DEBT AND LINES OF CREDIT

During 2006, International Paper used proceeds from divestitures and cash from operations to retire approximately $5.2 billion of long-term debt.

In December 2006, International Paper retired approximately $2.2 billion of notes with interest rates ranging from 3.8% to 10.0% and original maturities from 2008 to 2029. Also in the fourth quarter of 2006, International Paper Investments (Luxembourg) S.ar.l, a wholly-owned subsidiary of International Paper, repaid $343 million of long-term debt with an interest rate of LIBOR plus 40 basis points and a maturity date in November 2010.

In August 2006, International Paper used approx- imately $320 million of cash to repay its maturing 5.375% euro-denominated notes that were des- ignated as a hedge of euro functional currency net investments. Other debt activity in the third quarter included the repayments of $143 million of 7.875% notes and $96 million of 7% debentures, all maturing within the quarter.

In June 2006, International Paper paid approximately $1.2 billion to repurchase substantially all of its zero- coupon convertible debentures at a price equal to their accreted principal value plus interest, using proceeds from divestitures and $730 million of third- party commercial paper issued under the Company’s

receivables securitization program. As of

December 31, 2006, International Paper had repaid all of the commercial paper borrowed under this program.

In February 2006, International Paper repurchased $195 million of 6.4% debentures with an original maturity date of February 2026. Other reductions in the first quarter of 2006 included early payment of approximately $495 million of notes with coupon rates ranging from 4% to 8.875% and original matur- ities from 2007 to 2029.

Pre-tax early debt retirement costs of $165 million related to the above 2006 debt reductions are included in Restructuring and other charges in the accompanying consolidated statement of operations. In November and December of 2005, International Paper Investments (Luxembourg) S.ar.l, a wholly- owned subsidiary of International Paper, issued $700 million of long-term debt with an initial interest rate of LIBOR plus 40 basis points that can vary depend-

ing upon the credit rating of the Company and a maturity date in November 2010. Additionally, the subsidiary borrowed $70 million under a bank credit agreement with an initial interest rate of LIBOR plus 40 basis points that can vary depending on the credit rating of the Company, and with a maturity date in November 2006.

In December 2005, International Paper used a portion of the proceeds from the above borrowings, and from the sale of CHH in the third quarter of 2005, to repay approximately $190 million of notes with coupon rates ranging from 3.8% to 10% and original maturities from 2008 to 2029.

In September 2005, International Paper used a por- tion of the proceeds from the CHH sale to repay the remaining $250 million portion of a subsidiary’s $650 million long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007, and $312 million of commercial paper that had been issued in the same quarter. Other reductions in the third quarter included $662 million of notes with coupon rates ranging from 4% to 7.35% and original maturities from 2009 to 2029, and the repayment of $150 million of 7.10% notes with a maturity date of September 2005.

In June 2005, International Paper repaid approx- imately $400 million of a subsidiary’s long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007.

In February 2005, International Paper redeemed the outstanding $464 million aggregate principal amount of International Paper Capital Trust 5.25% convertible subordinated debentures originally due in July 2025 at 100.5% of par plus accrued interest. Other reduc- tions in the first quarter of 2005 included early payment of approximately $295 million of principal on notes with coupon rates ranging from 4% to 7.875% and original maturities from 2006 to 2015. Pre-tax early debt retirement expense of $57 million related to the above 2005 redemptions is included in Restructuring and other charges in the accompany- ing consolidated statement of operations.

A summary of long-term debt follows:

In millions at December 31 2006 2005 87⁄_{8% to 10% notes - due 2011 - 2012 $ 19 $ 136} 9.25% debentures - due 2011 44 125 7% to 7 7/8% notes - due 2007 198 437 67⁄_{8% notes - due 2023 - 2029 130 351} 6.75% notes - due 2011 195 819 6.65% notes - due 2037 99 98

6.4% notes to 6.5% notes - due 2007 147 344

6.4% to 7.75% debentures - due 2025 - 2027 254 571

5.85% notes - due 2012 284 969

5.25% to 5.5% notes - due 2014 - 2016 839 1,296

53⁄_{8% euro notes - due 2006 – 296}

51⁄_{8% debentures - due 2012 110 106}

3.8% to 4.25% notes - due 2008 - 2010 913 1,152

Zero-coupon convertible debentures - due 2021 2 1,185

Medium-term notes - due 2009 (a) 30 43

Floating rate notes - due 2007 - 2016 (b) 1,690 1,764 Environmental and industrial development bonds -

due 2007 - 2033 (c) 1,934 2,005

Commercial paper and bank notes (d) 246 415

Other (e) 89 85

Total (f) 7,223 12,197

Less: Current maturities 692 1,178

Long-term debt $6,531 $11,019

(a) The weighted average interest rate on these notes was 8.1% in 2006 and 2005.

(b) The weighted average interest rate on these notes was 5.0% in 2006 and 4.2% in 2005.

(c) The weighted average interest rate on these bonds was 5.4% in 2006 and 5.5% in 2005.

(d) The weighted average interest rate was 5.4% in 2006 and 4.9% in 2005. Includes $150 million of non-U.S. denominated borrowings with a weighted average interest rate of 5.1% in 2006.

(e) Includes $3 million at December 31, 2006, and $6 million at December 31, 2005, related to interest rate swaps treated as fair value hedges (see Note 13).

(f) The fair market value was approximately $7.3 billion at December 31, 2006 and $12.3 billion at December 31, 2005. Total maturities of long-term debt over the next five years are 2007 - $692 million; 2008 - $129 million; 2009 - $1.1 billion; 2010 - $1.2 billion; and 2011 - $381 million.

At December 31, 2006 and 2005, International Paper classified $100 million and $1.25 billion, respectively, of tenderable bonds, contingently convertible secu- rities, commercial paper and bank notes, and Current maturities of long-term debt as Long-term debt. International Paper has the intent and ability to renew or convert these obligations, as evidenced by the available bank credit agreements described below.

At December 31, 2006, International Paper’s unused contractually committed bank credit agreements totaled $3.0 billion. The agreements generally pro- vide for interest rates at a floating rate index plus a pre-determined margin dependent upon Interna- tional Paper’s credit rating. In March 2006, Interna- tional Paper replaced its maturing $750 million revolving bank credit agreement with a 364-day $500 million fully committed revolving bank credit agreement that expires in March 2007 and has a facility fee of 0.08% payable quarterly, and replaced its $1.25 billion revolving bank credit agreement with a $1.5 billion fully committed revolving bank credit agreement that expires in March 2011 and has a facility fee of 0.10% payable quarterly. In addition, in October 2006, the Company amended its existing receivables securitization program that provides for up to $1.2 billion of commercial paper-based financ- ings with a facility fee of 0.20% and an expiration date in November 2007, to provide up to $1.0 billion of available commercial paper-based financings with a facility fee of 0.1% and an expiration date of October 2009. At December 31, 2006, there were no borrowings under either the bank credit agreements or receivables securitization program.

Additionally, International Paper Investments (Luxembourg) S.ar.l. has a $100 million bank credit agreement maturing in December 2007, with $40

million in borrowings outstanding as of

December 31, 2006.

At December 31, 2006, outstanding debt included approximately $246 million of commercial paper and bank notes with interest rates that fluctuate based on market conditions and the Company’s credit rating. Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. In the third quarter of 2006, Standard & Poor’s reaffirmed the Company’s long-term credit rating of BBB, revised its ratings outlook from neg- ative to stable, and upgraded its short-term credit rating from A-3 to A-2. At December 31, 2006, the Company also held long-term credit ratings of Baa3 (stable outlook) and a short-term credit rating of P-3 from Moody’s Investor Services.

NOTE 13 DERIVATIVES AND HEDGING