-Related Fees

26

Taxation Fees

26

All Other Fees

26

 

 

INTERESTS OF EXPERTS

27

 

 

ADDITIONAL INFORMATION

28

 

 

GLOSSARY

29

 

 

Appendix A–Norbord Environment Policy

30

Appendix B–Norbord Health and Safety Policy

32

Appendix C–Audit Committee–Terms of Reference

33

 


 

Annual
Information
Form

 

 

 
 

3

 

Unless otherwise noted, all information contained in this Annual Information Form is as at December 31, 2006.

All dollar amounts in this Annual Information Form are US dollars unless otherwise specified.

Parts of the 2006 Annual Report of Norbord Inc. for the year ended December 31, 2006 ("Annual Report") are incorporated by reference in this Annual Information Form.

Caution Regarding Forward-Looking Information

This document includes forward-looking statements, as defined by applicable securities legislation. Often, but not always, forward-looking statements can be identified by the use of words such as "believes," "expects" or "does not expect," "is expected," "targets," "outlook," "plans," "scheduled," "estimates," "forecasts," "intends," "anticipates" or "does not anticipate" or variations of such words and phrases or statements that certain actions, events or results "may," "could," "would," "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Norbord to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Examples of such statements include, but are not limited to, comments with respect to: (1) outlook for the markets for products; (2) expectations regarding future product pricing; (3) the outlook for operations; (4) expectations regarding mill capacity and production volumes; (5) objectives; (6) strategies to achieve those objectives; (7) expected financial results; (8) sensitivity to changes in product prices, such as the price of OSB; (9) sensitivity to key input prices, such as the price of natural gas; (10) sensitivity to changes in foreign exchange rates; (11) Margin Improvement Program targets; (12) expectations regarding income tax rates; (13) expectations regarding compliance with environmental regulations; (14) expectations regarding contingent liabilities and guarantees, including the outcome of pending litigation; and (15) expectations regarding the amount, timing and benefits of capital investments.

Although Norbord believes it has a reasonable basis for making these forward-looking statements, readers are cautioned not to place undue reliance on such forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. These factors include, but are not limited to: (1) assumptions in connection with the economic and financial conditions in the United States, Europe, Canada and globally; (2) risks inherent with product concentration; (3) effects of competition and product pricing pressures; (4) outcome of the OSB class action lawsuits; (5) risks inherent with customer dependence; (6) effects of variations in the price and availability of manufacturing inputs including continued access to fibre resources at competitive prices; (7) various events which could disrupt operations, including natural events and ongoing relations with employees; (8) impact of changes to or non-compliance with environmental regulations; (9) impact of any product liability claims in excess of insurance coverage; (10) risks inherent with a capital intensive industry; (11) impact of future outcome of certain tax exposures; and (12) effects of currency exposures and exchange rate fluctuations.

The above list of important factors affecting forward-looking information is not exhaustive. Additional factors are noted elsewhere and reference should be made to the other risks discussed in filings with Canadian securities regulatory authorities and the US Securities and Exchange Commission. Norbord does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company, whether as a result of new information, future events or otherwise, or to publicly update or revise the above list of factors affecting this information.

 


Annual
Information
Form

Corporate Structure

 

 

 

4

 

 

Corporate Structure

 

Norbord Inc. is a corporation existing under the laws of Canada. Norbord Inc. was continued by Articles of Amalgamation issued under the Canada Business Corporations Act on December 31, 1998. Norbord Inc. filed Articles of Arrangement and Restated Articles of Incorporation on June 30, 2004, to facilitate the transfer of its paper and timber business to a new public company, Fraser Papers Inc. ("Fraser Papers") and the change of its name from Nexfor Inc. to Norbord Inc.

The registered and principal office of Norbord Inc. is 1 Toronto Street, Suite 600, Toronto, Ontario, M5C 2W4.

In this form, "Norbord" means Norbord Inc. and its consolidated subsidiaries and affiliates, and "Company" means Norbord Inc. as a separate corporation, unless the context implies otherwise.

Norbord is an international producer of wood-based panels with approximately 2,800 employees and 16 plant locations in the United States, Europe and Canada. Norbord has assets and sales in excess of $1 billion, and is one of the world’s largest producers of oriented strand board ("OSB").

At March 1, 2007 Brookfield Asset Management Inc., a global asset manager, owned approximately 38% of the outstanding Common Shares of the Company. The Company’s Common Shares are traded on the TSX under the symbol NBD.

The principal operating subsidiaries of the Company are:

  Percentage of 
 JurisdictionVoting SecuritiesDate of
Nameof IncorporationOwnedIncorporation
Norbord Alabama Inc.Alabama100%10/12/1999
Norbord Georgia Inc.Georgia100%03/22/2002
Norbord Industries Inc.Ontario100%08/24/1988
Norbord Industries, Inc.New York100%04/06/1987
Norbord LimitedUnited Kingdom100%03/22/1995
Norbord Minnesota Inc.Delaware100%12/20/2006
Norbord Mississippi, Inc.Mississippi100%02/02/1993
Norbord NVBelgium100%05/28/2004
Norbord South Carolina Inc.South Carolina100%05/22/1998
Norbord Texas (Jefferson) Inc.Delaware100%12/20/2006
Norbord Texas (Nacogdoches) Inc.Delaware100%12/20/2006

There are no voting or non-voting securities issued by any of the Company’s subsidiaries that are not 100% owned, directly or indirectly, by the Company.

 


General Development of the Business

Annual
Information
Form

 

 

 
 

5

 

General Development of the Business

 

Norbord has made substantial changes in its business over the past three years by increasing its investment in the panelboard business and eliminating its investments in lumber, pulp, timber and papers. On June 30, 2004, Norbord achieved a major milestone in this strategy when it distributed to its common shareholders all of the common shares of Fraser Papers, a corporation formed to acquire Norbord’s remaining lumber, pulp, timber and paper assets.

Changes in the Business 2004-2006

In December 2006, Norbord started up the second line at its Cordele, Georgia OSB mill. Construction began in June 2005. The project cost was $135 million, and when fully ramped up will add 550 million square feet (3/8-inch basis) of production capacity, increasing Norbord’s North American OSB capacity by 15%.

In December 2006, Norbord indefinitely shut its Juniper, New Brunswick I-Joist facility. The mill has an annual capacity of 60 million lineal feet. A provision of $13 million was recorded in the Company’s 2006 consolidated financial statements related to this closure.

On July 14, 2006, the Company paid $128 million to shareholders in a special CAD $1.00 per common share dividend.

On May 20, 2005, the Company paid $118 million to shareholders in a special CAD $1.00 per common share dividend.

Also on May 20, 2005, the Company redeemed CAD $60 million of Class A Preferred Shares Series 1 at par ($25.00), plus accrued and unpaid dividends.

In September 2004, Norbord acquired an OSB and particleboard facility in Genk, Belgium for $64 million. The acquisition positioned Norbord as one of the largest producers of OSB in Europe with an approximate 20% market share.

On September 30, 2004, the Company paid $149 million to shareholders in a special CAD $1.00 per common share dividend.

In July 2004, Norbord redeemed its $200 million 67/8% debentures due in 2005 and recorded a pre-tax charge of $9 million for call premiums net of associated interest rate swap gains.

In June 2004, the Company changed its name from Nexfor Inc. and distributed its remaining lumber, pulp, timber and paper assets to its shareholders in the form of a separate publicly traded corporation, Fraser Papers. The distribution was facilitated by distributing Fraser Papers common shares to common shareholders of Norbord, on the basis of one common share of Fraser Papers for every five common shares of Norbord held.

In March 2004, Norbord acquired MeadWestvaco Corporation’s 50% interest in Norbord Minnesota Inc. for $34 million, including $6 million of working capital. Norbord Minnesota Inc. was previously owned jointly by Norbord and MeadWestvaco Corporation.

Outlook

For information regarding Norbord’s outlook, see Norbord’s Management’s Discussion and Analysis in the Company’s 2006 Annual Report.

 


Annual
Information
Form

Risks of the Business

 

 

 

6

 

 

Risks of the Business

 

Information on Norbord’s business risks is included in the Management’s Discussion and Analysis in the Company’s 2006 Annual Report.

The principal risks to Norbord’s businesses include those that would be generally expected of an international, capital-intensive manufacturing business. They include:

Product Concentration

OSB accounts for more than 75% of Norbord’s panel production capacity. The price of OSB is one of the most volatile in the wood-based panels industry. Norbord’s concentration in OSB increases its sensitivity to product pricing and will result in a high degree of sales and earnings volatility.

Product Prices

Norbord’s financial performance is principally dependent on the selling price of its products. The markets for most of Norbord’s products are highly cyclical and are characterized by periods of supply and demand imbalance during which its product prices have tended to fluctuate significantly. In addition, since many of Norbord’s products are used for new home construction, seasonal and annual weather changes can affect demand and sales volumes. These imbalances, which may affect different areas of Norbord’s business at different times, are influenced by numerous factors that are beyond Norbord’s control and include: changes in global and regional production capacity for a particular product or group of products; changes in the end-use of those products or the increased use of substitute products; and the overall level of economic activity in the regions in which Norbord conducts business. Norbord has been negatively affected in the past by declines in product pricing and has occasionally taken market-related production downtime.

Competition

The wood-based panels industry is a highly competitive business environment in which companies compete, to a large degree, on the basis of price. Norbord’s principal market is the United States where it competes with North American and, in some instances, foreign producers. Norbord’s European operations compete primarily with other European producers. Certain competitors may have lower-cost facilities than Norbord. Norbord’s ability to compete in these and other markets is dependent on a variety of factors such as manufacturing costs, free access to markets, customer service, product quality, financial resources, and currency exchange rates.

In addition, competitors could develop new cost-effective substitutes for Norbord’s wood-based panels, or building codes could be changed to make the use of Norbord’s products less attractive for certain applications.

Customer Dependence

Norbord sells its products primarily to major retail chains, contractor supply yards, and wholesale distributors and faces strong competition for the business of significant customers. Although no single customer accounts for more than 10% of Norbord’s sales, Norbord generally does not have contractual assurances as to future sales. As a result, any significant customer order cancellations could negatively affect Norbord’s sales and earnings. Continued consolidation in the retail industry could expose Norbord to increased concentration of customer dependence and increase customers’ ability to exert pricing pressure on Norbord.

 


Risks of the Business

Annual
Information
Form

 

 

 
 

7

 

Manufacturing Inputs

Norbord is exposed to commodity price risk on most of its manufacturing inputs, principally wood fibre, resin and energy. These manufacturing inputs are purchased primarily on the open market in competition with other users of such resources and prices are influenced by factors beyond Norbord’s control. Norbord may not be able to pass increased costs through to its customers.

Fibre Resource

The market for wood fibre is highly competitive. A significant portion of Norbord’s wood fibre requirements in Canada are met through timber supply and forest management agreements and sustainable forest licenses ("Crown Arrangements") with Canadian provincial governmental authorities ("Governmental Authorities"). These Crown Arrangements, among other things, require the payment of stumpage fees for timber harvested and compliance with specified rehabilitation and silviculture management practices, cover periods ranging from 20 to 25 years and may be renewed or extended for additional five-year periods. These Crown Arrangements could be revoked or cancelled for non-performance. The Crown Arrangements also contain terms and conditions which could, under limited circumstances, result in a reduction of annual allowable timber that may be harvested by Norbord without any compensation. Restrictions on harvesting have increased over the past several years. Canadian aboriginal groups have made claims in respect of land governed by Governmental Authorities, which could affect a portion of these Crown Arrangements. Settlements in respect of these claims could increase the cost to harvest timber on such land and could lower the volume of timber available to Norbord.

In the United States, Europe and Canada, Norbord purchases timber, wood chips and other wood residues as well as recycled materials on the open market in competition with other users of such wood fibre resources and prices are influenced by factors beyond Norbord’s control.

Litigation

Norbord and eight other North American OSB producers have been named as defendants in several lawsuits filed in the United States District Court for the Eastern District of Pennsylvania. The lawsuits allege that these nine North American OSB producers violated United States and various state antitrust and other laws by allegedly agreeing to fix prices and reduce the supply of OSB from June 1, 2002 through the present.

The named plaintiffs seek to have the cases certified as class actions. One group of plaintiffs seeks to certify a class of persons and entities that purchased OSB in the United States directly from any of the named North American OSB producers between June 1, 2002 and the present. Other plaintiffs seek to certify one or more classes of persons and entities that purchased OSB in various states and the District of Columbia indirectly between June1, 2002 and the present.

Norbord believes that the lawsuits are entirely without merit and intends to defend this matter vigorously. However, the lawsuits are in their early stages, the outcome of litigation is subject to inherent uncertainties and an adverse outcome to these litigations has the potential to materially and adversely affect Norbord’s business, financial condition and results of operations.

Labour Relations

Norbord’s US employees are non-unionized, while its UK, Belgian and most of its Canadian employees are unionized, representing just under one-half of the workforce. All but one of Norbord’s UK and Belgian union contracts are evergreen. Norbord’s Cowie and Canadian contracts typically cover a three- to five-year term. No labour union contracts expired in 2006 and contracts covering employees at our Val-d’Or, Quebec, and Cochrane, Ontario mills expire during 2007. Norbord believes it will be able to negotiate acceptable contracts upon expiry, but strikes or work stoppages could result if Norbord is unable to do so.

 


Annual
Information
Form

Risks of the Business

 

 

 

8

 

 

Environmental Matters

Norbord’s operations are subject to a range of general and industry-specific environmental laws and regulations relating to air emissions, wastewater discharges, solid and hazardous waste management, plant and wildlife protection and site remediation. Norbord believes that all of its facilities are in substantial compliance with these matters. Failure to comply with applicable environmental laws and regulations could result in fines, penalties or other enforcement actions that could impact Norbord’s production capacity or increase Norbord’s production costs.

In January 2005 the International Agency for Research on Cancer (IARC) reclassified formaldehyde as a known human carcinogen. Norbord’s products are tested to ensure that they comply with agreed standards for formaldehyde content and emissions from the product. The emission of formaldehyde from OSB panels is similar to the emissions of natural wood. Standards for its other products are well below the levels associated with any observed health effects and Norbord believes there is no material risk associated with the use of formaldehyde in its manufacturing process.

Product Liability

Norbord produces a variety of wood-based panels. Norbord is not currently subject to any material claims with respect to the fitness for use of its products or related to product quality or performance issues. Norbord retains commercially reasonable insurance coverage for such claims, but could face increased costs if any future claims exceed purchased insurance coverage.

Natural Events

Norbord’s business is exposed to numerous natural events such as forest fires, adverse weather conditions, insect infestation, disease, prolonged drought, and other natural disasters, which are not insurable events. If such an event occurs, Norbord may need to curtail production or incur increased fibre costs.

Capital Intensity

The production of wood-based panels is capital intensive. Although Norbord maintains its production equipment with regular periodic and scheduled maintenance, there can be no assurance that key pieces of equipment will not need to be repaired or replaced. In certain circumstances, the costs of repairing or replacing that equipment and the associated downtime of the affected production line may not be an insurable event.

Tax Exposures

Norbord maintains reserves for known estimated tax exposures in all jurisdictions. These exposures are settled primarily through the closure of audits with the jurisdictional taxing authorities. Norbord believes its reserves are adequate to cover such exposures, but future settlements could differ materially from such reserves.

Currency Exposures

Norbord reports its financial results in US dollars. A portion of Norbord’s product prices and costs are influenced by relative currency values (particularly the Canadian dollar, Pound Sterling and Euro). Significant fluctuations in relative currency values could negatively affect the cost competitiveness of Norbord’s facilities, the value of its foreign investments, the results of its operations and its financial position. Norbord’s policy is to hedge all significant balance sheet exposures. In addition, the Company may hedge a portion of its foreign currency-denominated cash flow exposures.

 


Legal Proceedings

Annual
Information
Form

 

 

 
 

9

 

Legal Proceedings

 

Norbord and eight other North American OSB producers have been named as defendants in several lawsuits filed in the United States District Court for the Eastern District of Pennsylvania. The lawsuits allege that these nine North American OSB producers violated United States and various state antitrust and other laws by allegedly agreeing to fix prices and reduce the supply of OSB from June 1, 2002 through the present.

The named plaintiffs seek to have the cases certified as class actions. One group of plaintiffs seeks to certify a class of persons and entities that purchased OSB in the United States directly from any of the named North American OSB producers between June 1, 2002 and the present. Other plaintiffs seek to certify one or more classes of persons and entities that purchased OSB in various states and the District of Columbia indirectly between June 1, 2002 and the present.

Norbord believes that the lawsuits are entirely without merit and intends to defend this matter vigorously. However, the lawsuits are in their early stages, the outcome of litigation is subject to inherent uncertainties and an adverse outcome to these litigations has the potential to materially and adversely affect Norbord’s business, financial condition and results of operations.

 

 

 

 

 

 

 

 

 

 


Annual
Information
Form

Description of the Business

 

 

 

10

 

 

Description of the Business

 

Principal Products

Norbord’s business comprises the manufacturing, sales, marketing and distribution of panelboards and related products used primarily in the construction of new homes or the renovation and repair of existing structures. Products are generally sold to major retail chains, contractor supply yards and wholesale distributors. Some mill products move directly to industrial customers for further processing or as components for other products.

In 2006 and 2005, Norbord sales originated as follows:

 20062005
North America66%74%
Europe34%26%

Norbord’s production includes OSB, MDF, particleboard, hardwood plywood, and related specialty products. OSB is used principally for roofing, flooring and wall sheathing in home construction. OSB has displaced softwood plywood in many structural end-uses. OSB production currently represents approximately 62% of total North American structural panel production. In Europe, OSB’s share of the structural panel market is lower than in North America due mainly to different housing construction methods. However, OSB use is growing rapidly in Europe. In North America, OSB is a low-cost substitute for plywood. In Europe, OSB is often a high performance substitute for particleboard.

Norbord’s particleboard is used primarily in flooring and other construction applications. MDF applications include cabinets, moldings, interior wall paneling and furniture. Norbord’s hardwood plywood is overlaid with veneers and has similar end-uses to MDF.

 


Description of the Business

Annual
Information
Form

 

 

 
 

11

 

Principal Plants

The locations of Norbord’s mills, their estimated annual capacity at December 31, 2006, together with their annual production in each of the last two years, are as follows:

 Estimated

 

  
 Annual Capacity

 

  
 at Year-End

 

 Production
 2006

 

20062005
OSB (MMsf-3/8") 

 

  
Bemidji, Minnesota440

 

456437
Cordele, Georgia990

(1)

427441
Genk, Belgium260

 

257220
Guntown, Mississippi430

 

405412
Huguley, Alabama500

 

488471
Inverness, Scotland350

 

321319
Jefferson, Texas415

(2)

409374
Joanna, South Carolina500

 

480460
La Sarre, Quebec375

(2)

371356
Nacogdoches, Texas380

 

373345
Val-d’Or, Quebec340

 

348337
 4,980

 

4,3354,172
Particleboard (MMsf-3/8") 

 

  
Cowie, Scotland350

 

354337
Genk, Belgium170

 

190193
South Molton, England225

(3)

250247
 745

 

794777
MDF (MMsf-3/8") 

 

  
Cowie, Scotland360

(3)

366407
Deposit, New York160

 

151148
 520

 

517555
Plywood (MMsf-3/8") 

 

  
Cochrane, Ontario80

 

7978

(1)     Includes second line completed December 2006 with estimated annual capacity of 550 MMsf (3/8-inch basis).

(2)     Estimated annual capacity increased over prior year based on operational improvements, capital investment and other initiatives.

(3)     Estimated annual capacity decreased over prior year as an older, less efficient line was decommissioned during 2006.

Norbord employs multi-opening press technology at its Minnesota, Georgia, Mississippi, and two Texas OSB mills in the United States. All of these mills purchase their wood fibre requirements from outside sources with prices based on regional market dynamics. These mills are not unionized and employees participate in profit sharing programs whereby a percentage of each mill’s operating income is shared equally with the employee group at that mill.

Norbord also employs multi-opening press technology at its two Quebec OSB mills in Canada. A significant portion of the production of these mills is concentrated on specialty panels including I-joist web stock, thin panels and flooring. The wood fibre requirements for these mills are obtained under 25-year timber supply and forest management agreements with the Quebec Government and also from other outside sources with prices based on regional market dynamics. The mills are unionized.

 


Annual
Information
Form

Description of the Business

 

 

 

12

 

 

Norbord employs continuous press technology at its South Carolina and Alabama OSB mills in the US. Continuous press technology allows for improved operational efficiency and the production of OSB in non-standard sizes and with specialized performance characteristics. These mills purchase their wood fibre requirements from outside sources with prices based on regional market dynamics. These mills are not unionized and employees participate in profit sharing programs whereby a percentage of each mill’s operating income is shared equally with the employee group at that mill.

Norbord’s mill in Cowie, Scotland is a large, integrated operation with a continuous press MDF production line, a continuous press particleboard line, and value-added laminating facilities. The South Molton, England particleboard mill employs single-opening press technology and is integrated with laminating operations and a flat-pack furniture manufacturing facility. The OSB mill in Inverness, Scotland employs two multi-opening press lines. All of Norbord’s mills in the UK purchase their wood fibre requirements from outside sources with prices based on regional market dynamics.

The Genk, Belgium facility, acquired in September 2004, has two independent production lines which manufacture OSB and particleboard. The OSB line started up in 2001 and employs continuous press technology. The particleboard line started up in 1991 and employs multi-opening press technology. The wood fibre for the Genk operation is a combination of roundwood for OSB and recycled wood (pre and post-consumer), mixed roundwood and flax fibre for the particleboard line. Wood fibre purchases are made on the open market from a combination of public and private enterprises in the region.

The Deposit, New York mill produces MDF from hardwood fibre and is the only facility of its kind in the northeastern US. The Cochrane, Ontario plywood mill produces hardwood overlay plywood.

Fibre Resource

For the most part, Norbord’s operations purchase wood fibre in the form of logs, wood chips and wood residues from outside sources.

In addition to sourcing their wood fibre from third parties, Norbord’s Canadian operations hold forestry licenses to source 880,000 cubic metres of poplar and birch under Crown Arrangements in Ontario and Quebec. These provincial licenses generally include provisions for ground rents, stumpage charges and reforestation and are granted for terms of 20 to 25 years with renewal provisions. Restrictions on harvesting have increased over the past several years. In Quebec, the Chief Forester released the maximum annual allowable cut (MAAC) recommendations for the period 2008-2013. The MAAC on Norbord’s licenses will be reduced by 20% for aspen. All but 3% of this loss will be offset by access to more birch and to over-mature aspen stands.

Norbord participates in theSustainable Forestry Initiative (SFI) forest certification program. To obtain certification, mills must demonstrate a commitment to forest conservation including sound management planning and the protection of wildlife habitats and water quality. Nine of Norbord’s North American operations have received SFI forest certification. In addition, the Cochrane plywood mill was certified "FSC-mixed" under the Forest Stewardship Council (FSC) Chain of Custody certification in 2006.

In Europe, all sites hold FSC Chain of Custody certification, which assures that raw materials from sustainably managed resources are tracked through to the final product. Accordingly, a portion of the European mills’ production is labeled with the FSC stamp.

Research and Development

Norbord carries out research and applied technology programs to improve production techniques and product quality, develop new products, and minimize the environmental impact of its operations. The Company operates a central laboratory facility in St. Laurent, Quebec. In addition, the Company participates in and performs contract work at a number of industry-wide organizations including Forintek and