SECOND QUARTER CATALYST PAPER 2014 SECOND QUARTER REPORT

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1 SECOND QUARTER 2014 CATALYST PAPER 2014 SECOND QUARTER REPORT

2 Headquartered in Richmond, British Columbia (B.C.), Catalyst Paper employs 1,611 people and operates three mills and a distribution facility on Canada s Pacific coast. Our combined annual production capacity of 1.5 million tonnes meets the needs of customers, including retailers, publishers, commercial printers, and manufacturers who use our pulp, in North America, Latin America, the Pacific Rim and Europe. We have earned a reputation for environmental stewardship based on our commitment to certified fibre sourcing, manufacturing efficiency, verified chain of custody and environmentally responsible paper operations. A public company, Catalyst s shares trade on the Toronto Stock Exchange (TSX) under the symbol CYT.

3 PRESIDENT S MESSAGE Strong operating performance in the second quarter was overshadowed by a planned maintenance outage on our pulp mill, a 9% hydroelectricity rate increase, a stronger Canadian dollar and lower transaction prices for pulp and paper. The recovery boiler and kamyr digester outage at our Crofton pulp mill had a total cost and production impact of approximately $10.0 million, while the hydro rate increase, effective April 1, added approximately $1.0 million per month to our operating costs. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $7.1 million compared to $25.7 million in Q We generated negative free cash flow of $8.6 million in the second quarter, bringing our free cash flow for the year to date to positive $3.0 million. Adjusted EBITDA and free cash flow improved significantly from the second quarter of last year and exceeded results for Q by $7.7 million and $10.7 million respectively. Revenues for the quarter of $283.5 million were up 3.5% from the previous quarter, partly due to increased paper sales from the delivery of shipments delayed by the Q1 container truck driver strike in Port Metro Vancouver. Introduction of the BC Hydro Power Smart Program is an important step towards mitigating the impact of announced energy cost rate increases. The Power Smart Program provides a three-year funding injection of $100 million aimed at improving the energy efficiency of thermal-mechanical pulp facilities in British Columbia, with $45 million allocated to Catalyst Paper. The program will benefit our three mills by covering 75% of the required capital investment on projects to more efficiently harness energy and reduce energy waste. The first project at our Powell River mill is in the advanced stages of planning, has an expected cost of $25 million of which 75% will be covered by Power Smart funding, and will reduce our annual energy costs by approximately $5 million. OPERATIONAL EXCELLENCE We remain focussed on achieving operational excellence in the key areas within our control: safety, productivity and cost. Safety: We achieved our best ever safety performance in the quarter with a lost time incident frequency of 0.80 and a medical incident rate of We re making significant progress in our pursuit of an injury free work environment. Productivity: We achieved a new record in paper productivity this quarter with paper production 3.5% higher than average production in 2013 and 2% higher than the first quarter of We completed two major debottlenecking initiatives on our pulp mill during the planned maintenance outage. These initiatives were identified as key to optimizing future pulp production and we re already seeing the results in our daily pulp production volumes subsequent to the shut. As pulp is currently our highest contribution margin business an improved production rate contributes substantially to our bottom line. Technology: Our new manufacturing execution system (MES) went live at the Powell River mill in the quarter. This is the second implementation of the MES as it was implemented at the Port Alberni mill in By interfacing with our other manufacturing and enterprise resource planning systems, the MES will help optimize our manufacturing, packaging and inventory management practices. MARKET CONDITIONS North American demand for our paper grades remain challenged in the second quarter of 2014, showing continued declines from the first quarter. Benchmark prices for our coated and uncoated paper declined while remaining flat for directory and newsprint. NBSK pulp prices for China decreased by 3.1% due to short-term destocking this quarter. Softwood pulp prices have stabilized and are expected to continue to trade in a narrow range. CATALYST PAPER 2014 SECOND QUARTER REPORT PRESIDENT S MESSAGE 1

4 OUTLOOK We have a maintenance-heavy third quarter ahead of us with a total mill outage in Powell River and boiler shuts at all three mills. The related product mix impact should be favourable compared to the second quarter, with the Powell River total mill outage impacting production of specialty paper, our lowest contribution margin product, while the production impact of the recovery boiler outage in the second quarter impacted pulp, our highest contribution margin product. Our program to identify and implement opportunities for improvement is on track to realize significant benefits in 2014 and beyond. The Power Smart Program will result in improved energy efficiency of our three mills and other thermalmechanical pulping facilities in British Columbia. We are encouraged by this progress and will continue our discussions with key stakeholders on a suite of potential initiatives to further mitigate the impact of energy rate escalation. Joe Nemeth President and Chief Executive Officer July 23, CATALYST PAPER 2014 SECOND QUARTER REPORT PRESIDENT S MESSAGE

5 MANAGEMENT S DISCUSSION AND ANALYSIS OVERVIEW AND HIGHLIGHTS SEGMENTED RESULTS LIQUIDITY AND CAPITAL RESOURCES CONTINGENT LIABILITIES SUMMARY OF QUARTERLY RESULTS NON-GAAP MEASURES CRITICAL ACCOUNTING POLICIES AND ESTIMATES CHANGES IN ACCOUNTING POLICIES IMPACT OF ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE PERIODS RISKS AND UNCERTAINTIES SENSITIVITY ANALYSIS OUTLOOK DISCLOSURE CONTROLS AND INTERNAL CONTROL OVER FINANCIAL REPORTING CONSOLIDATED FINANCIAL STATEMENTS CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS The following management s discussion and analysis (MD&A) of Catalyst Paper Corporation (the company, we, us, and our) should be read in conjunction with our unaudited interim consolidated financial statements for the three and six month periods ended June 30, 2014 and June 30, 2013 and our audited annual consolidated financial statements for the year ended December 31, 2013 and the notes thereto, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.). Additional information about the company, including our most recent Annual Information Form is available on our website at or the Canadian Securities Administrator s electronic filing website at Throughout this discussion, references are made to certain measures that are not measures of performance under U.S. GAAP, including operating earnings, adjusted EBITDA, adjusted EBITDA before restructuring costs, average delivered cash costs per tonne before specific items, net earnings (loss) attributable to the company before specific items, net earnings (loss) per share attributable to the company s common shareholders before specific items, and free cash flow. We believe that these non-gaap measures are useful in evaluating our performance. These non- GAAP measures are defined and reconciled to their nearest GAAP measure in section 6, Non-GAAP measures. In this MD&A, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars. The term dollars and the symbols $ and CDN$ refer to Canadian dollars and the term U.S. dollars and the symbol US$ refer to United States dollars. In this MD&A, the term tonne and the symbol MT refer to a metric tonne and the term ton or the symbol ST refer to a short ton, a measure of weight equal to metric tonne. Use of these symbols is in accordance with industry practice. The information in this report is as of July 29, 2014 which is the date of filing in conjunction with our press release announcing our results for the second quarter of Disclosure contained in this document is current to July 29, 2014 unless otherwise stated. 4 CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

7 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements and information in this MD&A are not based on historical facts and constitute forward-looking statements or forward-looking information within the meaning of Canadian securities laws and the U.S. Private Securities Litigation Reform Act of 1995 (forward-looking statements), including but not limited to, statements about our strategy, plans, future operating performance, contingent liabilities and outlook. Forward-looking statements: Are statements that address or discuss activities, events or developments that we expect or anticipate may occur in the future; Can be identified by the use of words such as believe, expect, anticipate, intend, plan, likely, predicts, estimates, forecasts, and similar words or phrases or the negative of such words or phrases; Reflect our current beliefs, intentions or expectations based on certain assumptions and estimates, including those identified below, which could prove to be significantly incorrect: Our ability to develop, manufacture and sell new products and services that meet the needs of our customers and gain commercial acceptance; Our ability to continue to sell our products and services in the expected quantities at the expected prices and expected times; Our ability to successfully obtain cost savings from our cost reduction initiatives; Our ability to implement business strategies and pursue opportunities; Expected cost of goods sold; Expected component supply costs and constraints; Expected foreign exchange and tax rates. While considered reasonable by management, are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results or events to differ from historical or anticipated results or events. These risk factors and others are discussed in the MD&A. Certain of these risks are: The impact of general economic conditions in the countries in which we do business; Conditions in the capital markets and our ability to obtain financing and refinance existing debt; Market conditions and demand for our products (including declines in advertising and circulation); The implementation of trade restrictions in jurisdictions where our products are marketed; Fluctuations in foreign exchange or interest rates; Raw material prices (including wood fibre, chemicals and energy); The effect of, or change in, environmental and other governmental regulations; Uncertainty relating to labour relations; The availability of qualified personnel; Legal proceedings; The effects of competition from domestic and foreign producers; The risk of natural disaster and other factors many of which are beyond our control. As a result, no assurance can be given that any of the events or results anticipated by such forward-looking statements will occur or, if they do occur, what benefit they will have on our operations or financial condition. Readers are cautioned not to place undue reliance on these forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 5

8 1. OVERVIEW AND HIGHLIGHTS BUSINESS OVERVIEW We are the largest producer of mechanical printing papers in western North America. We also produce NBSK pulp which is marketed primarily in Asia. Our business is comprised of three business segments: specialty printing papers, newsprint, and pulp. Specialty printing papers include coated mechanical, uncoated mechanical and directory paper. We are the only producer of coated mechanical paper and soft calender (SC) paper in western North America. We operate three paper mills in British Columbia (B.C.) located in Crofton, Port Alberni, and Powell River. Our Crofton mill includes a two-line kraft pulp operation. More information about our business segments, product profile and our geographic sales distribution is provided on pages 6 to 7 of our 2013 Annual Report. Our production capacity by mill and product line is summarized in the following chart: 2014 Capacity by Mill Location and Product Line 1 Specialty printing papers 1 Newsprint 1 Pulp 2 Total Mill location Number of paper machines Uncoated mechanical Coated mechanical Directory Newsprint NBSK pulp Crofton, B.C , , ,000 Port Alberni, B.C , , ,000 Powell River, B.C , ,000 Total capacity (tonnes) 7 469, , , , ,000 1,513,000 % of total capacity 31% 15% 8% 23% 23% 100% 1 Capacities expressed in the above table can vary as we are able to switch production between products, particularly newsprint, directory and machine-finished uncoated grades. 2 Total pulp capacity at Crofton is 393,000 tonnes, of which 355,000 tonnes are designated as market pulp with the remainder 38,000 tonnes being consumed internally. 3 No. 1 paper machine at Crofton remains indefinitely curtailed. SECOND QUARTER OVERVIEW Business Overview Operating results for the second quarter were negatively impacted by a planned maintenance outage on Crofton s recovery boiler and kamyr digester, higher power costs due to a hydroelectricity rate increase, the negative impact of a stronger Canadian dollar and transaction prices trending lower for pulp and all paper grades. This was partially offset by increased paper sales due in part to the delivery of shipments delayed by the Q1 container truck driver strike in Port Metro Vancouver. We achieved improved productivity in the quarter with paper production of thousand tonnes exceeding average quarterly paper production for 2013 by 3.5% and Q production by 3.9%. Manufacturing costs were higher mostly due to increased electric power, chemicals, and maintenance costs. The planned maintenance outage had a total cost impact of approximately $10 million including incremental maintenance and related costs and the lost contribution margin impact of ten thousand tonnes reduced pulp production. We lost approximately four thousand tonnes more than expected due to additional work to debottleneck the pulp mill and related to certain start-up issues. Financial Performance We recorded a net loss of $6.3 million and a net loss before specific items of $13.6 million in Q2. This compared to a net loss of $3.8 million and net earnings before specific items of $6.5 million, respectively, in Q1. Significant specific items in Q2 included a net loss on the settlement of debt, a foreign exchange gain on the translation of U.S. dollar denominated debt, and a gain on the sale of poplar plantation land. Significant specific items in the prior quarter included a net gain on the repurchase of debt and a foreign exchange loss on the translation of U.S. dollar denominated debt. 6 CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

9 Adjusted EBITDA and adjusted EBITDA before restructuring costs was $7.1 million in Q2 compared to adjusted EBITDA and adjusted EBITDA before restructuring costs of $25.7 million in Q1. Refer to section 6, Non-GAAP measures, for additional information on specific items in the reported financial results. SELECTED FINANCIAL INFORMATION (In millions of Canadian dollars, except where otherwise stated) YTD Q2 Q1 Total Q4 Q3 Q2 Q1 Sales $ $ $ $ 1,051.4 $ $ $ $ Operating earnings (loss) 10.9 (3.9) 14.8 (87.8) (79.5) 4.9 (12.0) (1.2) Depreciation and amortization Adjusted EBITDA (0.6) 11.2 before restructuring costs (0.5) 11.2 Net earnings (loss) attributable to the company (10.1) (6.3) (3.8) (127.6) (95.0) 5.2 (28.0) (9.8) before specific items 1 (7.1) (13.6) 6.5 (31.5) 1.7 (3.5) (18.1) (11.6) Adjusted EBITDA margin 1 5.9% 2.5% 9.4% 4.4% 7.0% 6.1% (0.2%) 4.5% before restructuring costs 1 5.9% 2.5% 9.4% 4.5% 7.4% 6.1% (0.2%) 4.5% Net earnings (loss) per share attributable to the company s common shareholders (in dollars) basic and diluted from continuing operations $ (0.70) $ (0.43) $ (0.26) $ (9.01) $ (6.55) $ 0.36 $ (1.93) $ (0.89) basic and diluted from discontinued operations before specific items 1 (0.49) (0.94) 0.45 (2.17) 0.12 (0.24) (1.25) (0.80) (In thousands of tonnes) Sales , Production , Refer to section 6, Non-GAAP measures. CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 7

10 Market Overview * Uncoated mechanical is comprised of high-gloss and standard grades. Overall, market conditions remained challenging in the second quarter of North American demand for our paper grades decreased from the second quarter of 2013 and inventory levels rose from Q1. Demand declined for all paper grades except for uncoated paper. Reduced demand and rising inventories resulted in weaker operating rates, with benchmark prices declining for coated and uncoated paper and remaining flat for directory and newsprint in the quarter. NBSK pulp shipments remained flat compared to the second quarter of Pulp benchmark prices for China declined in the second quarter of Introduction of BC Hydro Power Smart Program On July 24, 2014, the Ministry of Energy and Mines and BC Hydro introduced a new energy efficiency program aimed at reducing the power costs of mechanical pulp producers. The Power Smart program provides a funding injection of $100 million over three years with $45 million allocated to Catalyst Paper. The program is aimed at reducing the energy intensity and improving the energy efficiency of the thermal-mechanical pulping process at seven pulp facilities in British Columbia. The Power Smart Program will benefit our three mills located in Crofton, Port Alberni and Powell River by providing funding for 75% of the capital investment required for equipment upgrades to more efficiently harness energy and reduce energy waste. The first project, already in the advanced stages of planning at our Powell River mill, will utilize waste steam to reduce our electrical load on the BC Hydro system. The project has an expected capital cost in excess of $25 million of which Power Smart funding will cover 75% and will reduce annual energy cost by an estimated $5 million. Redemption of Floating Rate Senior Secured Notes and Reduction of Secured Debt On April 19, 2014, we used the proceeds of the $20.0 million Term Loan entered into on March 20, 2014 to redeem the US$19.4 million outstanding balance on the Floating Rate Senior Secured Notes due 2016 (Floating Rate Notes). 8 CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

11 On April 1, 2014, we repurchased US$5.0 million of our PIK Toggle Senior Secured Notes due 2017 (2017 Notes) on the open market. Application to Appeal Sales Tax Ruling Granted On May 15, 2014, the British Columbia Court of Appeal granted the Province of British Columbia s (the Province) application for leave to appeal the Supreme Court of British Columbia s ruling on January 28, The Supreme Court of British Columbia ruled in favour of Catalyst Paper in our action against the Province involving a reassessment of the amount of sales tax payable under the Social Services Tax Act on electricity purchased from Powell River Energy Inc. (PREI) in 2001 through The appeal process may delay the receipt of a sales tax refund estimated at $5.8 million including interest. Changes to Board of Directors On July 8, 2014, Pierre A. Raymond was appointed to the Board of Directors. Settlement Agreement entered into with PACE Industry Union-Management Pension Fund On July 18, 2014, we entered into a settlement agreement with the PACE Industry Union-Management Pension Fund, a multi-employer pension plan which we contributed to on behalf of hourly employees at the Snowflake mill. Catalyst will, in accordance with the settlement agreement, remit three lump sum payments of US$1.0 million each, with the first payment scheduled to be made within 10 days of the date of the settlement agreement and the two subsequent payments to be made on or before May 1, 2015 and May 1, 2016, respectively. In addition, we will continue to remit monthly installments of US$0.1 million in accordance with a confirmed payment schedule. In 2012, a withdrawal liability of US$11.7 million was recognized as a result of the closure of the Snowflake mill. STRATEGY UPDATE Our objective is to return to profitability and maximize cash flows by focusing on reducing manufacturing costs and optimizing our brands and customer base. Additional information related to our corporate strategy, including key performance drivers and indicators, can be found on pages 12 to 18 of our 2013 Annual Report Key Objectives The following is an update on our second quarter progress towards our 2014 key objectives: Social: Safety: 20% reduction in medical incidents (MIs) and lost time incidents (LTIs) vs. 2013, with the long term goal of achieving top quartile performance (MIR < 1.0) We achieved our best ever safety performance in the quarter. LTI frequency of 0.80 improved 45% compared to the prior year. MIR of 1.59 was 59% lower than the prior year. Establish Catalyst as an employer of choice and develop best in class employee recruitment and retention programs Continued success in attracting talent to all areas of the company. During the quarter several key leadership roles were successfully recruited for including a new General Manager at our Port Alberni division and a Paper Production manager at our Powell River division. Hired 57 employees during the quarter (106 year-to-date) to fill key vacancies and to manage pending retirements. We have recruitment, hiring, and training programs in place to manage the significant impact attrition continues to have on staffing at our operations due to the age demographics of our people. Financial: Deliver cash flow positive results in 2014 Free cash flow for the quarter was negative $8.6 million. Liquidity decreased by $37.5 million from the prior quarter due to a lower borrowing base, redemption of the Floating Rate Notes and buyback of 2017 Notes, the impact of the maintenance shut on the recovery boiler, and a scheduled interest payment. Capital expenditures in the current quarter of $4.7 million were primarily invested in maintenance of business. Reduce interest cost and debt levels Reduced debt level by US$1.4 million and annual interest by US$1.4 million by entering into Term Loan and redeeming Floating Rate Notes. Reduced debt level by US$14.5 million and annual interest by US$1.6 million through repurchase of 2017 Notes. CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 9

12 Mitigate the impact of energy cost rate increases The Ministry of Energy and Mines and BC Hydro have introduced a $100 million Power Smart Program after several months of open dialogue between key stakeholders. We will utilize the funding available under the Power Smart Program to cover 75% of the required capital investment on projects that will improve our energy efficiency. This will partly mitigate the impact of announced energy cost rate increases. Continuously reduce costs and improve productivity in all of our operations through identifying and implementing opportunities for operational improvement and efficiency, capital planning and cost reviews Completed two major debottlenecking initiatives on the pulp mill to improve the productivity of our pulp operations. Continuing to drive a formal program to identify, analyze and implement opportunities for operational improvement. To date, more than 790 potential opportunities have been identified, and we are on track to realize significant benefits in key operating areas including productivity, energy consumption, and fibre yield. Our focus on streamlining Catalyst s organizational structure has resulted in a reduction in the annualized run-rate of selling, general and administrative costs of $3.5 million. Achieved improved productivity for our paper operations in the quarter compared to average production volumes in the prior year. Commercial: Expand geographic reach of Catalyst Paper into emerging world markets of Latin America and Asia Sales efforts continue to penetrate freight logical markets in South and Central America with more favourable business conditions. We are exploring creative loading and shipping options to reach these markets more cost effectively. Continue growth of new value added paper products (Marathon Lite and Ascent as the top two priorities) We continue to push lighter weights in all product lines, from our well established machine finished grades Electrabrite and Electracal to our 40-gram Marathon Lite newsprint. Customers save money with no loss in print fidelity or runnability. Several new trials are in place in South America and Asia with lighter weight products. Increase breadth of product range and solidify position as the most flexible and diverse producer and marketer of paper in the West We recently launched a new 70-pound Ascent coated grade. This weight gives magazine publishers the option of sourcing both the cover stock and inside pages from Catalyst to ensure optimal quality. Our diverse paper grade offering from Marathon newsprint at the low end to Ascent coated paper at the high end makes Catalyst the Western supplier of choice for printers and publishers that require a one stop solution. Catalyst remains a leader in the western retail and insert advertising sector with its wide product portfolio. Environmental: Work with community stakeholders to identify and implement solutions to local problems Participated in community meetings and discussions to manage current drought conditions in the Cowichan Valley resulting in a unanimous decision to reduce Cowichan River flow. Working cooperatively with Halalt First Nation to understand the band s challenges and opportunities in the local community. Actively assessing municipal wastewater co-treatment at our Powell River mill which would help the city avoid expensive duplication of sewerage infrastructure. Adhere to high international standards for transparency and reporting of performance on social, governance and environmental factors Completion of the Carbon Disclosure Reporting surveys of Catalyst GHG emissions, Fibre use and Water use as well as reporting through GreenBlue s Environmental Paper Assessment Tool ( 10 CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

13 CONSOLIDATED RESULTS OF OPERATIONS Sales Q vs. Q Sales revenues increased by 3.5% as a result of increased sales volumes for newsprint, uncoated and directory, partially offset by the negative impact of a stronger Canadian dollar, lower transaction prices for all paper grades and pulp, and lower sales volumes for lightweight coated and pulp. Increased paper sales were partly due to the resolution of the container truck driver strike in Port Metro Vancouver. Q vs. Q Sales revenues increased by 7.6% as a result of the positive impact of a weaker Canadian dollar, increased sales volumes for newsprint, uncoated and pulp, and higher average transaction prices for pulp, partially offset by lower transaction prices for all paper grades and lower sales volumes for lightweight coated and directory YTD vs YTD Sales revenues increased by 9.2% as a result of the positive impact of a weaker Canadian dollar, increased sales volumes for newsprint, uncoated and pulp, and higher average transaction prices for pulp, partially offset by lower transaction prices for all paper grades and lower sales volumes for lightweight coated and directory. CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 11

14 Adjusted EBITDA and adjusted EBITDA before Restructuring Costs The following table provides variances between periods for adjusted EBITDA and adjusted EBITDA before restructuring costs: (In millions of Canadian dollars) Q Q YTD Adjusted EBITDA in comparative period 1 $ 25.7 $ (0.6) $ 10.6 Restructuring costs Adjusted EBITDA before restructuring costs in comparative period (0.5) 10.7 Paper prices (2.8) (5.7) (11.3) Pulp prices (0.3) Impact of Canadian dollar (3.2) Volume and mix (2.7) Furnish mix and costs 1.5 (3.5) (9.4) Power and fuel costs (1.9) (2.7) (5.6) Labour costs (1.2) (1.8) (3.3) Maintenance costs (4.5) Selling, general and administrative Lower of cost or market impact on inventory, net of inventory change (1.1) (0.5) (1.5) De-recognition of interest in PREI (4.3) Power generation (3.1) Other, net 0.5 (2.3) (3.1) Adjusted EBITDA before restructuring costs in Q Restructuring costs Adjusted EBITDA in Q2 and YTD $ 7.1 $ 7.1 $ Refer to section 6, Non-GAAP measures. Operating Earnings (Loss) Q vs. Q Operating earnings decreased by $18.7 million due to lower adjusted EBITDA of $18.6 million and higher depreciation and amortization expense of $0.1 million. Q vs. Q Operating earnings increased by $8.1 million due to higher adjusted EBITDA of $7.7 million and lower depreciation and amortization expense of $0.4 million YTD vs YTD Operating earnings increased by $24.1 million due to higher adjusted EBITDA of $22.2 million and lower depreciation and amortization expense of $1.9 million. Net Earnings (Loss) Attributable to the Company Q vs. Q Net earnings attributable to the company decreased by $2.5 million primarily due to lower after-tax operating earnings of $18.7 million and a net loss after tax on the settlement of debt of $1.9 million compared to an after-tax gain of $0.9 million in the prior quarter. This was partially offset by an after-tax foreign exchange gain on the translation of U.S. dollar denominated debt of $8.9 million compared to an after-tax loss of $11.2 million in the prior quarter. Q vs. Q Net earnings attributable to the company increased by $21.7 million primarily due to higher after-tax operating earnings of $8.1 million and an after-tax foreign exchange gain on the translation of U.S. dollar denominated debt of $8.9 million compared to an after-tax loss of $9.6 million in Q2 2013, partially offset by an after-tax loss on the settlement of debt of $1.9 million, and an after-tax gain on the sale of the Elk Falls site of $2.1 million in Q CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

15 2014 YTD vs YTD Net earnings attributable to the company increased by $27.7 million primarily due to higher after-tax operating earnings of $24.1 million, reduced after-tax interest expense of $2.2 million, and lower after-tax foreign exchange loss on the translation of U.S. dollar denominated debt of $13.2 million, partially offset by after-tax gains in 2013 on the sale of the Snowflake mill of $4.1 million, our interest in Powell River Energy of $5.3 million, and the Elk Falls site of $2.1 million. 2. SEGMENTED RESULTS SPECIALTY PRINTING PAPERS Three months ended June 30, Six months ended June 30, (In millions of Canadian dollars, except where otherwise stated) Change Change Sales $ $ $ (2.9) $ $ $ 1.0 Operating earnings (loss) (8.2) (10.7) 2.5 (10.9) (13.6) 2.7 Depreciation and amortization (0.9) (2.9) Adjusted EBITDA (0.8) (0.2) before restructuring costs (0.8) (0.2) Adjusted EBITDA margin 1 0.5% (0.5%) 1.0% 2.1% 2.2% (0.1%) before restructuring costs 1 0.5% (0.5%) 1.0% 2.1% 2.2% (0.1%) (In thousands of tonnes) Sales (10.9) (15.0) Production (2.5) (10.0) 1 Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinuing operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the six months ended June 30, CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 13

16 Segment Overview North American demand for coated mechanical decreased by 8.5% from the second quarter of 2013 due to reduced advertising pages in magazines and a decrease in catalogues being mailed out. Demand for uncoated mechanical increased by 3.9% from Q Uncoated mechanical demand was buoyed by increased demand for high-gloss grades as customers sought lower cost alternatives to coated mechanical. Inventory levels for coated and uncoated paper rose higher in the quarter. The average benchmark prices for lightweight coated decreased 1.2% to US$800 per short ton, and for soft-calendered A grade (SC-A) decreased 2.9% to US$780 per short ton compared to the previous quarter. North American directory demand fell 20.0% in Q2 compared to the prior year due to ongoing pressure to reduce or eliminate white pages, smaller books, lower circulation, and the continued migration from printed books to the Internet. The average Q2 directory benchmark price remained flat at US$730 per short ton compared to the previous quarter. Operating rates for directory paper remain strong despite declining demand due to continued capacity reduction in the directory marketplace. Operational Performance The following chart summarizes the operating performance of our specialty printing papers segment: * Average delivered cash costs per tonne consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A and restructuring costs. Average delivered cash costs per tonne before specific items consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A, but excluding the impact of restructuring costs. Q vs. Q Sales volume decreased by 10,900 tonnes reflecting lower sales volumes for directory and lightweight coated, partially offset by higher sales volumes for uncoated mechanical. Average sales revenue increased $33 per tonne due to the positive impact of a weaker Canadian dollar, partly offset by lower average transaction prices for all specialty paper grades. Average delivered cash costs increased $25 per tonne due to increased cost of fibre, kraft, fillers, chemicals, electric power and distribution cost. Fibre costs increased due to higher pulp pricing, the strong US dollar drove the cost of fillers, chemicals and distribution higher, and electric power costs reflect a 9% hydroelectricity rate increase effective April 1, CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

17 2014 YTD vs YTD Sales volume decreased by 15,000 tonnes due to lower sales volumes for directory and lightweight coated, partially offset by higher sales volumes for uncoated mechanical. Average sales revenue increased $37 per tonne due to the positive impact of a weaker Canadian dollar, partly offset by lower average transaction prices for all specialty paper grades. Average delivered cash costs increased $38 per tonne due primarily to higher distribution, fibre, kraft, chemicals and power costs, partially offset by lower maintenance spending primarily due to the timing of maintenance outages. NEWSPRINT Three months ended June 30, Six months ended June 30, (In millions of Canadian dollars, except where otherwise stated) Change Change Sales $ 63.4 $ 49.4 $ 14.0 $ $ 96.0 $ 21.8 Operating earnings (loss) (0.9) Depreciation and amortization Adjusted EBITDA (0.7) before restructuring costs (0.8) Adjusted EBITDA margin 1 3.8% 6.3% (2.5%) 6.7% 5.4% 1.3% before restructuring costs 1 3.8% 6.5% (2.7%) 6.7% 5.5% 1.2% (In thousands of tonnes) Sales Production Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinuing operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the six months ended June 30, CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 15

18 Segment Overview Total North American demand for newsprint was down 6.4% in Q2 year-over-year in part due to lower newspaper print advertising and declining circulation. Inventory levels were higher than the previous quarter and the average Q2 North American newsprint benchmark price remained flat at US$605 per tonne compared to Q Operational Performance The following chart summarizes the operating performance of our newsprint segment: * Although C1 remains indefinitely curtailed, it is not included in our 2014 capacity table. ** Average delivered cash costs per tonne consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A and restructuring costs. Average delivered cash costs per tonne before specific items consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A, but excluding the impact of restructuring costs. Q vs. Q Sales volume increased by 20,600 tonnes due to increased newsprint production which partly offset lower directory production, and the sale of excess paper inventory in the quarter with the resolution of the extended container truck driver strike at Port Metro Vancouver. Average sales revenue remained flat due to the positive impact of a weaker Canadian dollar, offset by lower average transaction prices in the quarter. Average delivered cash costs increased $18 per tonne due primarily to increased distribution, fibre, starch, chemicals, and electric power costs, partly offset by increased production in the quarter. 16 CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

19 2014 YTD vs YTD Sales volume increased by 28,900 tonnes primarily due to increased newsprint production which partly offset lower directory production. Average sales revenue increased $14 per tonne due to the positive impact of a weaker Canadian dollar, partly offset by lower average transaction prices. Average delivered cash costs increased $3 per tonne due primarily to higher distribution, fibre, and electric power costs, partly offset by increased production. PULP Three months ended June 30, Six months ended June 30, (In millions of Canadian dollars, except where otherwise stated) Change Change Sales $ 61.9 $ 52.9 $ 9.0 $ $ $ 24.1 Operating earnings (loss) 3.3 (3.2) (2.2) 19.2 Depreciation and amortization Adjusted EBITDA (2.9) (1.5) 19.7 before restructuring costs (2.9) (1.5) 19.7 Adjusted EBITDA margin 1 6.3% (5.5%) 11.8% 14.2% (1.4%) 15.6% before restructuring costs 1 6.3% (5.5%) 11.8% 14.2% (1.4%) 15.6% (In thousands of tonnes) Sales Production Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinuing operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the six months ended June 30, CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 17

20 Segment Overview Global NBSK demand remained flat compared to the second quarter in The average NBSK benchmark pulp price for China decreased 3.1% to US$730 per tonne due to short-term destocking in the quarter. Operational Performance The following chart summarizes the operating performance of our pulp segment: * Average delivered cash costs per tonne consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A and restructuring costs. Average delivered cash costs per tonne before specific items consist of cost of sales, excluding depreciation and amortization, and including the impact of SG&A, but excluding the impact of restructuring costs. Q vs. Q Sales volume remained flat compared to the same quarter last year. Average sales revenue increased $112 per tonne due to higher average transaction prices and the positive impact of a weaker Canadian dollar. Average delivered cash costs increased by $25 per tonne due to increased fibre and chemical costs and higher fossil fuel usage in the quarter YTD vs YTD Sales volume increased by 2,100 tonnes compared to the prior year. Average sales revenue increased by $141 per tonne due to higher average transaction prices and the positive impact of a weaker Canadian dollar. Average delivered cash costs increased by $18 per tonne due to higher fibre and steam fuel costs, partly offset by increased production. 18 CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

21 3. LIQUIDITY AND CAPITAL RESOURCES SELECTED FINANCIAL INFORMATION Three months ended June 30, Six months ended June 30, (In millions of Canadian dollars, except where otherwise stated) Change Change Cash flows provided (used) by operations before changes in non-cash working capital $ (5.7) $ (8.5) $ 2.8 $ 10.7 $ (10.7) $ 21.4 Changes in non-cash working capital (2.7) Cash flows provided (used) by: Operations Investing activities (2.1) (8.2) 36.1 (44.3) Financing activities (22.4) (20.8) (1.6) (22.5) (40.4) 17.9 Capital spending (4.7) (8.5) 3.8 (7.8) (14.4) 6.6 Depreciation and amortization (0.4) (1.9) Capital spending as % of depreciation and amortization 43% 75% (32%) 36% 61% (25%) Net debt to net capitalization at June % 78% 21% 99% 78% 21% 1 Net debt ratio equals net debt (total debt less cash) divided by net capitalization (shareholder s equity attributable to the company and total debt less cash). Refer to page 32 to 33 of our 2013 Annual Report for a discussion of the nature and sources of funding for our principal cash requirements. OPERATING ACTIVITIES Cash flows from operating activities increased by $0.1 million in Q2 from the same quarter in the previous year, primarily due to an increase in adjusted EBITDA of $7.7 million and a reduction in cash interest expense of $0.5 million, offset by an increase in the cash impact of employee future benefits of $1.3 million, an unfavourable exchange rate impact on our foreign currency denominated working capital balances of $2.3 million compared to a favourable impact of $2.2 million in Q2 2013, and the favourable change in non-cash working capital being $2.7 million lower in the current quarter than Q INVESTING ACTIVITIES Cash provided by investing activities decreased by $2.1 million largely due to a decrease in proceeds from the sale of non-core assets of $8.2 million, partially offset by a reduction in capital additions of $3.8 million, and a decrease in restricted cash of $22.5 million compared to $20.1 million in Q FINANCING ACTIVITIES Cash used by financing activities in Q2 was $22.4 million compared to $20.8 million in the same quarter last year. Cash used in the current quarter included repurchase of 2017 Notes for $5.0 million, redemption of the remaining Floating Rate Notes for $21.8 million and quarterly repayment of the Term Loan for $0.5 million, partially offset by a net draw on the ABL Facility of $6.5 million. Cash used in Q included net repayment on the ABL Facility of $4.7 million and partial redemption of the Floating Rate Notes for $15.8 million. CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 19

22 CAPITAL RESOURCES Availability on the ABL Facility and total liquidity is summarized in the following table: (In millions of Canadian dollars) Q2 Q1 Q4 Q3 Q2 Q1 Borrowing base $ $ $ $ $ $ Letters of credit (18.5) (18.6) (19.3) (19.8) (19.8) (22.1) Amount drawn, net (7.8) (1.3) (10.6) (11.8) (4.7) Availability Cash on hand Restricted cash Total liquidity $ $ $ $ $ $ Borrowing base is reduced by reserves of $1.3 million for pension, $1.9 million for creditor insurance deductibles, $2.0 million for landlord waivers, $1.6 million for employee source deductions, and $0.3 million related to WorkSafeBC. 2 Our ABL Facility is subject to certain financial covenants as disclosed in our interim consolidated financial statements for the three and six months ended June 30, 2014 in note 11, Long-term debt. Our total liquidity decreased by $11.7 million from the same quarter last year primarily due to the redemption of the Floating Rate Notes, repurchase of 2017 Notes, and the impact of the extended maintenance shut on Crofton s recovery boiler and kamyr digester. Liquidity decreased by $37.5 million compared to the previous quarter due to a lower borrowing base, the debt redemption and buyback, the impact of the maintenance shut, and an interest payment on May 1. The borrowing base declined primarily due to a reduction in accounts receivable. At July 29, 2014, the company had 14,527,571 common shares issued and outstanding. Our common shares have no par value and an unlimited number of shares are authorized for future issuance. FINANCIAL INSTRUMENTS Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, long-term debt, and derivatives. Derivatives are used primarily to reduce exposure to currency risk on revenues, or occasionally debt, as well as price risk associated with revenue and energy costs. For a description of the nature and extent of risk to the company from our financial instruments, as well as our respective accounting treatment of financial instruments, refer to our annual consolidated financial statements for the year ended December 31, 2013 note 27, Financial instruments. For the methods and assumptions we use to determine the fair value of financial instruments, refer to note 26, Fair value measurement, of those statements. Our methods and assumptions for determining the fair value of financial instruments have not changed materially since those used in the preparation of our consolidated financial statements for the year ended December 31, At June 30, 2014 the company had foreign currency options and forward contracts with a notional principal of US$45.0 million with major financial institutions. At June 30, 2014 period-end exchange rates, these instruments were reported at their fair value of $0.8 million. At June 30, 2014, commodity swap agreements with a negligible fair value were outstanding to fix the sales price of 3,500 metric tonnes of NBSK pulp within the next seven months. 20 CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS

23 The following table reconciles the average spot exchange rate to our effective exchange rate: US$/CDN$ FOREIGN EXCHANGE Q2 Q1 Q4 Q3 Q2 Q1 Average Bank of Canada noon spot rate Average effective rate included in adjusted EBITDA (Favourable)/unfavourable impact of derivatives, other than those designated as effective hedges for accounting purposes, included in other expenses 1 (0.003) (0.001) Foreign exchange (gain)/loss, on working capital balances, included in other expenses 2 (0.010) (0.005) (0.011) (0.011) (0.005) Average effective rate in net earnings/(loss) before income taxes (In millions of Canadian dollars) 1 Favourable/(unfavourable) impact of derivatives included in other expenses $ 0.6 $ 0.2 $ $ $ $ 2 Foreign exchange gain/(loss) on working capital balances included in other expenses (2.3) Excludes foreign exchange gain/(loss) on long term debt and $US interest expense 4. CONTINGENT LIABILITIES We are not aware of any significant contingent liabilities outstanding as of July 29, CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS 21

24 5. SUMMARY OF QUARTERLY RESULTS The following table highlights selected financial information for the eight consecutive quarters ending June 30, 2014: (In millions of Canadian dollars, except per share amounts) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Sales 2 $ $ $ $ $ $ $ $ Adjusted EBITDA 1, (0.6) Net earnings (loss) attributable to the company (6.3) (3.8) (95.0) 5.2 (28.0) (9.8) (35.2) Net earnings (loss) per share attributable to the company s common shareholders basic and diluted from continuing operations $ (0.43) $ (0.26) $ (6.55) $ 0.36 $ (1.93) $ (0.89) $ (1.55) $ 1.73 basic and diluted from discontinued operations 0.21 (0.89) (0.01) 1 Refer to section 6, Non-GAAP measures. 2 Numbers exclude the Snowflake mill s results from operations which have been reclassified as discontinued operations in the consolidated statements of earnings (loss) in the interim consolidated financial statements for the three and six months ended June 30, 2014 Refer to section 1, Overview and highlights, and the discussion on Consolidated results of operations, for details of Q results compared to Q NON-GAAP MEASURES Management uses certain measures that are not defined by U.S. GAAP to evaluate our performance and, as a result, the measures as employed by management may not be comparable to similarly titled measures reported by other entities. These non-gaap measures should not be considered by an investor as an alternative to their nearest respective GAAP measure. Our non-gaap measures include operating earnings (loss), adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, impairment and other closure costs, and before other nonoperating income and expenses), adjusted EBITDA before restructuring costs, adjusted EBITDA margin, adjusted EBITDA margin before restructuring costs, average delivered cash costs per tonne before specific items, net earnings (loss) attributable to the company before specific items, net earnings (loss) per share attributable to the company s common shareholders before specific items, and free cash flow. Specific items are items that do not arise from the company s day-to-day operating, investing and financing activities, or items that are subject to material volatility based on factors outside of management s control. Specific items include: foreign exchange gain or loss on long-term debt; gain or loss on cancellation of long-term debt; asset-impairment and other closure costs; restructuring costs; unusual non-recurring items; and certain income tax adjustments. 22 CATALYST PAPER 2014 SECOND QUARTER REPORT MANAGEMENT S DISCUSSION AND ANALYSIS